[Federal Register Volume 72, Number 91 (Friday, May 11, 2007)]
[Rules and Regulations]
[Pages 26870-27029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2206]



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Part II





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 412 and 413



Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and 
Hospital Direct and Indirect Graduate Medical Education Policy Changes; 
Final Rule

Federal Register / Vol. 72, No. 91 / Friday, May 11, 2007 / Rules and 
Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412 and 413

[CMS-1529-F]
RIN 0938-AO30


Medicare Program; Prospective Payment System for Long-Term Care 
Hospitals RY 2008: Annual Payment Rate Updates, and Policy Changes; and 
Hospital Direct and Indirect Graduate Medical Education Policy Changes

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

ACTION: Final Rule.

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SUMMARY: This final rule updates the annual payment rates for the 
Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs). The final 
payment amounts and factors used to determine the updated Federal rates 
that are described in this final rule were determined based on the LTCH 
PPS rate year July 1, 2007 through June 30, 2008. The annual update of 
the long-term care diagnosis-related group (LTC-DRG) classifications 
and relative weights remains linked to the annual adjustments of the 
acute care hospital inpatient diagnosis-related group system, and 
continue to be effective each October 1. The final outlier threshold 
for July 1, 2007, through June 30, 2008, is derived from the LTCH PPS 
rate year calculations. We are also finalizing policy changes which 
include revisions to the GME and IME policies. In addition, we are 
adding a technical amendment correcting the regulations text at Sec.  
412.22.

EFFECTIVE DATE: These regulations are effective on July 1, 2007.

FOR FURTHER INFORMATION CONTACT:
Tzvi Hefter, (410) 786-4487 (General information).
Judy Richter, (410) 786-2590 (General information, payment adjustments 
for special cases, and onsite discharges and readmissions, interrupted 
stays, co-located providers, and short-stay outliers).
Michele Hudson, (410) 786-5490 (Calculation of the payment rates, LTC-
DRGs, relative weights and case-mix index, market basket, wage index, 
budget neutrality, and other payment adjustments).
Ann Fagan, (410) 786-5662 (Patient classification system).
Miechal Lefkowitz, (410) 786-5316 (Graduate Medical Education 
payments).
Linda McKenna, (410) 786-4537 (Payment adjustments, interrupted stay, 
and transition period).
Renate Rockwell, (410) 786-4645 (Graduate Medical Education payments).
Elizabeth Truong, (410) 786-6005 (Federal rate update, budget 
neutrality, other adjustments, and calculation of the payment rates).
Michael Treitel, (410) 786-4552 (High cost outliers and cost-to-charge 
ratios).

Table of Contents

I. Background
    A. Legislative and Regulatory Authority
    B. Criteria for Classification as a LTCH
    1. Classification as a LTCH
    2. Hospitals Excluded from the LTCH PPS
    C. Transition Period for Implementation of the LTCH PPS
    D. Limitation on Charges to Beneficiaries
    E. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
II. Summary of the Provisions of the Final Rule
    A. Summary of Major Contents of this Final Rule
    B. Responses to Comments
III. Long-Term Care Diagnosis-Related Group (LTC-DRG) 
Classifications and Relative Weights
    A. Background
    B. Patient Classifications into DRGs
    C. Organization of DRGs
    D. Update of LTC-DRGs
    1. Background
    2. Method for Updating the LTC-DRG Relative Weights
    3. Budget Neutrality (BN) Requirement for the Annual LTC-DRG 
Update
    E. ICD-9-CM Coding System
    1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    2. Maintenance of the ICD-9-CM Coding System
    3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
IV. Changes to the LTCH PPS Payment Rates for the 2008 LTCH PPS Rate 
Year
    A. Overview of the Development of the Payment Rates
    B. LTCH PPS Market Basket
    1. Overview of the RPL Market Basket
    2. Market Basket Estimate for the 2008 LTCH PPS Rate Year
    C. Standard Federal Rate for the 2008 LTCH PPS Rate Year
    1. Background
    2. Update to the Standard Federal Rate for the 2008 LTCH PPS 
Rate Year
    3. Standard Federal Rate for the 2008 LTCH PPS Rate Year
    D. Calculation of LTCH Prospective Payments for the 2008 LTCH 
PPS Rate Year
    1. Adjustment for Area Wage Levels
    a. Background
    b. Geographic Classifications/Labor Market Area Definitions
    c. Labor-Related Share
    d. Wage Index Data
    2. Adjustment for Cost-of-Living in Alaska and Hawaii
    3. Adjustment for High-Cost Outliers (HCOs)
    a. Background
    b. Cost-to-charge ratios (CCRs)
    c. Establishment of the Fixed-Loss Amount
    d. Reconciliation of Outlier Payments Upon Cost Report 
Settlement
    e. Application of Outlier Policy to Short-Stay Outlier (SSO) 
Cases
    4. Other Payment Adjustments
    5. Budget Neutrality (BN) Offset to Account for the Transition 
Methodology
    6. One-time Prospective Adjustment to the Standard Federal Rate
V. Other Policy Changes for the 2008 LTCH PPS Rate Year
    A. Short-Stay Outlier (SSO) Cases
    1. Background
    2. Additional Discussion of the SSO Payment Formula (Includes 
Technical Correction)
    3. Determination of Cost-to-Charge Ratios (CCRs)
    4. Reconciliation of SSO Cases
    B. Expansion of Special Payment Provisions for LTCH Hospitals 
within Hospitals (HwHs) and LTCH Satellites: Expansion of the 25 
Percent Rule to Certain Situations Not Currently Covered Under 
Existing Sec.  412.534
VI. Computing the Adjusted Federal Prospective Payments for the 2008 
LTCH PPS Rate Year
VII. Transition Period
VIII. Payments to New LTCHs
IX. Method of Payment
X. Monitoring
XI. MedPAC Recommendations: The RTI Contract
XII. Graduate Medical Education (GME)
    A. GME Background
    B. Resident Training in Nonhospital Settings
    1. Background
    2. Moratorium on Disallowances of Allopathic or Osteopathic 
Family Practice Residents Training Time in Nonhospital Settings, and 
Questions and Answers (Qs&As) on CMS Web site (Section 713 of the 
MMA and Sec.  413.78)
    3. Requirements for Written Agreements for Residency Training in 
Nonhospital Settings (Sec.  413.78(e))
    4. Modification of the Definition of ``All or Substantially All 
of the Costs for the Training Program in the Nonhospital Setting''
    5. Implementation of a 90 Percent Cost Threshold
    C. Other Issues to be Considered
    D. Summary of Final Provisions
XIII. Technical Amendment
XIV. Collection of Information Requirements
XV. Regulatory Impact Analysis
    A. Introduction
    1. Executive Order 12866
    2. Regulatory Flexibility Act (RFA)
    3. Impact on Rural Hospitals
    4. Unfunded Mandates
    5. Federalism

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    6. Alternatives Considered
    B. Anticipated Effects of Payment Rate Changes
    1. Budgetary Impact
    2. Impact on Providers
    3. Calculation of Prospective Payments
    4. Results
    5. Effects on the Medicare Program
    C. Impact of Other Policy Changes
    1. Effects of Policy Expansion of the Special Payment Provisions 
for LTCH HwHs and LTCH Satellites to Certain Situations Not 
Presently Covered by Existing Sec.  412.534 for Subclause (I) LTCHs
    2. Effects of Policy Change Relating to Payment for Direct 
Graduate Medical Education (GME)
    D. Accounting Statement
Addendum: Tables

Acronyms

    Because of the many terms to which we refer by acronym in this 
final rule, we are listing the acronyms used and their corresponding 
terms in alphabetical order below:
AAMC Association of American Medical Colleges
AFMAA Academic Family Medicine Advocacy Alliance
AHA American Hospital Association
AHIMA American Health Information Management Association
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMGA American Medical Group Association
AMPRA American Medical Peer Review Association
AOA American Osteopathic Association
APR All patient refined
ASCA Administrative Simplification Compliance Act of 2002 (Pub. L. 107-
105)
BBA Balanced Budget Act of 1997 (Pub. L. 105-33)
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113)
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000 (Pub. L. 106-
554)
BN Budget neutrality
CBSA Core-based statistical area
CCR Cost-to-charge ratio
C&M Coordination and maintenance
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
COLA Cost of living adjustment
CS Consolidated severity-adjusted
CY Calendar year
DSH Disproportionate share of low-income patients
DRGs Diagnosis-related groups
FI Fiscal intermediary
FMC Family Medicine Center
FTE Full-time equivalent
FY Federal fiscal year
GME Graduate medical education
HCO High-cost outlier
HCRIS Hospital cost report information system
HHA Home health agency
HHS (Department of) Health and Human Services
HIPAA Health Insurance Portability and Accountability Act (Pub. L. 104-
191)
HIPC Health Information Policy Council
HwHs Hospitals within hospitals
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification (codes)
IME Indirect medical education
I-O Input-Output
IPF Inpatient psychiatric facility
IPPS [Acute Care Hospital] Inpatient Prospective Payment System
IRF Inpatient rehabilitation facility
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare code editor
MDC Major diagnostic categories
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare provider analysis and review
MMA Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (Pub. L. 108-173)
MSA Metropolitan statistical area
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCHS National Center for Health Statistics
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509)
OMB Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
OTN One-Time Notification
PIP Periodic interim payment
PLI Professional liability insurance
PMSA Primary metropolitan statistical area
PPI Producer Price Indexes
PPS Prospective payment system
PRA Per resident amount
PSF Provider specific file
QIO Quality Improvement Organization (formerly Peer Review organization 
(PRO))
RIA Regulatory impact analysis
RPL Rehabilitation psychiatric long-term care (hospital)
RTI Research Triangle Institute, International
RY Rate year (begins July 1 and ends June 30)
SIC Standard industrial code
SNF Skilled nursing facility
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982 (Pub. L. 97-248)
TEP Technical expert panel
UHDDS Uniform hospital discharge data set

I. Background

A. Legislative and Regulatory Authority

    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals described in section 1886(d)(1)(B)(iv) of the Social 
Security Act (the Act), effective for cost reporting periods beginning 
on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in fiscal year (FY) 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs. It also requires that the ``per 
discharge'' system maintain budget neutrality (BN). We believe the 
statutory mandate for BN applies only to the first year of the

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implementation of the LTCH PPS such that estimated payments in the 
first year of the PPS were projected to equal payments that would have 
been paid for operating and capital-related costs of LTCHs had this new 
payment system not been enacted.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under BBRA and BIPA (67 FR 
55954). This system uses information from LTCH patient records to 
classify patients into distinct long-term care diagnosis-related groups 
(LTC-DRGs) based on clinical characteristics and expected resource 
needs. Payments are calculated for each LTC-DRG and provisions are made 
for appropriate payment adjustments. Payment rates under the LTCH PPS 
are updated annually and published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in this document when we refer to discharges, 
the intent is to describe Medicare discharges.) The August 30, 2002 
final rule further details the payment policy under the TEFRA system 
(67 FR 55954).
    In the August 30, 2002 final rule, we also presented an in-depth 
discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
BN requirements mandated by section 123 of the BBRA. The same final 
rule that established regulations for the LTCH PPS under 42 CFR part 
412, subpart O, also contained LTCH provisions related to covered 
inpatient services, limitation on charges to beneficiaries, medical 
review requirements, furnishing of inpatient hospital services directly 
or under arrangement, and reporting and recordkeeping requirements. We 
refer readers to the August 30, 2002 final rule for a comprehensive 
discussion of the research and data that supported the establishment of 
the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
are effective. The annual updated rates are now effective from July 1 
through June 30 instead of from October 1 through September 30. We 
refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate is based on a LTCH PPS rate 
year. While the LTCH payment rate update is effective July 1, the 
annual update of the LTC-DRG classifications and relative weights are 
linked to the annual adjustments of the acute care hospital inpatient 
DRGs and are effective each October 1.
    In the Prospective Payment System for Long-Term Care Hospitals RY 
2007: Annual Payment Rate Updates, Policy Changes, and Clarifications 
final rule (71 FR 27798) (hereinafter referred to as the RY 2007 LTCH 
PPS final rule), we set forth the 2007 LTCH PPS rate year annual update 
of the payment rates for the Medicare PPS for inpatient hospital 
services provided by LTCHs. We also adopted the ``Rehabilitation, 
Psychiatric, Long-Term Care (RPL)'' market basket under the LTCH PPS in 
place of the excluded hospital with capital market basket. In addition, 
we implemented a zero percent update to the LTCH PPS Federal rate for 
RY 2007. We also revised the existing payment adjustment for short stay 
outlier (SSO) cases by reducing part of the current payment formula and 
adding a fourth component to that payment formula. In addition, we 
sunsetted the surgical DRG exception to the payment policy established 
under the 3-day or less interruption of stay policy. Finally, we 
clarified the policy at Sec.  412.534(c) for adjusting the LTCH PPS 
payment so that the LTCH PPS payment is equivalent to what would 
otherwise be payable under Sec.  412.1(a).

B. Criteria for Classification as a LTCH

1. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient LOS of 
greater than 25 days. Alternatively, Sec.  412.23(e)(2)(ii) states that 
for cost reporting periods beginning on or after August 5, 1997, a 
hospital that was first excluded from the PPS in 1986 and can 
demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease 
must have an average inpatient LOS for all patients, including both 
Medicare and non-Medicare inpatients, of greater than 20 days.
    Section 412.23(e)(3) provides that, subject to the provisions of 
paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, the average 
Medicare inpatient LOS, specified under Sec.  412.23(e)(2)(i) is 
calculated by dividing the total number of covered and noncovered days 
of stay for Medicare inpatients (less leave or pass days) by the number 
of total Medicare discharges for the hospital's most recent complete 
cost reporting period. Section 412.23 also provides that subject to the 
provisions of paragraphs (e)(3)(ii) through (e)(3)(iv) of this section, 
the average inpatient LOS specified under Sec.  412.23(e)(2)(ii) is 
calculated by dividing the total number of days for all patients, 
including both Medicare and non-Medicare inpatients (less leave or pass 
days) by the number of total discharges for the hospital's most recent 
complete cost reporting period.
    In the RY 2005 LTCH PPS final rule (69 FR 25674), we specified the 
procedure for calculating a hospital's inpatient average length of stay 
(ALOS) for purposes of classification as a LTCH. That is, if a 
patient's stay includes days of care furnished during two or more 
separate consecutive cost reporting periods, the total days of a 
patient's stay would be reported in the cost reporting period during 
which the patient is discharged (69 FR 25705). Therefore, we revised 
Sec.  412.23(e)(3)(ii) to specify that,

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

C. Transition Period for Implementation of the LTCH PPS

    In the August 30, 2002 final rule (67 FR 55954), we provided for a 
5-year transition period. During this 5-year transition period, a 
LTCH's total payment under the PPS was based on an increasing 
percentage of the Federal rate with a corresponding decrease in the 
percentage of the LTCH PPS payment that is based on reasonable cost 
concepts. However, effective for cost reporting periods beginning on or 
after October 1, 2006, total LTCH PPS payments are based on 100 percent 
of the Federal rate.

D. Limitation on Charges to Beneficiaries

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

E. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance

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

[[Page 26874]]

providers, to conduct the covered electronic transactions according to 
the applicable transactions and code sets standards.

II. Summary of the Provisions of the Final Rule

A. Major Contents of This Final Rule

    In this final rule, we are setting forth the annual update to the 
payment rates for the Medicare LTCH PPS, as well as, other policy 
changes. The following is a summary of the major areas that we have 
addressed in this final rule.
    In section III. of this preamble, we discuss the LTCH PPS patient 
classification and the relative weights which remain linked to the 
annual adjustments of the acute care hospital inpatient DRG system, and 
are based on the annual revisions to the International Classification 
of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM) codes 
effective each October 1.
    Also, in section III. of this preamble, we have established a BN 
requirement for the annual update of the LTC-DRG classifications and 
relative weights to reflect changes in relative LTCH resource use. This 
requirement ensures that estimated aggregate LTCH PPS payments will not 
decrease or increase as a result of the annual update to the LTC-DRG 
classifications and relative weights based on the most recent available 
data. In this section, we also summarize the proposed severity adjusted 
MS-LTC-DRGs and the development of the proposed relative weights for FY 
2008 presented in the FY 2008 IPPS proposed rule.
    As discussed in section IV.C. of this preamble, we are implementing 
a 0.71 percent update to the LTCH PPS Federal rate for the 2008 LTCH 
PPS rate year based on an adjustment to account for changes in coding 
practices. Also in section IV. of this preamble, we discuss the 
prospective payment rate for RY 2008, and in section VI., we discuss 
the applicable adjustments to the payment rates, including the 
revisions to the wage index, the labor-related share, the cost-of-
living adjustment (COLA) factors, and the outlier threshold, for the 
2008 LTCH PPS rate year.
    In section V.A. of this preamble, we discuss our change to the 
current payment formula for certain SSO cases. That is, those cases 
with a LOS that is less than or equal to one standard deviation of the 
ALOS of an IPPS discharge that was grouped into the same DRG. However, 
in situations where the SSO cases would exceed the IPPS discharge that 
was grouped in the same DRG, payment would continue to be paid under 
the existing formula.
    In section V.B. of this preamble, we discuss the expansion of the 
present 25 percent admission policy at Sec.  412.534(c) to those 
certain situations not already affected by the existing policy. 
Previously, this policy only applied to co-located LTCHs and LTCH 
satellites whose percentage of discharges exceeded the 25 percent 
threshold (or the applicable percentage). This is extended to include 
an adjusted payment to LTCH discharges that were admitted from 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH where those discharges exceed the 25 percent (or applicable 
percentage) threshold. The final policy also applies to grandfathered 
LTCHs and satellite facilities of LTCHs that have Medicare discharges 
that were admitted from a hospital co-located with the LTCH or 
satellite facility of the grandfathered LTCH.
    In section X. of this preamble, we will discuss our on-going 
monitoring protocols under the LTCH PPS.
    In section XI. of this preamble, we discuss the recommendations 
made by the Research Triangle Institute, International's (RTI) 
evaluation of the feasibility of adopting recommendations made in the 
June 2004 Medicare Payment Advisory Commission (MedPAC) Report.
    In section XII. of this preamble, we discuss our revisions to 
redefine the statutory term ``all or substantially all of the costs for 
the training program in the nonhospital setting.'' The statute requires 
that hospitals must pay ``all or substantially all'' of the costs for a 
training program in a nonhospital setting in order to count FTE 
residents training in the nonhospital setting for Medicare graduate 
medical education (GME) payment purposes. We are revising Sec.  
413.75(b) to introduce a new definition of ``all or substantially all 
of the costs for the training program in the nonhospital setting'' to 
mean, at least 90 percent of the total of the costs of the residents' 
salaries and fringe benefits (including travel and lodging where 
applicable) and the portion of the cost of teaching physicians' 
salaries attributable to nonpatient care direct GME activities. In 
addition, we are revising Sec.  412.105(f)(1)(ii)(C) for IME and Sec.  
413.78 to reflect this new definition of ``all or substantially all'' 
of the GME costs in a nonhospital setting, effective for cost reporting 
periods beginning on or after July 1, 2007.
    In section XV. of this preamble, we analyze the impact of the 
changes presented in this final rule on Medicare expenditures, 
Medicare-participating LTCHs, and Medicare beneficiaries.

B. Responses to Comments

    We received 270 comments on the RY 2007 LTCH PPS proposed rule. 
Comments and responses follow the appropriate policy section in this 
rule. The following is a comment we received regarding the schedule of 
the LTCH PPS update.
    Comment: One commenter urged CMS to consolidate the July 1 update 
of the LTCH PPS rates and the October 1 development of the LTC-DRG 
weights into one publication cycle, a step which the commenter states 
would be very beneficial for the LTCH industry.
    Response: We appreciate the commenter's suggestion and we will 
evaluate whether such a consolidation is a workable alternative to our 
present schedule.

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

A. Background

    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a DRG-based patient 
classification system reflecting the differences in patient resource 
use and costs). Section 307(b)(1) of the BIPA modified the requirements 
of section 123 of the BBRA by requiring that the Secretary examine 
``the feasibility and the impact of basing payment under such a system 
[the LTCH PPS] on the use of existing (or refined) hospital DRGs that 
have been modified to account for different resource use of LTCH 
patients, as well as the use of the most recently available hospital 
discharge data.''
    In accordance with section 123 of the BBRA as amended by section 
307(b)(1) of the BIPA and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify these cases into distinct 
LTC-DRGs based on clinical characteristics and estimated resource 
needs. The LTC-DRGs used as the patient classification component of the 
LTCH PPS correspond to the hospital inpatient DRGs in the IPPS. (As 
discussed in greater detail below in this section, in the FY 2008 IPPS 
proposed rule, we have proposed to adopt the severity-weighted patient 
classification system, the proposed MS-LTC-DRGs, for the LTCH PPS 
beginning in FY 2008, which is the same patient classification system 
proposed for use under the IPPS for FY 2008.) We assign an appropriate 
weight to the LTC-DRGs to account for the difference in resource use by 
patients exhibiting the case complexity and multiple medical problems 
characteristic of LTCHs.

[[Page 26875]]

    In a departure from the IPPS, we use low volume LTC-DRGs (less than 
25 LTCH cases) in determining the LTC-DRG weights, since LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
To manage the large number of low volume DRGs (all DRGs with fewer than 
25 cases), we group low volume DRGs into 5 quintiles based on average 
charge per discharge. (A listing of the current composition of low 
volume quintiles used in determining the FY 2007 LTC-DRG relative 
weights appears in the FY 2007 IPPS final rule (71 FR 47974 through 
47978). A listing of the proposed composition of low volume quintiles 
used in determining the proposed FY 2008 MS-LTC-DRG relative weights 
appears in the FY 2008 IPPS proposed rule.) We also account for 
adjustments to payments for cases in which the stay at the LTCH is less 
than or equal to five-sixths of the geometric ALOS and classify these 
cases as SSO cases. (A detailed discussion of the application of the 
Lewin Group model that was used to develop the LTC-DRGs appears in the 
August 30, 2002 LTCH PPS final rule (67 FR 55978).)

B. Patient Classifications Into DRGs

    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; that payment varies by 
the LTC-DRG to which a beneficiary's stay is assigned. Consistent with 
our historical practice of having LTC-DRGs correspond to the DRGs 
applicable under the IPPS, we will continue to model the LTCH-DRGs 
after their predecessor CMS DRGs. In addition, we are proposing to use 
the FY 2008 GROUPER Version 25.0 to be effective for discharges 
occurring on or after October 1, 2007 through September 30, 2008.
    Cases are classified into LTC-DRGs for payment based on the 
following six data elements:
    (1) Principal diagnosis.
    (2) Up to eight additional diagnoses.
    (3) Up to six procedures performed.
    (4) Age.
    (5) Sex.
    (6) Discharge status of the patient.
    As indicated in the August 30, 2002 LTCH PPS final rule, upon the 
discharge of the patient from a LTCH, the LTCH must assign appropriate 
diagnosis and procedure codes from the most current version of the 
International Classification of Diseases, Ninth Revision, Clinical 
Modification (ICD-9-CM). HIPAA Transactions and Code Sets Standards 
regulations at 45 CFR parts 160 and 162 require that no later than 
October 16, 2003, all covered entities must comply with the applicable 
requirements of subparts A and I through R of part 162. Among other 
requirements, those provisions direct covered entities to use the ASC 
X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, version 
4010, and the applicable standard medical data code sets for the 
institutional health care claim or equivalent encounter information 
transaction (see 45 CFR 162.1002 and 45 CFR 162.1102).
    Medicare FIs/MACs enter the clinical and demographic information 
into their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a DRG can be made. During this 
process, the following types of cases, among others, are selected for 
further development:
    <bullet> Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.6, Radical abdominal hysterectomy, would be an inappropriate code 
for a male.)
    <bullet> Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a non-approved transplant 
center.)
    <bullet> Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262, 
Other severe protein-calorie malnutrition, contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    After screening through the MCE, each claim will be classified into 
the appropriate LTC-DRG by the Medicare LTCH GROUPER software. As 
indicated in the August 30, 2002 LTCH PPS final rule, the Medicare 
GROUPER software, which is used under the LTCH PPS, is specialized 
computer software, and is the same GROUPER software program used under 
the IPPS. The GROUPER software was developed as a means of classifying 
each case into a DRG on the basis of diagnosis and procedure codes and 
other demographic information (age, sex, and discharge status). 
Following the LTC-DRG assignment, the Medicare FI/MAC determines the 
prospective payment by using the Medicare PRICER program, which 
accounts for hospital-specific adjustments. Under the LTCH PPS, we 
provide an opportunity for the LTCH to review the LTC-DRG assignments 
made by the FI and to submit additional information within a specified 
timeframe as specified in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the DRG weights and 
to classify current cases for purposes of determining payment. The 
records for all Medicare hospital inpatient discharges are maintained 
in the MedPAR file. The data in this file are used to evaluate possible 
DRG classification changes and to recalibrate the DRG weights during 
our annual update under both the IPPS (Sec.  412.60(e)) and the LTCH 
PPS (Sec.  412.517). As discussed in greater detail in sections III.D. 
and E. of this preamble, with the implementation of section 503(a) of 
the Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA) (Pub. L. 108-173), there is the possibility that one feature 
of the GROUPER software program may be updated twice during a Federal 
FY (October 1 and April 1) as required by the statute for the IPPS (69 
FR 48954 through 48957). Specifically, as we discussed in the FY 2007 
IPPS final rule, diagnosis and procedure codes for new medical 
technology may be created and added to existing CMS DRGs in the middle 
of the Federal FY on April 1 (71 FR 47959 and 47971). However, this 
policy change will have no effect on the LTC-DRG relative weights 
during the FY, which will continue to be updated only once a year on 
October 1, nor will there be any impact on Medicare payments under the 
LTCH PPS during the FY as a result of this policy. The use of the ICD-
9-CM code set is also compliant with the current requirements of the 
Transactions and Code Sets Standards regulations at 45 CFR parts 160 
and 162, published in accordance with HIPAA.
    In the IPPS proposed rule, we proposed to create and implement MS-
DRGs for FY 2008; that is, the proposed MS-DRGs would be effective 
beginning with discharges on or after October 1, 2007 through September 
30, 2008. The proposed MS-DRGs are a severity-based system of DRGs in 
which all existing CMS DRGs were refined to better recognize severity 
of illness among patients. The details of this proposal can be reviewed 
online at http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/CMS-1533-P.pdf.
    Under the broad authority of section 123(a) of the BBRA as modified 
by section 307(b) of the BIPA, we intend to model the proposed MS-LTC-
DRGs on the corresponding CMS DRGs as described in the FY 2008 IPPS 
proposed rule if this DRG system is implemented for the IPPS in FY 
2008. In addition, as

[[Page 26876]]

stated above in this section, we intend to use the FY 2008 GROUPER 
Version 25.0, effective for discharges occurring on or after October 1, 
2007 through September 30, 2008 for the LTCH PPS if the IPPS system is 
implemented for FY 2008.
    To elaborate, if the proposed MS-DRGs are adopted for use by the 
IPPS, the LTC-DRGs will use the same structure as the proposed MS-DRGs, 
and will be referred to as the MS-LTC-DRGs. Cases will continue to be 
classified into MS-LTC-DRGs using the six data elements listed above, 
and will be subject to review by the MCE as they have in the past. 
After screening through the MCE, claims will be classified into the 
appropriate MS-LTC-DRG by the LTCH PPS GROUPER software. Following the 
MS-LTC-DRG assignment, the Medicare FI/MAC determines the appropriate 
payment using the Medicare PRICER program.

C. Organization of DRGs

    The DRGs are organized into 25 major diagnostic categories (MDCs), 
most of which are based on a particular organ system of the body; the 
remainder involve multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Surgical DRGs are assigned based on a surgical hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. The GROUPER software program does not recognize all 
ICD-9-CM procedure codes as procedures that affect DRG assignment, that 
is, procedures which are not surgical (for example, EKG), or minor 
surgical procedures (for example, 86.11, Biopsy of skin and 
subcutaneous tissue).
    The medical DRGs are generally differentiated on the basis of 
diagnosis. Both medical and surgical DRGs may be further differentiated 
based on age, sex, discharge status, and presence or absence of 
complications or comorbidities (CC). The proposed MS-DRGs, as defined 
in the FY 2008 IPPS proposed rule, and the MS-LTC-DRGs contain base 
DRGs that have been subdivided into one, two, or three severity levels. 
The most severe level has at least one code that is a major CC, 
referred to as ``with MCC''. The next lower severity level contains 
cases with at least one CC, referred to as ``with CC''. Those DRGs 
without an MCC or a CC are referred to as ``without CC/MCC''. When data 
did not support the creation of three severity levels, the base DRG was 
divided into either two levels or the base was not subdivided. The 
proposed two-level subdivisions consist of one of the following 
subdivisions:
    <bullet> With CC/MCC.
    <bullet> Without CC/MCC.
    In this type of subdivision, cases with at least one code that is 
on the CC or MCC list are assigned to the ``with CC/MCC'' DRG. Cases 
without a CC or an MCC are assigned to the ``without CC/MCC'' DRG.
    The other type of proposed two-level subdivision is as follows:
    <bullet> With MCC.
    <bullet> Without MCC.
    In this type of subdivision, cases with at least one code that is 
on the MCC list are assigned to the ``with MCC'' DRG. Cases that do not 
have an MCC are assigned to the ``without MCC'' DRG. This type of 
subdivision could include cases with a CC code, but no MCC.
    We note that CCs are defined by certain secondary diagnoses not 
related to, or not inherently a part of, the disease process identified 
by the principal diagnosis. (For example, the GROUPER software would 
not recognize a code from the 800.0x series, Skull fracture, as a CC 
when combined with principal diagnosis 850.4, Concussion with prolonged 
loss of consciousness, without return to preexisting conscious level.) 
In addition, we note that the presence of additional diagnoses does not 
automatically generate a CC, as not all MS-DRGs or MS-LTC-DRGs 
recognize comorbid or complicating conditions in their definition. (For 
example, proposed MS-DRG 069, Transient Ischemia (formerly CMS DRG 524, 
Transient Ischemia), is based solely on the principal diagnosis, 
without consideration of additional diagnoses for DRG determination.)
    As discussed in greater detail in the FY 2007 IPPS final rule (71 
FR 47898 through 47912 and 47973), in its March 2005 Report to 
Congress, ``Physician-Owned Specialty Hospitals,'' MedPAC recommended 
that the Secretary improve payment accuracy in the hospital IPPS by, 
among other things, ``refining the current DRGs to more fully capture 
differences in severity of illness among patients.'' (Recommendation 1, 
p. 93.) As we discussed in that same final rule (71 FR 47973), we did 
not adopt a new severity-adjusted patient classification system under 
the IPPS, for FY 2007, but we did refine the CMS DRG patient 
classification system for Version 24.0 of the GROUPER software to 
improve the CMS DRG system's recognition of severity of illness for FY 
2007. The updates to the CMS DRG patient classification system used 
under the IPPS for FY 2007 (GROUPER Version 24.0), were also applied to 
the LTC-DRGs used under the LTCH PPS for FY 2007.
    In the FY 2008 IPPS proposed rule, we presented the changes to the 
proposed MS-DRG patient classification system for FY 2008. In that 
rule, we proposed the IPPS GROUPER Version 25.0 for FY 2008 to process 
LTCH PPS claims for LTCH discharges occurring from October 1, 2007 
through September 30, 2008. As noted above in this section and as we 
also discussed in the FY 2007 IPPS final rule, in its March 1, 2005 
Report to Congress on Medicare Payment Policy (page 64) and in 
Recommendation 1 of the 2005 Report to Congress on Physician-Owned 
Specialty Hospitals, MedPAC recommended that CMS, among other things, 
refine the current DRGs under the IPPS to more fully capture 
differences in severity of illness among patients.

D. Update of LTC-DRGs

1. Background
    We propose to modify the existing LTC-DRGs so that they reflect the 
changes made to the CMS DRGs under the proposed IPPS notice. As 
discussed in greater detail in the FY 2008 IPPS proposed rule, under 
the LTCH PPS, relative weights for each proposed MS-LTC-DRG are a 
primary element used to account for the variations in cost per 
discharge and resource utilization among the payment groups (that is, 
proposed MS-LTC-DRGs). To ensure that Medicare patients classified to 
each proposed MS-LTC-DRG have access to an appropriate level of 
services and to encourage efficiency, each year based on the best 
available data, we calculate a relative weight for each proposed MS-
LTC-DRG that represents the resources needed by an average inpatient 
LTCH case in that proposed MS-LTC-DRG. For example, cases in a proposed 
MS-LTC-DRG with a relative weight of 2 will, on average, cost twice as 
much as cases in a proposed MS-LTC-DRG with a relative weight of 1. 
Under Sec.  412.517, the proposed MS-LTC-DRG classifications and 
weighting factors (that is, relative weights) are adjusted annually to 
reflect changes in factors affecting the relative use of LTCH 
resources, including treatment patterns, technology and number of 
discharges.
    For FY 2008, the proposed MS-LTC-DRG classifications and relative 
weights were updated based on LTCH data from the FY 2005 MedPAR file, 
which contained hospital bills data from the December 2006 update. The 
proposed MS-LTC-DRG patient classification system is based upon 745 MS-
DRGs that formed the structure of the FY 2008

[[Page 26877]]

LTCH PPS GROUPER program. The FY 2008 proposed MS-LTC-DRGs continues to 
include two ``error DRGs.'' As in the IPPS, we included two error DRGs 
in which cases that cannot be assigned to valid DRGs will be grouped. 
These two proposed error MS-LTC-DRGs are MS-LTC-DRG 999 (Principal 
Diagnosis Invalid as a Discharge Diagnosis) and MS-LTC-DRG 998 
(Ungroupable). The other 743 proposed MS-LTC-DRGs are the same MS-DRGs 
used in the IPPS GROUPER program for FY 2008 (Version 25.0).
    For FY 2008, as discussed in greater detail in the FY 2008 IPPS 
proposed rule, we proposed to adopt the MS-LTC-DRGs for the LTCH PPS 
for RY 2008. (Additional information on the proposed MS-LTC-DRG 
classifications and proposed MS-LTC-DRG relative weights can be found 
in the FY 2008 IPPS proposed rule.)
    In the past, the annual update to the CMS DRGs was based on the 
annual revisions to the ICD-9-CM codes and was effective each October 
1. The ICD-9-CM coding update process was revised as discussed in 
greater detail in the FY 2005 IPPS final rule (69 FR 48953 through 
48957). Specifically, section 503(a) of the MMA includes a requirement 
for updating diagnosis and procedure codes twice a year instead of the 
current process of annual updates on October 1 of each year. This 
requirement is included as part of the amendments to the Act relating 
to recognition of new medical technology under the IPPS. (For 
additional information on this provision, including its implementation 
and its impact on the LTCH PPS, refer to the FY 2005 IPPS final rule 
(69 FR 48953 through 48957), the RY 2006 LTCH PPS final rule (70 FR 
24172 through 24177), and the RY 2008 LTCH PPS proposed rule (72 FR 
4783 through 4784).)
    As discussed in the RY 2008 proposed rule (72 FR 4784), in 
implementing section 503(a) of the MMA, there will only be an April 1 
update if diagnosis and procedure codes are requested and approved. We 
note that any new codes created for April 1 implementation will be 
limited to those diagnosis and procedure code revisions primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM has 
been an open process through the ICD-9-CM Coordination and Maintenance 
(C&M) Committee since 1995. Requestors will be given the opportunity to 
present the merits for a new code and make a clear and convincing case 
for the need to update ICD-9-CM codes through an April 1 update.
    At the September 2006 ICD-9-CM C&M Committee meeting, there were no 
requests for an April 1, 2007 implementation of ICD-9-CM codes, and 
therefore, the next update to the ICD-9-CM coding system will not occur 
until October 1, 2007 (FY 2008). Presently, as there were no coding 
changes suggested for an April 1, 2007 update, the ICD-9-CM coding set 
implemented on October 1, 2006, will continue through September 30, 
2007 (FY 2007). As discussed above in this section, the next update to 
the proposed MS-LTC-DRGs and relative weights for proposed FY 2008 will 
be presented in the FY 2008 IPPS proposed rule. Furthermore, we will 
notify LTCHs of any revisions to the GROUPER software used under the 
IPPS and LTCH PPS that would be implemented April 1, 2008. As noted 
previously in this section, in the FY 2007 IPPS final rule (71 FR 
47973), we established the use of Version 24.0 of the CMS GROUPER, 
which is used under the IPPS for FY 2007, to classify cases for LTCH 
PPS discharges that would occur on or after October 1, 2006 and on or 
before September 30, 2007.
2. Method for Updating the LTC-DRG Relative Weights
    As discussed in the August 30, 2002 LTCH PPS final rule that 
implemented the LTCH PPS, under the LTCH PPS, each LTCH will receive a 
payment that represents an appropriate amount for the efficient 
delivery of care to Medicare patients (67 FR 55984). The system must be 
able to account adequately for each LTCH's case-mix to ensure both a 
fair distribution of Medicare payments and access to care for those 
Medicare patients whose care is more costly. Therefore, in Sec.  
412.523(c), we adjust the standard Federal PPS rate by the LTC-DRG 
relative weights in determining payment to LTCHs for each case. As we 
have noted above, we are proposing to adopt the MS-LTC-DRGs for the 
LTCH PPS for FY 2008. However, as discussed in the FY 2008 IPPS 
proposed rule, this proposed change in the patient classification 
system does not affect the basic principles of the development of 
relative weights under a DRG-based PPS. For purposes of clarity, in the 
general discussion below in which we describe the basic methodology of 
the patient classification system in use since the start of the LTCH 
PPS, we use the acronym ``MS-LTC-DRG'' to specify the proposed DRG 
patient classification system to be used by the LTCH PPS in FY 2008. 
Although the proposed adoption of the MS-LTC-DRGs would result in some 
modifications of existing procedures for assigning weights (for 
example, in cases of zero volume and/or nonmonotonicity, as discussed 
below), the basic methodology for developing the proposed FY 2008 MS-
LTC-DRG relative weights presented in the FY 2008 IPPS proposed rule 
continued to be determined in accordance with the general methodology 
established in the August 30, 2002 LTCH PPS final rule (67 FR 55989 
through 55991), which is discussed below. Therefore, in the discussion 
below, the term ``LTC-DRGs'' will be used in descriptions of the basic 
methodology established at the beginning of the LTCH PPS that will 
remain unchanged if we adopt the proposed MS-LTC-DRGs. The use of the 
term ``MS-LTC-DRGs'' in the following discussion will indicate a 
discussion of specifics aspects of our proposed adoption of the 
severity-weighted patient classification system for FY 2008 as 
presented in the FY 2008 IPPS proposed rule.)
    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 as described in Sec.  
412.515. To ensure that Medicare patients who are classified to each 
LTC-DRG have access to services and to encourage efficiency, we 
calculate a relative weight for each LTC-DRG that represents the 
resources needed by an average inpatient LTCH case in that LTC-DRG. For 
example, cases in a LTC-DRG with a relative weight of 2 will, on 
average, cost twice as much as cases in a LTC-DRG with a weight of 1.
    As we discussed in the FY 2007 IPPS final rule, the LTC-DRG 
relative weights effective under the LTCH PPS for FY 2007 were 
calculated using the March 2006 update of FY 2005 MedPAR data and 
Version 24.0 of the GROUPER software (71 FR 47973). We use total days 
and total charges in the calculation of the LTC-DRG relative weights.
    LTCHs often specialize in certain areas, such as ventilator-
dependent patients and rehabilitation or wound care. Some case types 
(DRGs) may be treated, to a large extent, in hospitals that have (from 
a perspective of charges) relatively high (or low) charges. 
Distribution of cases with relatively high (or low) charges in specific 
LTC-DRGs has the potential to inappropriately distort the measure of 
average charges. To account for the fact that cases may not be randomly 
distributed across LTCHs, we use a hospital-specific relative value 
method to calculate relative weights. We believe this method removes 
this hospital-specific source of bias in measuring

[[Page 26878]]

average charges. Specifically, we reduce the impact of the variation in 
charges across providers on any particular LTC-DRG relative weight by 
converting each LTCH's charge for a case to a relative value based on 
that LTCH's average charge. (See the FY 2007 IPPS final rule for 
further information on the application of the hospital-specific 
relative value methodology under the LTCH PPS (71 FR 47974 through 
47975).)
    To account for LTC-DRGs with low volume (that is, with fewer than 
25 LTCH cases), we grouped those low volume LTC-DRGs into 1 of 5 
categories (quintiles) based on average charges, for the purposes of 
determining relative weights. For FY 2007 based on the FY 2005 MedPAR 
data, we identified 180 LTC-DRGs that contained between 1 and 24 cases. 
This list of low volume LTC-DRGs was then divided into 1 of the 5 low 
volume quintiles, each containing 36 LTC-DRGs (180/5 = 36). Each of the 
low volume LTC-DRGs grouped to a specific quintile received the same 
relative weight and ALOS using the formula applied to the regular LTC-
DRGs (25 or more cases). (See the FY 2007 IPPS final rule for further 
explanation of the development and composition of each of the 5 low 
volume quintiles for FY 2007 and their composition (71 FR 47975 through 
47978).)
    After grouping the cases in the appropriate LTC-DRG, we calculated 
the relative weights by first removing statistical outliers and cases 
with a LOS of 7 days or less. Next, we adjusted the number of cases 
remaining in each LTC-DRG for the effect of SSO cases under Sec.  
412.529. The short-stay adjusted discharges and corresponding charges 
were used to calculate ``relative adjusted weights'' in each LTC-DRG 
using the hospital-specific relative value method. We also adjusted the 
LTC-DRG relative weights to account for nonmonotonically increasing 
relative weights. That is, we made an adjustment if cases classified to 
the LTC-DRG ``with CCs'' of a ``with CC''/``without CC'' pair had a 
lower average charge than the corresponding LTC-DRG ``without CCs'' by 
assigning the same weight to both LTC-DRGs in the ``with CC''/``without 
CC'' pair. (See the FY 2007 IPPS final rule for further details on the 
steps for calculating the LTC-DRG relative weights (71 FR 47978 through 
47984).)
    In addition, of the 538 LTC-DRGs in the LTCH PPS for FY 2007, based 
on LTCH cases in the FY 2005 MedPAR files, we identified 183 LTC-DRGs 
for which there were no LTCH cases in the database. That is, no 
patients who would have been classified to those DRGs were treated in 
LTCHs during FY 2005, and therefore, no charge data were reported for 
those DRGs. Thus, in the process of determining the relative weights of 
LTC-DRGs, we were unable to determine weights for these 183 LTC-DRGs 
using the method described in this section of the preamble. However, 
since patients with a number of the diagnoses under these LTC-DRGs may 
be treated at LTCHs beginning in FY 2007, we assigned relative weights 
to each of the 183 ``no volume'' LTC-DRGs based on clinical similarity 
and relative costliness to one of the remaining 355 (538-183 = 355) 
LTC-DRGs for which we were able to determine relative weights, based on 
the FY 2005 claims data. (A list of the current no-volume LTC-DRGs and 
further explanation of their FY 2007 relative weight assignment can be 
found in the FY 2007 IPPS final rule (71 FR 47980 through 47984).)
    Furthermore, for FY 2007, we established LTC-DRG relative weights 
of 0.0000 for heart, kidney, liver/intestinal, lung, simultaneous 
pancreas/kidney, and pancreas transplants (LTC-DRGs 103, 302, 480, 495, 
512 and 513, respectively) because presently no LTCH meets the 
applicable requirements to perform Medicare covered transplant 
procedures. However, if in the future, a LTCH seeks to meet such 
requirements as a Medicare-approved transplant center to perform 
Medicare-covered transplant procedures, we believe that the application 
and approval procedure would allow sufficient time for us to propose 
appropriate weights for the LTC-DRGs affected. At the present time, we 
included these 6 transplant LTC-DRGs in the GROUPER software program 
for administrative purposes. As the LTCH PPS uses the same GROUPER 
software program for LTCHs as is used under the IPPS, removing these 
DRGs would be administratively burdensome.
    As we noted previously in this section, there were no new ICD-9-CM 
code requests for an April 1, 2007 update. Therefore, Version 24.0 of 
the DRG GROUPER software established in the FY 2007 IPPS final rule 
will continue to be effective until October 1, 2007. Moreover, the LTC-
DRGs and relative weights for FY 2007 established in Table 11 of that 
same IPPS final rule (71 FR 48321 through 48331) will continue to be 
effective until October 1, 2007, (just as they would have been even if 
there had been any new ICD-9-CM code requests for an April 1, 2007 
update). Accordingly, Table 3 in the Addendum to this final rule lists 
the LTC-DRGs and their respective relative weights, geometric ALOS, and 
five-sixths of the geometric ALOS that we will continue to use for the 
period of July 1, 2007 through September 30, 2007. (This table is the 
same as Table 11 of the Addendum to the FY 2007 IPPS final rule.) The 
next update to the ICD-9-CM coding system will be presented in the FY 
2008 IPPS proposed rule (since there will be no April 1, 2007 updates 
to the ICD-9-CM coding system).
    In addition, the proposed DRGs and GROUPER for FY 2008 that would 
be effective October 1, 2007, will be presented in the IPPS FY 2008 
proposed rule. Below we provide a summary of the development of the 
proposed LTC-DRG relative weights for FY 2008 presented in that same 
proposed rule. To calculate the proposed MS-LTC-DRG relative weights 
for FY 2008 in the FY 2008 IPPS proposed rule, we obtained total 
Medicare allowable charges from FY 2006 Medicare LTCH bill data from 
the December 2006 update of the MedPAR file, which are the best 
available data at this time, and we used the proposed Version 25.0 of 
the CMS GROUPER used under the IPPS (as discussed in section II.B. of 
the preamble of that proposed rule) to classify cases. To calculate the 
final MS-LTC-DRG relative weights for FY 2008, we proposed that, if 
more recent data are available (for example, data from the March 2007 
update of the MedPAR file), we would use those data and the finalized 
Version 25.0 of the CMS GROUPER used under the IPPS. We continued to 
use total days and total charges in the calculation of the proposed MS-
LTC-DRG relative weights. We also continued to use the hospital-
specific relative value methodology, described above, for determining 
the proposed MS-LTC-DRG relative weights for FY 2008.
    As noted above in this section, although the proposed adoption of 
the MS-LTC-DRGs would result in some modifications of existing 
procedures discussed above for assigning relative weights under the 
current system (as discussed in detail below), the basic methodology 
for developing the proposed FY 2008 MS-LTC-DRG relative weights in the 
FY 2008 IPPS proposed rule continue to be determined in accordance with 
the general methodology established in the August 30, 2002 LTCH PPS 
final rule (67 FR 55989 through 55991) summarized above. With the 
implementation of the LTCH PPS for FY 2003, we established a procedure 
to address setting relative weights for LTC-DRG ``pairs'' that were 
differentiated on the presence or

[[Page 26879]]

absence of CCs (71 FR 47979). As discussed in the FY 2008 IPPS proposed 
rule, our proposal to adopt a severity-based patient classification 
system for the LTCH PPS, the MS-LTC-DRGs described above, required us 
to adapt our existing approach for setting relative weights for the 
severity levels within a specific base DRG. We are also proposed to 
modify our existing methodology for maintaining monotonicity when 
setting relative weights for the proposed MS-LTC-DRGs.
    As under the existing procedure, under the proposed MS-LTC-DRGs, 
for purposes of the annual setting of the relative weights, there 
continue to be three different categories of DRGs based on volume of 
cases within specific LTC-DRGs. LTC-DRGs with at least 25 cases are 
each assigned a relative weight; low-volume proposed MS-LTC-DRGs (that 
is, proposed MS-LTC-DRGs that contain between 1 and 24 cases annually) 
are grouped into quintiles (described below) and assigned the weight of 
the quintile. Cases with no-volume proposed MS-LTC-DRGs (that is, no 
cases in the database were assigned to those proposed MS-LTC-DRGs) are 
cross-walked to other proposed MS-LTC-DRGs based on the clinical 
similarities and assigned the weight of the quintile that is closest to 
the relative weight of the cross-walked proposed MS-LTC-DRG. (For in-
depth discussions of our proposals regarding proposed relative weight 
setting for low-volume MS-LTC-DRGs and for no-volume MS-LTC-DRGs, see 
the FY 2008 IPPS proposed rule.)
    As noted above, for FY 2008, we are proposing to adopt the MS-DRGs 
for use in both the LTCH PPS and the IPPS. While the LTCH PPS and the 
IPPS use the same patient classification system, the methodology that 
is used to set the DRG weights for use in each payment system differs 
because the overall volume of cases in the LTCH PPS is much less than 
in the IPPS. As a general rule, as described in the FY 2008 IPPS 
proposed rule, we are proposing to set the weights for the proposed MS-
LTC-DRGs using the following steps: (1) If an MS-LTC-DRG has at least 
25 cases, it is assigned its own relative weight; (2) if an MS-LTC-DRGs 
has between 1 and 24 cases, it is assigned to a quintile to which we 
will assign a relative weight; and (3) if an MS-LTC-DRG has no cases, 
it is cross-walked to another DRG based upon clinical similarities and 
assigned the appropriate relative weight. Theoretically, as with the 
existing LTC-DRG system, cases under the proposed MS-LTC-DRG system 
that are more severe require greater expenditure of medical care 
resources and will result in higher average charges. Therefore, in the 
three severity levels of the base MS-LTC-DRG, relative weights should 
increase with severity, from lowest to highest. If the relative weights 
do not increase (that is, if based on the relative weight calculation 
using the most recent LTCH claims data, a proposed MS-LTC-DRG with MCC 
would have a lower relative weight than one with CC, or the DRG without 
CC/MCC would have a higher relative weight than either of the others), 
there is a problem with monotonicity.
    As discussed above in this section, to account for LTC-DRGs with 
low volume (that is, with fewer than 25 LTCH cases), we group those 
``low-volume LTC-DRGs'' (that is, DRGs that contained between 1 and 24 
cases annually) into one of five categories (quintiles) based on 
average charges, for the purposes of determining relative weights. As 
discussed in the FY 2008 IPPS proposed rule, we proposed to continue to 
employ this treatment of low-volume proposed MS-LTC-DRGs with a 
modification to combine proposed MS-LTC-DRGs for the purpose of 
computing a relative weight in cases where necessary to maintain 
monotonicity in determining the proposed FY 2008 MS-LTC-DRG relative 
weights using the best available LTCH data. In that proposed rule, 
using LTCH cases from the December 2006 update of the FY 2006 MedPAR 
file, we identified 307 proposed MS-LTC-DRGs that contained between 1 
and 24 cases. This list of proposed MS-LTC-DRGs was then divided into 
one of the 5 low-volume quintiles, each containing a minimum of 61 
proposed MS-LTC-DRGs (307/5 = 61, with a remainder of 2 proposed MS-
LTC-DRGs). Consistent with our current methodology, we are proposing to 
make an assignment to a specific low-volume quintile by sorting the 
low-volume proposed MS-LTC-DRGs in ascending order by average charge. 
(See the FY 2008 IPPS proposed rule for further explanation of the 
development and composition of each of the 5 low volume quintiles for 
FY 2007 and their proposed composition.)
    As we noted previously, although the proposed adoption of the MS-
LTC-DRGs would result in some modifications of existing procedures for 
assigning relative weights, the proposed FY 2008 MS-LTC-DRG relative 
weights presented in Table 11 of the FY 2008 IPPS proposed rule are 
based on the methodology established in the August 30, 2002 LTCH PPS 
final rule (67 FR 55989 through 55991). In summary, as described in 
greater detail in that same proposed rule, LTCH cases would be grouped 
to the appropriate proposed MS-LTC-DRG, while taking into account the 
low-volume proposed MS-LTC-DRGs as described above, before the proposed 
FY 2008 MS-LTC-DRG relative weights can be determined. After grouping 
the cases to the appropriate proposed MS-LTC-DRG, we proposed to 
calculate the proposed relative weights for FY 2008 by first removing 
statistical outliers and cases with a LOS of 7 days or less and to 
adjust the number of cases in each proposed MS-LTC-DRG for the effect 
of SSO cases under Sec.  412.529. The short-stay adjusted discharges 
and corresponding charges are used to calculate ``relative adjusted 
weights'' in each proposed MS-LTC-DRG using the HSRV method described 
above.
    Next we proposed to determine relative weights for the no-volume 
proposed MS-LTC-DRGs. As discussed in the FY 2008 IPPS proposed rule, 
of the 745 proposed MS-LTC-DRGs for FY 2008, we identified 124 proposed 
MS-LTC-DRGs for which there were no LTCH cases in the database. That 
is, no patients who would have been classified to those proposed MS-
LTC-DRGs were treated in LTCHs during FY 2006, and therefore, no charge 
data were reported for those proposed MS-LTC-DRGs. Thus, in the process 
of determining the proposed MS-LTC-DRG relative weights, we are unable 
to determine weights for these 124 proposed MS-LTC-DRGs using the 
methodology described above. However, because patients with a number of 
the diagnoses under these proposed MS-LTC-DRGs may be treated at LTCHs 
beginning in FY 2008, we are proposing to assign relative weights to 
each of the 124 no-volume proposed MS-LTC-DRGs based on clinical 
similarity and relative costliness to one of the remaining 621 (745-124 
= 621) proposed MS-LTC-DRGs for which we are able to determine proposed 
relative weights, based on FY 2006 LTCH claims data. In general, we 
determined proposed relative weights for the 124 proposed MS-LTC-DRGs 
with no LTCH cases in the FY 2006 MedPAR file used in this proposed 
rule by cross-walking these proposed MS-LTC-DRGs to other proposed MS-
LTC-DRGs and then grouping them to the appropriate proposed low-volume 
quintile. (A list of the proposed no-volume MS-LTC-DRGs and further 
explanation of their proposed FY 2008 relative weight assignment can be 
found in the FY 2008 IPPS proposed rule.) We also adjusted the proposed 
MS-LTC-DRG relative weights to account for nonmonotonically increasing 
relative weights, including any no volume

[[Page 26880]]

proposed MS-LTC-DRGs, where applicable, as described above.
    Furthermore, for FY 2008 we proposed to establish proposed MS-LTC-
DRG relative weights of 0.0000 for the following transplant proposed 
MS-LTC-DRGs: Heart transplant or implant of heart assist system w MCC 
(proposed MS-LTC-DRG 1); Heart transplant or implant of heart assist 
system w/o MCC (proposed MS-LTC-DRG 2); Liver transplant w MCC or 
intestinal transplant (proposed MS-LTC-DRG 5); Liver transplant w/o MCC 
(proposed MS-LTC-DRG 6); Lung transplant (proposed MS-LTC-DRG 7); 
Simultaneous pancreas/kidney transplant (proposed MS-LTC-DRG 8); and 
Pancreas transplant (proposed MS-LTC-DRG 10). As explained in the FY 
2008 IPPS proposed rule, this is because Medicare will only cover these 
procedures if they are performed at a hospital that has been certified 
for the specific procedures by Medicare and presently no LTCH has been 
so certified. 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 proposed MS-LTC-DRGs affected. At the 
present time, we would only include these seven proposed transplant MS-
LTC-DRGs in the GROUPER program for administrative purposes only. 
Because we use the same GROUPER program for LTCHs as is used under the 
IPPS, removing these proposed MS-LTC-DRGs would be administratively 
burdensome. (See the FY 2008 IPPS proposed rule for further details on 
the steps for calculating the proposed MS-LTC-DRG relative weights for 
FY 2008.)
3. Budget Neutrality (BN) Requirement for the Annual LTC-DRG Update
    As noted above in this section, currently under Sec.  412.517, the 
LTC-DRG classifications and relative weights are adjusted annually to 
reflect changes in factors affecting the relative use of LTCH 
resources, such as treatment patterns, technology and number of 
discharges. Currently, there are no statutory or regulatory 
requirements that the annual update to the LTC-DRG classifications and 
relative weights be done in a budget neutral manner. Historically, 
since the initial implementation of the LTCH PPS in FY 2003, we have 
updated the LTC-DRG relative weights each year without a BN adjustment 
based on the most recent available LTCH claims data, which reflect 
current LTCH patient mix and coding practices, and appropriately 
reflected more or less resource use than the previous year's LTC-DRG 
relative weights (71 FR 47991). When we proposed changes to the LTC-
DRGs for FY 2007 in the FY 2007 IPPS proposed rule, we estimated that 
those proposed changes to the LTC-DRG classifications and relative 
weights would result in about an estimated 1.4 percent decrease in 
estimated aggregate LTCH PPS payments (71 FR 24413). As we discussed in 
the FY 2007 IPPS final rule (71 FR 47991), several commenters, 
including MedPAC, urged us to establish a BN requirement for the annual 
reclassification and recalibration of the LTC-DRGs so that, in future 
years, the LTCH PPS could avoid an estimated decrease in estimated 
aggregate payments, such as the estimated 1.4 percent decrease that 
resulted from the proposed update to the LTC-DRGs and relative weights 
for FY 2007. In response to previous proposed annual updates to the 
LTC-DRG relative weights, we also received comments recommending that a 
BN adjustment be applied in determining the LTC-DRG relative weights to 
mitigate LTCH PPS payment fluctuations. (See the FY 2005 IPPS final 
rule (69 FR 48999 through 49000), and the FY 2006 IPPS final rule (70 
FR 47333 through 47334).)
    In response to those comments, we explained that we understood the 
commenters' concern with the estimated decrease in payments under LTCH 
PPS based upon the changes in the LTC-DRGs and relative weights 
proposed for FY 2007. However, as we discussed in the FY 2007 IPPS 
final rule, we did not postpone the proposed FY 2007 reclassification 
and recalibration of the LTC-DRGs, nor did we implement those changes 
in a budget neutral manner. We noted several reasons for the annual 
fluctuations in LTC-DRG relative weights that have resulted in both 
estimated increases and decreases in estimated aggregate LTCH PPS 
payments in the 4 years since the implementation of the LTCH PPS in FY 
2003. Specifically, we reiterated our belief that several factors have 
affected the changes to the LTC-DRG relative weights over the past 4 
years, including actual improvements in coding so that cases are 
appropriately assigned to LTC-DRGs. We also explained that historically 
we recalibrated the LTC-DRG relative weights each year based on the 
most recent available LTCH claims data, which reflect current LTCH 
patient mix and coding practices, and appropriately reflects more or 
less resource use than the previous year's LTC-DRG relative weights. 
The intended purpose of the annual recalibration of the LTC-DRG 
relative weights is to reflect any variation in coding practices and 
charges from the previous year and to help ensure that the LTC-DRG 
relative weights in the upcoming fiscal year will result in appropriate 
and accurate payments to LTCHs for the resources they expend to treat 
their Medicare patients. (71 FR 47984 through 47989)
    We also reminded the commenters that under the IPPS, there is a 
statutory requirement that the annual DRG reclassification and 
recalibration changes be made in a manner that assures that the 
estimated aggregate payments are neither greater than nor less than the 
estimated aggregate payments that would have been made without the 
changes, but there is no corresponding statutory requirement under the 
LTCH PPS. However, we noted that, given the considerable discretion 
granted to the Secretary under section 123 of the BBRA and section 
307(b) of the BIPA of 2000 to develop the LTCH PPS, it is possible 
that, at some point, the Secretary would consider using this broad 
authority to establish a BN policy for the annual update of the LTC-DRG 
classifications and relative weights. We further stated that if we find 
that it would be appropriate to propose making the updates to the LTC-
DRGs and relative weights in a budget neutral manner, the public would 
have the opportunity to submit comments on any proposed change during 
the rulemaking process.
    As we discussed in the RY 2007 LTCH PPS proposed rule (72 FR 4784 
through 4786), a LTCH's case-mix index (CMI) is defined as its case 
weighted average LTC-DRG relative weight for all its discharges in a 
given period. Changes in CMI consist of two components: ``real'' CMI 
changes and ``apparent'' CMI changes. Real CMI increase is defined as 
the increase in the average LTC-DRG relative weights resulting from the 
hospital's treatment of more resource intensive patients. Apparent CMI 
increase is defined as the increase in CMI due to changes in coding 
practices. The computed (or observed) CMI increase is defined as real 
CMI increase (due to an increase in patient severity) plus the increase 
due to changes in coding practices (including better documentation of 
the medical record by physicians and more complete coding of the 
medical record by coders). If LTCH patients have more costly 
impairments, lower functional status, or increased comorbidities, and 
thus require more resources in the LTCH, we consider this a real change 
in case-mix. Conversely, if LTCH patients have the same impairments, 
functional status, and

[[Page 26881]]

comorbidities but are coded differently resulting in higher payment, we 
consider this an apparent change in case-mix. We believe that changes 
in payment rates, including the LTC-DRG relative weights, should 
accurately reflect changes in LTCHs' true cost of treating patients 
(real CMI increase), and should not be influenced by changes in coding 
practices (apparent CMI increase).
    As stated above in this section, apparent CMI increase results from 
cases being grouped to a LTC-DRG with a higher weight than it would be 
without such changes in coding practices. As we discussed in the FY 
2007 IPPS final rule (71 FR 48343 through 48344), in discussing the 
impact of the changes to the LTC-DRG classifications and relative 
weights established for FY 2007 that were estimated to result in an 
aggregate decrease in LTCH PPS payments of approximately 1.3 percent, 
we explained that changes in coding practices (rather than patient 
severity) primarily resulted in fluctuations in the LTC-DRG relative 
weights in the past. Specifically, based on an analysis of FY 2005 LTCH 
claims data, we continued to observe that the average LTC-DRG relative 
weight decreases due to an increase of relatively lower charge cases 
being assigned to LTC-DRGs with higher relative weights in the prior 
year. Contributing to this increase in these relatively lower charge 
cases being assigned to LTC-DRGs with higher relative weights in the 
prior year are improvements in coding practices, which are typical when 
moving from a reasonable cost-based payment system to a PPS. The impact 
of including cases with relatively lower charges into LTC-DRGs that had 
a relatively higher relative weight in the previous version of the 
GROUPER software is a decrease in the average relative weight for those 
LTC-DRGs in the updated version of the GROUPER software.
    We noted in the RY 2008 LTCH PPS proposed rule (72 FR 4785) that 
this same phenomenon of relatively lower charge cases being assigned to 
LTC-DRGs with higher relative weights in the prior year was also 
observed when we analyzed the LTCH claims data from FY 2003 and FY 2004 
to update the LTC-DRG relative weights for FY 2005 and FY 2006, 
respectively (see the FY 2005 IPPS final rule (69 FR 48999) and the FY 
2006 IPPS final rule (70 FR 47701 through 47702).) However, this 
phenomenon was more notable based on the FY 2004 LTCH claims data that 
were used to update the LTC-DRG relative weights for FY 2006, where the 
changes to the LTC-DRG weights established were estimated to result in 
a decrease in aggregate LTCH PPS payments of 4.2 percent (as compared 
to the estimated 1.3 percent decrease in aggregate LTCH PPS payments 
based on the FY 2005 LTCH claims data used to determine the FY 2007 
LTC-DRG relative weights). Because the estimated decrease in aggregate 
LTCH PPS payments due to the update to the LTC-DRG relative weights 
based on more recent (FY 2005) LTCH claims data was significantly lower 
(1.3 percent estimated based on the LTC-DRG changes for FY 2007) than 
it was based on FY 2004 LTCH claims data (4.2 percent estimated based 
on the LTC-DRG changes for FY 2006), we believe that, as LTCHs have 
become more familiar with the ICD-9-CM coding principles and guidelines 
used under a DRG-based system, annual changes in LTCH CMI are 
approaching the point where the observed CMI increase is primarily due 
to changes in real CMI (that is, increased patient severity) rather 
than apparent CMI (that is, changes in coding practices). In other 
words, because we have observed that, over time as LTCHs have gained 
more experience with ICD-9-CM coding, estimated changes in LTCH PPS 
payments due to recalibration of the LTC-DRG relative weights based on 
more recent claims data (for example, the FY 2007 LTC-DRG relative 
weights calculated from FY 2005 LTCH claims data as compared to the FY 
2006 LTC-DRG relative weights calculated from FY 2004 LTCH claims data) 
have diminished over time. That is, we have estimated smaller 
fluctuations in aggregate LTCH PPS payments as a result of the annual 
recalibration of the LTC-DRG relative weights based on more recent LTCH 
claims data generated after the implementation of the LTCH PPS (for 
example, the 1.3 percent estimated decrease in aggregate LTCH PPS 
payments for FY 2007 based on FY 2004 LTCH claims data as compared to 
the 4.2 percent estimated decrease in aggregate LTCH PPS payments for 
FY 2007 based on FY 2005 LTCH claims data).
    For these reasons, as discussed in the RY 2008 LTCH PPS proposed 
rule (72 FR 4785), we believe that LTCH coding practices have 
stabilized such that the most recent available LTCH claims data now 
primarily reflect changes in the resources used by the average LTCH 
patient in a particular LTC-DRG (and not changes in coding practices). 
Thus, we believe that the most recent available data (as described 
below in this section) mainly reflect the true costs of treating LTCH 
patients, and we believe changes in payment rates, including the LTC-
DRGs, should reflect such costs. Furthermore, in that same proposed 
rule, we explained that a LTCH CMI analysis based on the most recent 
available LTCH claims data, which is discussed in section IV.C. of this 
preamble, also supports our belief that observed CMI increase is 
primarily due to changes in real CMI (that is, increased patient 
severity) rather than apparent CMI (that is, changes in coding 
practices). Specifically, this CMI analysis indicates that changes in 
LTCH coding practices, which resulted in fluctuations in the LTC-DRG 
relative weights in the past, appear to be stabilizing as LTCHs have 
become more familiar with a DRG-based system.
    Specifically, this LTCH CMI analysis shows that the overall 
observed change in LTCH CMI from FY 2003 compared to FY 2004 was an 
increase of approximately 6.75 percent while the overall observed 
change in LTCH CMI from FY 2004 compared to FY 2005 was an increase of 
approximately 3.49 percent, which is only about half of the LTCH CMI 
growth measured from the prior period (that is, the 6.75 percent from 
FY 2003 to FY 2004). Furthermore, preliminary analysis of FY 2006 LTCH 
claims data, which reflects over 3 full years of experience under the 
LTCH PPS for most LTCHs, showed an even smaller overall observed CMI 
increase of about 1.9 percent from FY 2005 compared to FY 2006. Again, 
the observed CMI increase from FY 2005 to FY 2006 is only about half of 
the LTCH CMI growth measured from the prior period (that is, the 3.49 
percent from FY 2004 to FY 2005). Because this LTCH CMI analysis shows 
that observed CMI is declining, we believe that LTCH coding practices 
have stabilized such that changes in LTCH CMI are now primarily due to 
changes in real CMI (that is, increased patient severity) rather than 
apparent CMI (that is, changes in coding practices). In other words, 
because we believe that the observed annual CMI increase is primarily 
``real'' and not ``apparent,'' it is no longer necessary to update the 
LTC-DRGs in a non-budget neutral manner (as discussed in greater detail 
below in this section). As stated above in this section, we believe 
that changes in payment rates, including the LTC-DRG relative weights, 
should accurately reflect changes in LTCHs' true cost of treating 
patients (real CMI increase) and should not be influenced by changes in 
coding practices (apparent CMI increase).
    In light of these facts, in order to mitigate estimated 
fluctuations in estimated aggregate LTCH PPS

[[Page 26882]]

payments, as urged by past commenters, we stated in the RY 2008 
proposed rule (72 FR 4785) that we had given further consideration to 
the issue of establishing a BN requirement for annual LTC-DRG 
reclassification and recalibration. Therefore, in that proposed rule, 
under the broad authority conferred upon the Secretary under section 
123 of the BBRA as amended by section 307(b) of the BIPA to develop the 
LTCH PPS, we proposed that, beginning with the LTC-DRG update for FY 
2008, the annual update to the LTC-DRG classifications and relative 
weights would be done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the LTC-DRG classification 
and relative weight changes. Accordingly, we proposed to revise Sec.  
412.517 to specify that annual changes to the LTC-DRG classifications 
and the recalibration of the LTC-DRG relative weights would be made in 
a budget neutral manner such that estimated aggregate LTCH PPS payments 
are not affected.
    Comment: Numerous commenters, including MedPAC, supported our 
proposal to recalibrate the LTC-DRGs annually in a budget neutral 
manner. Some commenters also recommended that we should monitor the 
recalibration so that any reweighting of the LTC-DRGs is conducted in a 
manner that does not result in a redistribution of payments from high 
acuity DRGs to lower acuity DRGs, pending implementation of revised 
certification criteria designed to screen out LTCH inappropriate 
patients.
    Response: We appreciate the commenters' support of our proposed BN 
requirement for the annual LTC-DRG update. As discussed in the RY 2008 
LTCH PPS proposed rule (72 FR 4785 through 4786), we explained that we 
believe that it would be appropriate to update the LTC-DRG 
classifications and relative weights in a budget neutral manner at this 
time for the reasons discussed below. As noted above in this section, 
the relative weight for each LTC-DRG represents the resources needed by 
an average inpatient LTCH case in that LTC-DRG, such that LTCH 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 relative weight of 1.
    In the past when we recalibrated the LTC-DRG relative weights each 
year without a BN adjustment based on the most recent available LTCH 
claims data, we believe that the resulting LTC-DRG relative weights 
appropriately reflected more or less resource use than the previous 
year's LTC-DRG relative weights, and that the estimated aggregate 
payment changes were appropriate given that the LTCH claims data used 
to determine those LTC-DRG relative weights reflected changes in coding 
practices, as well as changes in actual resource use. Historically, we 
have not updated the LTC-DRGs in a budget neutral manner because we 
believed that past fluctuations in the LTC-DRG relative weights were 
primarily due to changes in LTCH coding practices, which included both 
``real'' and ``apparent'' changes in LTCHs' case-mix (as discussed 
above in this section). We believe that changes in the LTCH PPS payment 
rates, including the LTC-DRG relative weights, should accurately 
reflect changes in LTCHs' true cost of treating patients (real CMI 
increase), and should not be influenced by changes in coding practices 
(apparent CMI increase). Therefore, in the past we did not update the 
LTC-DRGs in a budget neutral manner so that ``apparent'' CMI changes 
were not permanently built into the LTCH PPS payment rates.
    Because LTCH 2006 claims data does not appear to significantly 
reflect changes in LTCH coding practices in response to the 
implementation of the LTCH PPS (as explained above in this section), we 
believe that it may be appropriate to update the LTC-DRGs so that 
estimated aggregate LTCH PPS payments would neither increase or 
decrease since we believe that changes in the LTC-DRG classifications 
and relative weights should accurately reflect changes in LTCHs' 
resource use (that is, true cost of treating patients) and should not 
be influenced by changes in coding practices, and that the most recent 
such LTCH claims data primarily reflects changes in the resources 
needed by an average LTCH case in a particular LTC-DRG (and not changes 
in coding practices).
    Thus, we now believe it would be reasonable and appropriate to 
update the LTC-DRGs in a budget neutral manner, beginning in FY 2008, 
so that estimated aggregate payments under the LTCH PPS would be 
unaffected (that is, estimated aggregate LTCH PPS payments would not be 
greater than or less than they would have been without the proposed 
LTC-DRG classification and relative weight changes) by any changes 
resulting from the annual reclassification and recalibration of the 
LTC-DRGs. Updating the LTC-DRGs in a budget neutral manner would result 
in an annual update to the individual LTC-DRG classifications and 
relative weights based on the most recent available data to reflect 
changes in relative LTCH resource use; however, the LTC-DRG relative 
weights would be uniformly adjusted to ensure that estimated aggregate 
payments under the LTCH PPS would not be affected (that is, decreased 
or increased).
    In this final rule, under the broad authority conferred upon the 
Secretary under section 123 of the BBRA as amended by section 307(b) of 
the BIPA to develop the LTCH PPS, beginning with the LTC-DRG update for 
FY 2008 (discussed in greater detail below), the annual update to the 
LTC-DRG classifications and relative weights will be done in a budget 
neutral manner such that estimated aggregate LTCH PPS payments will be 
unaffected, that is, will be neither greater than nor less than the 
estimated aggregate LTCH PPS payments that would have been made without 
the LTC-DRG classification and relative weight changes. Accordingly, we 
are revising Sec.  412.517 to specify that annual changes to the LTC-
DRG classifications and the recalibration of the LTC-DRG relative 
weights are made in a budget neutral manner such that estimated 
aggregate LTCH PPS payments are not affected.
    As discussed above, we believe that the most recent available LTCH 
claims data reflects the intensity of resource use of the treatment of 
Medicare patients based on current LTCH coding and treatment practices. 
Accordingly, we believe that annually updating the LTC-DRG relative 
weights using the most recent available LTCH claims data reflects more 
or less resource use than the previous year's LTC-DRG relative weights 
based on the current LTCH practices. Therefore, we believe that any 
redistribution in payments as a result of the annual recalibration of 
the LTC-DRG relative weights based on this updated LTCH claims data 
appropriately reflects LTCH resource use in the treatment of their 
Medicare patients. While we will continue to monitor LTCH data, 
including any redistribution of payments upon the annual update of the 
LTC DRGs, for the reasons discussed above, we are not adopting the 
commenters' suggestion to establish a requirement that the annual 
recalibration of the relative weights be done in a manner that would 
adjust for redistribution of payments from high acuity LTC-DRGs to 
lower acuity LTC-DRGs.
    As we explained in the RY 2008 LTCH PPS proposed rule (72 FR 4786), 
we intend to update the LTC-DRG classifications and relative weights 
for FY 2008 based on the best available data

[[Page 26883]]

at the time to allow for changes in factors affecting hospital resource 
use, including but not limited to, practice patterns and new 
technology. This will be done in a budget neutral manner, such that 
estimated aggregate payments under the LTCH PPS would neither decrease 
or increase as a result of the changes due to the annual 
reclassification and recalibration of the LTC-DRGs. Because we will 
continue to use the most recent available LTCH data, the updated LTC-
DRG relative weights will continue to reflect changes in LTCH resource 
use (as is the case under the current (non-budget neutral) LTC-DRG 
update methodology). Thus, for example, if the most recent LTCH claims 
data showed that the resource use for hypothetical LTC-DRG ``ABC'' is 
double the resource use for hypothetical LTC-DRG ``XYZ,'' then the 
value of the relative weight for LTC-DRG ``ABC'' would be about twice 
the value of relative weight for LTC-DRG ``XYZ.''
    In addition to accounting for changes in relative resource use, to 
include a BN requirement for the annual update to the LTC-DRGs, the 
updated LTC-DRG relative weights will need to be uniformly adjusted to 
ensure that estimated aggregate LTCH PPS payments will not be affected. 
That is, a BN factor will need to be computed to ensure that the LTC-
DRG reclassification and recalibration process, by itself, neither 
increases nor decreases estimated aggregate LTCH PPS payments.
    As discussed in the FY 2008 IPPS proposed rule, to accomplish BN 
when annually updating the LTC-DRG classifications and relative weights 
under revised Sec.  412.517, we proposed to use a method that is 
similar to the methodology used under the IPPS. (Information on the 
IPPS DRG BN adjustment can be found in the FY 2007 IPPS final rule (71 
FR 47970).) As noted above, we proposed to adopt the MS-LTC-DRGs for 
the LTCH PPS for FY 2008. Therefore, in the discussion that follows, we 
will refer to the development of the proposed budget neutrality factor 
in terms of the proposed MS-LTC-DRG severity-weighted patient 
classification system. Specifically, after recalibrating the proposed 
MS-LTC-DRG relative weights, as we do under our existing methodology 
(as described in detail in the FY 2007 IPPS final rule (71 FR 47978 
through 47981)), as described in greater detail in the FY 2008 IPPS 
proposed rule, we would calculate and apply a normalization factor 
(which will be published annually in the IPPS proposed and final rules 
when we update the LTC-DRGs and relative weights) to the proposed MS-
LTC-DRG relative weights to ensure that estimated aggregate LTCH PPS 
payments are not influenced by changes in the composition of case types 
or changes made to the classification system. That is, the 
normalization adjustment is intended to ensure that the recalibration 
of the proposed MS-LTC-DRG relative weights (that is, the process 
itself) neither increases nor decreases total estimated payments. To 
calculate the normalization factor, we proposed to use the most recent 
available claims data (FY 2006) and apply the proposed GROUPER (Version 
25.0) to calculate the proposed MS-LTC-DRG relative weights. (We also 
proposed to use the most recent available claims data in the analysis 
for this final rule.) These weights were determined such that the 
average CMI value is 1.0. Then, we proposed to group the same claims 
data (FY 2006) using the current GROUPER (Version 24.0) and current 
LTC-DRG relative weights. The average CMI was calculated for the claims 
data using the current GROUPER and relative weights. Finally, the ratio 
of the average CMI of the claims data set under the current GROUPER and 
the proposed GROUPER was calculated as the proposed normalization 
factor.
    For FY 2008, based on the latest available data, the proposed 
normalization factor is estimated as 1.020302, which was applied to 
each proposed MS-LTC-DRG relative weight. (We also stated that if more 
current data become available prior to publication of the final rule, 
we will use those data to determine the normalization factor.) That is, 
each proposed MS-LTC-DRG relative weight was multiplied by 1.020302 in 
the first step of the BN process.
    We are also proposed to ensure that estimated aggregate LTCH PPS 
payments (based on the most recent available LTCH claims data) after 
recalibration (the proposed relative weights) would be equal to 
estimated aggregate LTCH PPS payments (for the same most recent 
available LTCH claims data) before recalibration (the existing relative 
weights). Therefore, we proposed to calculate the BN adjustment factor 
by simulating estimated payments under both sets of GROUPERs and 
relative weights. We proposed to simulate total estimated payments 
under the current payment policies (RY 2007) using the most recent 
available claims data (FY 2006) and using the proposed GROUPER (Version 
25.0), and normalized relative weights. Then, we proposed to simulate 
estimated payments using the most recent available claims data (FY 
2006) and apply the proposed GROUPER (Version 25.0). We next calculated 
payments using the same claims data (FY 2006) with the current GROUPER 
(Version 24.0). The ratio of the estimated average payment under the 
current GROUPER and the proposed GROUPER was calculated as the proposed 
BN factor. Then each of the proposed normalized relative weights was 
multiplied by the proposed BN factor to determine the proposed budget 
neutral relative weight for each proposed MS-LTC-DRG. Accordingly, 
based on the most recent available data, we proposed to apply a BN 
factor of 1.003924 to the relative weights after normalizing. To 
calculate the proposed MS-LTC-DRG relative weights for FY 2008, we 
obtained total Medicare allowable charges from FY 2006 Medicare LTCH 
bill data from the December 2006 update of the MedPAR file, which are 
the best available data at that time. We also proposed that if more 
current data become available prior to publication of the final rule, 
we will use those data to determine the budget neutrality factor. The 
proposed FY 2008 MS-LTC-DRG relative weights are presented in Table 11 
in the Addendum of the FY 2008 IPPS proposed rule, which reflect the 
budget neutral adjustment described above.
    In the recently issued FY 2008 IPPS proposed rule, we proposed 
significant refinements to the DRGs used under both the IPPS and LTCH 
PPS to better recognize severity of illness among patients. The 
proposed refinements would be effective October 1, 2007. The proposed 
new MS-DRG and MS-LTC-DRG systems present opportunities to acute care 
hospitals and LTCHs, respectively, to improve documentation and coding 
to receive higher payments without a real increase in patient severity 
of illness. The Office of the Actuary estimates an adjustment of -2.4 
percent to the IPPS rates for each of FY 2008 and FY 2009 will be 
necessary to account for the anticipated improvements in coding and 
documentation. In the FY 2008 IPPS proposed rule, we proposed to apply 
this -2.4 percent adjustment for case mix increase in FY 2008 and in FY 
2009 in both the IPPS and LTCH PPS systems to address the proposed 
change to the refined severity DRGs. It should be noted that this 
adjustment is not related to the finalized budget neutrality adjustment 
included in this LTCH final rule and discussed above. The budget 
neutrality adjustment in this rule is an annual requirement that is 
needed to assure that annual recalibration of the DRG weights based on 
the most recent available claims data, results in no

[[Page 26884]]

changes (increase or decrease) in estimated payments that stem from 
updating the DRG weights, while the proposed -2.4 percent adjustment 
for FYs 2008 and 2009 is tied solely to the proposed change to the MS-
LTC-DRGs. Accordingly, each of the proposed MS-LTC-DRG relative weights 
in Table 11 of the Addendum to the FY 2008 IPPS proposed rule reflects 
this proposed adjustment. That is, each proposed MS-LTC-DRG relative 
weight was multiplied by a factor of 0.976 to account for changes in 
coding or classification of discharges resulting from the proposed 
adoption of the new patient classification system. This proposed 
adjustment is consistent with the proposed adjustment applied to the 
proposed IPPS rates for FYs 2008 and 2009 to eliminate the effect of 
changes in coding or classification of discharges that do not reflect 
real change in case-mix because we believe that adoption of the 
proposed MS-LTC-DRGs would create a risk of increased aggregate levels 
of payment as a result of increased documentation and coding.

E. ICD-9-CM Coding System

1. Uniform Hospital Discharge Data Set (UHDDS) Definitions
    Because the assignment of a case to a particular LTC-DRG or the 
proposed MS-LTC-DRG will help determine the amount that will be paid 
for the case, it is important that the coding is accurate. 
Classifications and terminology used in the LTCH PPS are consistent 
with the ICD-9-CM coding scheme and the UHDDS, as recommended to the 
Secretary by the National Committee on Vital and Health Statistics 
(``Uniform Hospital Discharge Data: Minimum Data Set, National Center 
for Health Statistics (NCHS), April 1980'') and as revised in 1984 by 
the Health Information Policy Council (HIPC) of the Department of 
Health and Human Services (HHS).
    We note that the ICD-9-CM coding terminology and the definitions of 
principal and other diagnoses of the UHDDS are consistent with the 
requirements of the HIPAA Administrative Simplification Act of 1996 (45 
CFR part 162). Furthermore, the UHDDS was used as a standard for the 
development of policies and programs related to hospital discharge 
statistics by both governmental and nongovernmental sectors for over 30 
years. In addition, the following definitions (as described in the 1984 
Revision of the UHDDS, approved by the Secretary for use starting 
January 1986) are requirements of the ICD-9-CM coding system, and have 
been used as a standard for the development of the CMS-DRGs:
    <bullet> Diagnoses are defined to include all diagnoses that affect 
the current hospital stay.
    <bullet> Principal diagnosis is defined as the condition 
established after study to be chiefly responsible for occasioning the 
admission of the patient to the hospital for care.
    <bullet> Other diagnoses (also called secondary diagnoses or 
additional diagnoses) are defined as all conditions that coexist at the 
time of admission, that develop subsequently, or that affect the 
treatment received or the LOS or both. Diagnoses that relate to an 
earlier episode of care that have no bearing on the current hospital 
stay are excluded.
    <bullet> All procedures performed will be reported. This includes 
those that are surgical in nature, carry a procedural risk, carry an 
anesthetic risk, or require specialized training.
    We provide LTCHs with a 60-day window after the date of the notice 
of the initial LTC-DRG or proposed MS-LTC-DRG assignment to request 
review of that assignment of the discharge to an LTC-DRG or MS-LTC-DRG. 
Additional information may be provided by the LTCH to the FI as part of 
that review.
2. Maintenance of the ICD-9-CM Coding System
    The ICD-9-CM C&M Committee is a Federal interdepartmental 
committee, co-chaired by the National Center for Health Statistics 
(NCHS) and CMS, which is charged with maintaining and updating the ICD-
9-CM system. The C&M Committee is jointly responsible for approving 
coding changes, and developing errata, addenda, and other modifications 
to the ICD-9-CM to reflect newly developed procedures and technologies 
and newly identified diseases. The C&M Committee is also responsible 
for promoting the use of Federal and non-Federal educational programs 
and other communication techniques with a view toward standardizing 
coding applications and upgrading the quality of the classification 
system.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has the lead responsibility for the ICD-9-CM procedure codes 
included in the Tabular List and Alphabetic Index for Procedures. The 
C&M Committee encourages participation by health-related organizations 
in this process and holds public meetings for discussion of educational 
issues and proposed coding changes twice a year at the CMS Central 
Office located in Baltimore, Maryland. The agenda and dates of the 
meetings can be accessed on our Web site at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes.
    As discussed previously in this section, for the IPPS, section 
503(a) of the MMA includes a requirement for updating diagnosis and 
procedure codes twice a year instead of annual updates on October 1 of 
each year. This requirement will improve the recognition of new 
technologies under the IPPS by accounting for them in the GROUPER 
software at an earlier date. Because this statutory requirement could 
have a significant impact on health care providers, coding staff, 
publishers, system maintainers, and software systems, among others, we 
solicited comments on our proposed provisions to implement this 
requirement as part of the FY 2005 IPPS proposed rule (69 FR 28220 
through 28221). We responded to comments and published our new policy 
regarding the updating of diagnosis and procedure codes (currently the 
ICD-9-CM) in the FY 2005 IPPS final rule (69 FR 48953 through 48957). 
In addition, we established a policy for the possibility of an April 1 
ICD-9-CM diagnosis and procedure code update in the RY 2006 LTCH PPS 
final rule (70 FR 24176) since LTCH systems would be expected to 
recognize and report those new codes through the channels described in 
this section even though no DRG additions or deletions or changes to 
relative weights will occur prior to the usual October 1 update. (For 
more detailed information on the affect of the statutory mandates 
directed at the IPPS as amended by section 503(a) of the MMA, refer to 
the FY 2005 IPPS final rule (69 FR 48954 through 48957) and the RY 2007 
LTCH PPS final rule (71 FR 27806 through 27808)).
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp. Summary tables showing new, revised, and deleted code 
titles are also posted on the CMS Web site at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp. Information on ICD-
9-CM diagnosis codes can be found at http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/. Information on new, revised, and deleted 
ICD-9-CM codes is also available in the American Hospital Association 
(AHA) publication, the Coding Clinic for ICD-9-CM. AHA also distributes 
information to publishers and software vendors. We also send copies of 
all ICD-9-CM coding changes to our contractors for use in updating

[[Page 26885]]

their systems and providing education to providers. In addition, of 
particular note to LTCHs are the invalid diagnosis codes (Table 6C) and 
the invalid procedure codes (Table 6D) located in the annual proposed 
and final rules for the IPPS. Claims with invalid codes are not 
processed by the Medicare claims processing system.
3. Coding Rules and Use of ICD-9-CM Codes in LTCHs
    We continue to urge LTCHs to focus on improved coding practices. 
Inappropriate coding of cases can adversely affect the uniformity of 
cases in each LTC-DRG or proposed MS-LTC-DRG and produce inappropriate 
weighting factors at the annual recalibration. Because of concerns 
raised by LTCHs concerning correct coding, we have asked the AHA to 
provide additional clarification and instruction on proper coding in 
the LTCH setting. The AHA will provide this instruction via their 
established process of addressing questions through their publication, 
the Coding Clinic for ICD-9-CM. Written questions or requests for 
clarification may be addressed to the Central Office on ICD-9-CM, 
American Hospital Association, One North Franklin, Chicago, IL 60606. A 
form for question(s) is available for download and can be mailed on 
AHA's Web site at: www.ahacentraloffice.org. In addition, current 
coding guidelines are available at the NCHS Web site: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/ftpicd9.htm#conv.
    In conjunction with the cooperating parties (AHA, the American 
Health Information Management Association (AHIMA), and NCHS), we 
reviewed actual medical records and continue to emphasize the 
importance of the quality of the documentation under the LTCH PPS. 
Based on the LTCH claims data analysis described above in section 
III.D.2. of this preamble, we fully believe that with some experience 
under a PPS, the quality of the documentation and coding of LTCHs has 
improved, as it did for the IPPS. However, because of the need for 
proper coding by LTCHs, the cooperating parties will assist their 
members with continued improvement in documentation and coding issues 
for the LTCHs through specific questions and coding guidelines. The 
importance of consistent and complete documentation is emphasized in 
the revised ICD-9-CM Official Guidelines for Coding and Reporting: ``A 
joint effort between the attending physician and coder is essential to 
achieve complete and accurate documentation, code assignment, and 
reporting of diagnoses and procedures. The importance of consistent, 
complete documentation in the medical record cannot be overemphasized. 
Without this documentation, the application of all coding guidelines is 
a difficult, if not impossible task'' (Coding Clinic for ICD-9-CM, 
Fourth Quarter 2002, page 115).
    To improve medical record documentation, LTCHs should be aware that 
if the patient is being admitted for continuation of treatment of an 
acute or chronic condition, guidelines at Section I.B.10 of the Coding 
Clinic for ICD-9-CM, Fourth Quarter 2002 (page 129) are applicable for 
the selection of principal diagnosis. To clarify coding advice issued 
in the August 30, 2002 LTCH PPS final rule (67 FR 55979), at Guideline 
I.B.12, Late Effects, we state that a late effect is considered to be 
the residual effect (condition produced) after the acute phase of an 
illness or injury has terminated (Coding Clinic for ICD-9-CM, Fourth 
Quarter 2002, page 129). Regarding whether a LTCH should report the 
ICD-9-CM code(s) for an unresolved acute condition instead of the 
code(s) for late effects of rehabilitation, we emphasize that each case 
must be evaluated on its unique circumstances and coded appropriately. 
Depending on the documentation in the medical record, either a code 
reflecting the acute condition or rehabilitation could be appropriate 
in a LTCH.
    Since implementation of the LTCH PPS, our Medicare FIs have 
conducted training and provided assistance to LTCHs in correct coding. 
We have also issued manuals containing procedures, as well as coding 
instructions to LTCHs and FIs. We will continue to conduct training and 
provide guidance on an ``as needed'' basis. We also refer readers to 
the detailed discussion on correct coding practices in the August 30, 
2002 LTCH PPS final rule (67 FR 55981 through 55983). Additional coding 
instructions and examples will be published in the Coding Clinic for 
ICD-9-CM.

IV. Changes to the LTCH PPS Payment Rates for the 2008 LTCH PPS Rate 
Year

A. Overview of the Development of the Payment Rates

    The LTCH PPS was effective beginning with a LTCH's first cost 
reporting period beginning on or after October 1, 2002. Effective with 
that cost reporting period, LTCHs are paid, during a 5-year transition 
period, a total LTCH prospective payment that is comprised of an 
increasing proportion of the LTCH PPS Federal rate and a decreasing 
proportion based on reasonable cost-based principles, unless the 
hospital makes a one-time election to receive payment based on 100 
percent of the Federal rate, as specified in Sec.  412.533. New LTCHs 
(as defined at Sec.  412.23(e)(4)) are paid based on 100 percent of the 
Federal rate, with no phase-in transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.532. In 
this section, we discuss the factors that will be used to update the 
LTCH PPS standard Federal rate for the 2008 LTCH PPS rate year that 
will be effective for LTCH discharges occurring on or after July 1, 
2007 through June 30, 2008. When we implemented the LTCH PPS in the 
August 30, 2002 LTCH PPS final rule (67 FR 56029 through 56031), we 
computed the LTCH PPS standard Federal payment rate for FY 2003 by 
updating the latest available (FY 1998 or FY 1999) Medicare inpatient 
operating and capital cost data, using the excluded hospital market 
basket.
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs be budget neutral for the initial year of implementation. 
Therefore, in calculating the standard Federal rate under Sec.  
412.523(d)(2), we set total estimated LTCH PPS payments equal to 
estimated payments that would have been made under the reasonable cost-
based payment methodology had the PPS for LTCHs not been implemented. 
Section 307(a) of the BIPA specified that the increases to the 
hospital-specific target amounts and the cap on the target amounts for 
LTCHs for FY 2002 provided for by section 307(a)(1) of the BIPA shall 
not be considered in the development and implementation of the LTCH 
PPS.
    Furthermore, as specified at Sec.  412.523(d)(1), the standard 
Federal rate is reduced by an adjustment factor to account for the 
estimated proportion of outlier payments under the LTCH PPS to total 
estimated LTCH PPS payments (8 percent). For further details on the 
development of the FY 2003 standard Federal rate, see the August 30, 
2002 LTCH PPS final rule (67 FR 56027 through 56037), and for 
subsequent updates to the LTCH PPS Federal rate, refer to the following 
final rules: RY 2004 LTCH PPS final rule (68 FR 34134 through 34140), 
RY 2005 LTCH PPS final rule (69 FR 25682 through 25684), RY 2006 LTCH 
PPS final rule (70 FR 24179 through 24180), and RY 2007 LTCH PPS final 
rule (71 FR 27819 through 27827).

[[Page 26886]]

B. LTCH PPS Market Basket

1. Overview of the RPL Market Basket
    Historically, the Medicare program has used a market basket to 
account for price increases of the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. The 
development of the LTCH PPS standard Federal rate, using the excluded 
hospital with capital market basket, is discussed in further detail in 
the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56033).
    In the August 30, 2002 final rule (67 FR 56016 through 56017 and 
56030), which implemented the LTCH PPS, we established the use of the 
excluded hospital with capital market basket as the LTCH PPS market 
basket. The excluded hospital with capital market basket was also used 
to update the limits on LTCHs' operating costs for inflation under the 
TEFRA reasonable cost-based payment system. We explained that we 
believe the use of the excluded hospital with capital market basket to 
update LTCHs' costs for inflation was appropriate because the excluded 
hospital market basket (with a capital component) measures price 
increases of the services furnished by excluded hospitals, including 
LTCHs. For further details on the development of the excluded hospital 
with capital market basket, see the RY 2004 LTCH PPS final rule (68 FR 
34134 through 34137).
    In the RY 2007 LTCH PPS final rule (71 FR 27810), we noted that 
based on our research, we did not develop a market basket specific to 
LTCH services. We are still unable to create a separate market basket 
specifically for LTCHs due to the small number of facilities and the 
limited amount of data that is reported (for instance, only 
approximately 15 percent of LTCHs reported contract labor cost data for 
2002). In that same final rule, under the broad authority conferred 
upon the Secretary by section 123 of the BBRA as amended by section 
307(b) of the BIPA, we adopted the ``Rehabilitation, Psychiatric and 
Long-Term Care (RPL) market basket'' as the appropriate market basket 
of goods and services under the LTCH PPS for discharges occurring on or 
after July 1, 2006. Specifically, beginning with the 2007 LTCH PPS rate 
year, for the LTCH PPS, we adopted the use of the RPL market basket 
based on FY 2002 cost report data as it was the best available data. We 
choose to use the FY 2002 Medicare cost reports because these are the 
most recent, relatively complete cost data for inpatient rehabilitation 
facilities (IRFs), inpatient psychiatric facilities (IPF), and LTCHs.
    The RPL market basket is determined based on the operating and 
capital costs of IRFs, IPFs and LTCHs. Since all IRFs are now paid 
under the IRF PPS Federal payment rate, nearly all LTCHs are paid 100 
percent of the Federal rate under the LTCH PPS, and most IPFs are 
transitioning to payment based on 100 percent of the Federal per diem 
payment amount under the IPF PPS (payments to IPFs will be based 
exclusively on 100 percent of the Federal rate for cost reporting 
periods beginning on or after January 1, 2008), the RPL market basket 
reflects changes in the operating and capital costs for these 
hospitals. As we explained in that same final rule, we believe a market 
basket based on the data of IRFs, IPFs and LTCHs is appropriate to use 
under the LTCH PPS since it is the best available data that reflects 
the cost structures of LTCHs.
    For further details on the development of the RPL market basket, 
including the methodology for determining the operating and capital 
portions of the RPL market basket, see the RY 2007 LTCH PPS final rule 
(71 FR 27810 through 27817).
2. Market Basket Estimate for the 2008 LTCH PPS Rate Year
    Consistent with our historical practice, we estimate market basket 
increase based on Global Insight's forecast using the most recent 
available data. The most recent estimate of the RPL market basket for 
July 1, 2007 through June 30, 2008 (the 2008 LTCH PPS rate year), based 
on Global Insight's 1st quarter 2007 forecast with history through the 
4th quarter of 2006, is 3.2 percent. Global Insight, Inc. is a 
nationally recognized economic and financial forecasting firm that 
contracts with CMS to forecast changes in the components of the market 
baskets. Consistent with our historical practice of using market basket 
estimates based on the most recent available data, we are finalizing 
3.2 percent as the estimate of the RPL market basket for the 2008 LTCH 
PPS rate year.
    As discussed in greater detail in this section, for the 2008 LTCH 
PPS rate year, we are updating the standard Federal rate by 0.71 
percent. The update reflects an adjustment based on the most recent 
market basket estimate (currently 3.2 percent) and an adjustment to 
account for the increase in case-mix in the prior period (FY 2005) that 
resulted from changes in coding practices rather than an increase in 
patient severity.

C. Standard Federal Rate for the 2008 LTCH PPS Rate Year

1. Background
    At Sec.  412.523(c)(3)(ii), for LTCH PPS rate years beginning RY 
2004 through RY 2006, we updated the standard Federal rate to adjust 
for the most recent estimate of the projected increases in prices for 
LTCH inpatient hospital services. We established the policy of annually 
updating the standard Federal rate by the increase factor described in 
the RY 2004 LTCH PPS final rule (68 FR 34138) because at that time we 
believed that was the most appropriate method for updating the LTCH PPS 
standard Federal rate annually for years after FY 2003. When we moved 
the date of the annual update of the LTCH PPS from October 1 to July 1 
in the RY 2004 LTCH PPS final rule (68 FR 34138), we revised Sec.  
412.523(c)(3) to specify that for LTCH PPS rate years beginning on or 
after July 1, 2003, the annual update to the standard Federal rate for 
the LTCH PPS would be equal to the previous rate year's Federal rate 
updated by the most recent estimate of increases in the appropriate 
market basket of goods and services included in covered inpatient LTCH 
services. We believed that was the most appropriate method for updating 
the LTCH PPS standard Federal rate annually for years after RY 2004. In 
the RY 2007 LTCH PPS final rule (71 FR 27818), we established at Sec.  
412.523(c)(3)(iii) that the update to the standard Federal rate for the 
2007 LTCH PPS rate year is zero percent. As discussed in that same 
final rule, we explained that rather than solely using the most recent 
estimate of the LTCH PPS market basket as the basis of the update 
factor for the Federal rate for RY 2007, we believed it was appropriate 
to adjust the rate to account for the changes in coding practices 
(rather than patient severity) as indicated by our ongoing monitoring 
activities.
    Accordingly, we established the LTCH PPS standard Federal rate, 
effective from July 1, 2006 through June 30, 2007 (the 2007 LTCH PPS 
rate year), at $38,086.04 (71 FR 27818). Additionally, in the RY 2007 
LTCH PPS proposed rule (71 FR 4742 through 4747), we provided a 
description of a preliminary model of an update framework under the 
LTCH PPS. We received few comments on that update framework preliminary 
model. As discussed in the RY 2007 LTCH PPS final rule (71 FR 27818 
through 27819 and 27902 through 27906), although we did not propose to 
adopt an analytical

[[Page 26887]]

update framework, we continued to solicit comments on the framework 
based on the preliminary model, using the best available data and 
concepts, and we may propose to adopt a framework at some time in the 
future. While we did not receive any comments regarding the update 
framework during the public comment period for the RY 2008 LTCH PPS 
proposed rule, we continue to be interested in comments and suggestions 
on the preliminary model of an update framework under the LTCH PPS that 
was present in Appendix A of the RY 2007 LTCH PPS final rule (71 FR 
27902 through 27906).
    In the discussion that follows, we explain how we developed the 
standard Federal rate for the 2008 LTCH PPS rate year. Specifically, we 
explain our rationale, which is based on our ongoing monitoring 
activities, for implementing an annual update to the standard Federal 
rate for RY 2008 that reflects an adjustment for the most recent market 
basket estimate and an adjustment to account for the increase in case-
mix in a prior period (FY 2005) that resulted from changes in coding 
practices rather than an increase in patient severity.
2. Update to the Standard Federal Rate for the 2008 LTCH PPS Rate Year
    Under Sec.  412.523(c)(3)(ii), for RY 2004 through RY 2006, the 
annual update to the LTCH PPS standard Federal rate was equal to the 
most recent estimate of increases in the prices of an appropriate 
market basket of goods and services included in covered inpatient LTCH 
services. As noted above in this section, in the RY 2007 LTCH PPS final 
rule, under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of BIPA to include 
appropriate adjustments in the establishment of the LTCH PPS, for 
discharges occurring on or after July 1, 2006 and on or before June 30, 
2007 (RY 2007), we specified at Sec.  412.523(c)(3)(iii) that the 
standard Federal rate from the previous year would be updated by a 
factor of zero percent. That is, the standard Federal rate for the 2007 
LTCH PPS rate year remained the same as the standard Federal rate in 
effect during the 2006 LTCH PPS rate year (July 1, 2005 through June 
30, 2006) (that is, $38,086.04).
    As discussed in greater detail in the RY 2007 LTCH PPS final rule 
(71 FR 27819 through 27827), the update to the standard Federal rate 
for RY 2007 was determined based on the estimate of the LTCH PPS market 
basket and an analysis of LTCH case-mix, in conjunction with a review 
of LTCHs' margins and our ongoing LTCH monitoring activities. 
Specifically, from our CMI analysis, we calculated the observed CMI 
increase between FY 2003 and FY 2004 (6.75 percent) and determined that 
a significant portion of the 6.75 percent increase in CMI between FY 
2003 and FY 2004 is due to changes in coding practices, which we define 
as ``apparent'' increase in case-mix, rather than the treatment of more 
resource intensive patients. We also noted that the large observed 
increase in LTCH case-mix was not accompanied by a corresponding 
increase in Medicare costs. Finally, we noted in the RY 2007 LTCH PPS 
final rule (71 FR 27826 through 27827) that although the most recent 
update of the market basket discussed in that final rule is 0.2 percent 
lower than the estimate of the market basket discussed in the RY 2007 
LTCH PPS proposed rule, we believed that finalizing a zero percent 
update to the Federal rate for RY 2007 was appropriate for several 
reasons.
    First, we did not believe that there was a significant difference 
between the most recent estimates of the market basket for RY 2007 (3.4 
percent) and the estimate used in the RY 2007 LTCH PPS proposed rule 
(3.6 percent). Furthermore, there could be some minimal variation in 
how much of the observed case-mix increase represents real case-mix 
changes. Finally, because the proposed update for RY 2007 at Sec.  
412.523(c)(3)(iii) explicitly specified that the RY 2007 standard 
Federal rate would be the previous LTCH PPS rate year updated by an 
update factor of zero percent, we believe some commenters may not have 
been aware that the final update for RY 2007 could have been different 
than (that is, greater than or less than) zero percent. Thus, we 
believed that the best approach was to adopt an update factor of zero 
percent in the final rule for RY 2007, which reflected both the market 
basket estimate and an adjustment to account for the increase in case-
mix in a prior period (FY 2004) that resulted from changes in coding 
practices rather than an increase in patient severity. In that same 
final rule (71 FR 27821), we stated that the revision to Sec.  
412.523(c)(3) only addressed an update to the LTCH PPS Federal rate for 
the 2007 LTCH PPS rate year (Sec.  412.523(c)(3)(iii)), and that we 
would propose future revisions to Sec.  412.523(c)(3) to address future 
proposed updates to the LTCH PPS Federal rates in future rate years 
based on an analysis of the most recent available LTCH data.
    In determining the update to the standard Federal rate for the 2008 
LTCH PPS rate year, we again performed a CMI analysis using the most 
recent available LTCH claims data and found the observed CMI increase 
between FY 2004 and FY 2005 to be 3.49 percent. We believe that there 
is still some component of apparent CMI increase within the observed 
CMI increase of 3.49 percent that is due to coding practices rather 
than the treatment of more resource intensive patients (real CMI 
increase). Therefore, we believe it is appropriate to apply an 
adjustment to the market basket update for RY 2008 to account for the 
apparent CMI increase for a subsequent prior period (that is, CMI 
increase due to changes in coding practices during FY 2005).
    Comment: Many commenters urged us to provide the full market basket 
update rather than finalize the proposed update factor of 0.71 percent. 
Several commenters maintained that market basket is a measure of the 
expected increase in price inputs for the upcoming year that raise the 
cost of resources used in providing care to Medicare patients. 
Furthermore, some commenters believed that an increase of less than the 
market basket would not account for the costs of goods and services 
required to deliver LTCH services and will result in rates below the 
cost of care.
    Response: As we have discussed previously in the RY 2007 final rule 
(71 FR 27798), as well as throughout this section of the preamble of 
this final rule, while we continue to believe that an update to the 
2008 LTCH PPS rate year should be based on the most recent estimate of 
the LTCH PPS market basket, we also believe it appropriate that the 
rate be adjusted by an adjustment to account for changes in coding 
practices. In essence, we updated the standard Federal rate for the 
2008 LTCH PPS rate year by a factor (+3.2 percent) for the full market 
basket in addition to applying a factor (-2.49 percent) to eliminate 
the effect of coding or classification changes that do not reflect real 
changes in LTCHs' case-mix during FY 2005. This adjustment is necessary 
in order to account for payments that were made based on improved 
coding (rather than increased patient severity) in a prior year.
    We note that MedPAC had recommended a zero percent update for RY 
2008 (March 2007 MedPAC Report to Congress, MedPAC Payment Policy, 
Recommendation 3D, p. 221) and that the proposed update factor of 0.71 
percent is higher than what MedPAC had believed appropriate at the 
time. Therefore, we disagree with the comment that an increase of less 
than the market basket would not account for the costs of goods and 
services required

[[Page 26888]]

to deliver LTCH services and will result in rates below the cost of 
care.
    Comment: Several commenters noted that in addition to case mix, 
other elements that would affect the price of inputs include wages, 
drugs, products, and supplies; therefore, the commenters question our 
use of ``case-mix as determinative of an appropriate market basket 
increase.'' A commenter also noted that ``the market basket update is a 
prospective measure of price inflation, and CMS provides no data 
suggesting that prices will not increase by 3.2 percent over RY 2008. 
CMS also does not provide any data showing that prices from 2004 to 
2005 and from 2005 to 2006 (years included in the agency's case-mix 
analysis) increased less than the market basket update amount for those 
years.'' Consequently, the commenter believed that we have not 
explained adequately how case mix changes are related to the market 
basket to warrant a reduction in the full market basket.
    Response: We believe these commenters misunderstood our approach in 
applying the findings from our case mix analysis. First, we do not 
disagree that the estimated market basket is a prediction of the 
increase in the costs of goods and services in the coming year. 
Accordingly, we have based the update to the standard Federal rate each 
year since RY 2004 on the most recent estimate of the market basket. 
For RY 2004 through RY 2006, the annual update to the LTCH PPS standard 
Federal rate was equal to the most recent estimate of the market 
basket. Beginning in RY 2007, our monitoring activities and CMI 
analysis determined that a significant portion of the observed increase 
in CMI between FY 2003 and FY 2004 is due to changes in coding 
practices, rather than the treatment of more resource intensive 
patients. Accordingly, we updated the standard Federal rate for RY 2007 
based both on the full estimate of market basket and an adjustment to 
account for the excessive payments that were made based on improved 
coding (rather than increased patient severity) in a prior period 
(between FY 2003 and FY 2004) which consequently resulted in a zero 
percent update. This approach was replicated for RY 2008 which resulted 
in a net update to the rate for RY 2008 of 0.71 percent.
    Comment: Some commenters believed there is no regulatory basis for 
CMS to adjust the market basket update to account for apparent case-mix 
increase in a previous year. Specifically, a commenter wrote, ``Other 
than the availability of data, CMS provides no logical explanation as 
to why an estimation of the ``apparent'' increase in case-mix derived 
from FY 2004 and FY 2005 claims should be applied to the market basket 
increase in RY 2008.'' Furthermore, some commenters believed the 
proposed update factor of 0.71 percent is not based on verifiable or 
relevant data.
    Response: Section 123 of the BBRA as amended by section 307(b) of 
the BIPA conferred upon the Secretary broad discretion to determine the 
standard rate and make appropriate adjustments to the system. We note 
that while Sec.  412.523(c)(3) specifies the update to the standard 
rate for each year since FY 2003, the regulations do not specifically 
require that the Secretary automatically apply a market basket increase 
to prospective years. On the contrary, the regulations are to be 
updated each year to reflect any update to the standard rate as a 
result of rulemaking. Furthermore, we consistently use the most recent 
available data to determine the appropriate update factor. Accordingly, 
for this final rule we used the most recent available data, including 
the most recent estimate of the RPL market basket for July 1, 2007 
through June 30, 2008, based on Global Insight's 1st quarter 2007 
forecast with history through the 4th quarter of 2006, and the case-mix 
data from FY 2004 compared to FY 2005, to establish the 0.71 percent 
update factor.
    As discussed in detail in the RY 2007 LTCH PPS final rule (71 FR 
27819 through 27827), in determining the update to the LTCH PPS Federal 
rate for RY 2007, we used 2.75 percent as the proxy for ``real'' CMI 
change during RY 2004. We noted in that same final rule (71 FR 27822) 
that we were aware of a well-established RAND Corporation (RAND) study 
[``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)]. Based upon such study, we 
determined that real case-mix change for IPPS hospitals was a fairly 
steady 1.0 and 1.4 percent per year. We also noted that in updating 
IPPS rates, we have consistently assumed that real case-mix change was 
between 1.0 to 1.4 percent per year, which is a more conservative 
estimate of real case-mix increase than the 2.75 percent used in 
determining the update to the Federal rate for RY 2007 (71 FR 27822). 
For further information on the update to the Federal rate for RY 2007, 
see the RY 2007 final rule (71 FR 27819 through 27827).
    For this final rule, the CMI analysis performed in determining the 
Federal rate update for RY 2008 is based on the observed CMI increase 
from FY 2004 to FY 2005 (the first and second full years of the LTCH 
PPS, respectively). We believe that as the LTCH PPS matured and LTCHs 
have become more familiar with the DRG-based payment system, it is more 
appropriate to utilize the estimate of real case-mix increase (1.0 
percent to 1.4 percent) based on the RAND study that is typically found 
in acute care hospitals under the IPPS. Furthermore, an analysis of the 
most recent available LTCH claims data (FY 2005 LTCH claims data from 
the March 2006 update of the MedPAR files) show a steady decrease in 
the observed CMI from year to year since FY 2003 (the observed CMI 
change between FY 2003 and FY 2004 is 6.75 percent, between FY 2004 and 
FY 2005 is 3.49 percent, and between FY 2005 and FY 2006 is estimated 
to be 1.9 percent), which suggests that both apparent and real 
components of CMI are decreasing as the LTCH PPS matures. Given the 
estimated 1.9 percent observed CMI increase for FY 2006, it appears 
that it is inappropriate to assume a constant annual real case mix of 
2.75 percent.
    Therefore, for periods beyond the first full year of the LTCH PPS, 
we believe it is no longer appropriate to use such a generous estimate 
of real CMI. (Many LTCHs have cost reporting periods beginning in 
August and thus were not paid under the LTCH PPS until August 2003. For 
those hospitals, the first full year of the LTCH PPS was during FY 
2004.) While the well-established ``real'' case-mix parameters based on 
the RAND study are based on IPPS data, we believe they are appropriate 
to apply under the LTCH PPS for the reasons explained below in this 
section. In the RY 2008 LTCH PPS proposed rule, we solicited comments 
on other data sources that could be used to determine a proxy for real 
LTCH PPS case-mix change other than the 1.0 to 1.4 percent per year 
case-mix parameters based on the RAND study. Although we did not 
receive any comments suggesting alternative data sources that could be 
used to determine a proxy for real LTCH PPS case-mix change, we did 
receive comments pertaining to using 1.0 as the proxy for real case 
mix.
    As we have discussed numerous times in previous LTCH PPS proposed 
and final rules, acute care hospitals paid under the IPPS and LTCHs 
paid under the LTCH PPS have much in common. Hospitals paid under both 
systems are required to meet the same certification criteria set forth 
in section 1861(e) of the Act to participate as a hospital in the 
Medicare program. LTCHs are certified as acute care hospitals but are 
classified as LTCHs for payment purposes solely because such hospitals 
generally have

[[Page 26889]]

an inpatient ALOS of greater than 25 days (as set forth in section 
1886(d)(1)(B)(iv)(I) of the Act). Furthermore, the LTCH PPS uses the 
same patient classification system that is used under the IPPS, and 
several LTCH PPS payment policies, such as the area wage adjustment 
(Sec.  412.525(c)), COLA for Alaska and Hawaii (Sec.  412.525(b)), and 
high cost outlier (HCO) policy (Sec.  412.525(a)) are modeled after the 
similar IPPS policies.
    Therefore, we believe it is appropriate to utilize the estimate of 
real CMI increase based on the RAND study of 1.0 percent as the proxy 
for the portion of the observed 3.49 percent CMI increase from FY 2004 
to FY 2005 that represents real CMI changes for use in determining the 
proposed RY 2008 Federal rate update. We are using the more 
conservative 1.0 percent (rather than the 1.4 percent) as a proxy for 
real CMI increase because it is consistent with what is used under the 
IPPS and we believe the similarities between LTCHs and acute care 
hospitals are significant as we explained previously. (For a more 
detailed discussion on the 1.0 percent for real CMI increase utilized 
in the IPPS, see the FY 2007 IPPS final rule (71 FR 48156 through 
48158), and the FY 1994 IPPS proposed rule (58 FR 30444).) Accordingly, 
since the observed CMI change for FY 2005 is estimated at 3.49 percent 
(based on the most recent available LTCH case-mix data from FY 2004 
compared to FY 2005), accounting for the real CMI change of 1.0 
percent, we believe that 2.49 percent (3.49-1.0 = 2.49) of that 
increase reflects CMI increase that is due to changes in coding 
practices (rather than patient severity).
    Comment: Some commenters disagreed with our estimate of real case 
mix increase which is based on a study of acute care hospitals 
conducted by RAND using claims data from 1987 to 1988. The commenters 
did not believe the old data from acute care hospitals is relevant to 
LTCHs.
    Response: As we have discussed numerous times in previous LTCH PPS 
proposed and final rules, as well as in the previous section of this 
preamble, we continue to believe that acute care hospitals paid under 
the IPPS and LTCHs paid under the LTCH PPS have much in common. 
Hospitals paid under both systems are required to meet the same 
certification criteria set forth in section 1861(e) of the Act to 
participate as a hospital in the Medicare program. The commenters did 
not provide any alternative data sources to determine real case mix for 
LTCHs. Accordingly, we continue to believe that it is appropriate to 
utilize the same 1.0 percent factor to project real case mix for both, 
the IPPS and the LTCH PPS.
    Comment: Some commenters believed we proposed to use the more 
conservative estimate of real case-mix increase (1.0 percent) rather 
than the upper bound based on the RAND study (1.4 percent) without 
sufficient justification. However, commenters agreed that we requested 
comments on other data sources that could be used to determine a proxy 
for real LTCH PPS case-mix changes. While we did not receive any 
comments providing alternative data sources to determine real case-mix 
increase, several commenters suggested that the best proxy for real 
case-mix increase is the observed case-mix increase adjusted to 
eliminate any provider with atypical case mix changes.
    Response: We continue to believe that using the more conservative 
1.0 percent (rather than the 1.4 percent) as a proxy for real CMI 
increase is appropriate because it is consistent with what is used 
under the IPPS and we believe the similarities between LTCHs and acute 
care hospitals are significant as we explained previously.
    As we discussed in greater detail in the RY 2007 LTCH PPS final 
rule (71 FR 27819 through 27827), while we continue to believe that an 
update to the LTCH PPS Federal rate year should be based on the most 
recent estimate of the LTCH PPS market basket, we believe it 
appropriate that the rate be offset by an adjustment to account for 
changes in coding practices that do not reflect increased patient 
severity. Such an adjustment protects the integrity of the Medicare 
Trust Funds by ensuring that the LTCH PPS payment rates better reflect 
the true costs of treating LTCH patients (71 FR 27798 through 27820). 
Therefore, in determining the RY 2008 update to the LTCH PPS Federal 
rate, we believe it is appropriate to apply an adjustment to eliminate 
the effect of coding or classification changes in a prior period (FY 
2005) that do not reflect real changes in LTCHs' case-mix. 
Specifically, the case-mix adjustment in determining the RY 2008 
Federal rate is meant to reduce current payments to account for the 
increase in payments in FY 2005 that resulted from the CMI increase 
that was attributable to the apparent case-mix increase in that year. 
As was the case when we determined the RY 2007 update factor, this 
adjustment would be necessary to account for payments that were made 
based on improved coding (rather than increased patient severity) in 
prior years. Therefore, in this final rule, under the broad authority 
conferred upon the Secretary by section 123 of the BBRA as amended by 
section 307(b) of the BIPA to include appropriate adjustments, 
including updates, in the establishment of the LTCH PPS, we are 
revising Sec.  412.523(c)(3), to specify that, for discharges occurring 
on or after July 1, 2007 and on or before June 30, 2008, the standard 
Federal rate from the previous year will be updated by 0.71 percent, 
which is based on the most recent market basket estimate (3.2 percent) 
adjusted by the apparent CMI (2.49 percent) due to changes in coding 
practice rather than an increase in patient severity. As explained 
above in this section, the update factor for RY 2008 is based on the 
most recent estimate of the LTCH PPS market basket offset by an 
adjustment to account for changes in case-mix in prior periods due to 
changes in coding practices rather than increased patient severity. We 
note that the update factor of 0.71 percent is higher than the zero 
percent update recommended by the MedPAC for RY 2008 (MedPAC Public 
Meeting, January 9, 2007, Meeting Transcript pp. 225-226). In the RY 
2008 LTCH PPS proposed rule, we solicited comments on a possible zero 
percent update to the standard Federal rate for RY 2008. While most 
commenters recommended a full market basket update, we did receive some 
comments noting that in light of MedPAC's recommendation of a zero 
percent update, the commenters were pleased that we did not propose to 
implement a zero percent update and the commenters supported our 
proposal of a 0.71 percent update.
    Furthermore, since we are using the most recent estimates of the 
market basket and CMI increase in the prior period (FY 2005) for 
calculating the update factor to the LTCH PPS Federal rate, we noted in 
the proposed rule that at the time the analysis must be performed for 
the final rule, we would consider comments received on this proposed 
rule and would also use the most recent estimates available at that 
time, if appropriate, which may be different from the data used in the 
proposed rule. Therefore, we explained that the proposed update factor 
applied to the standard Federal rate may change in the final rule.
    At this time, the most recent estimate of the LTCH PPS market 
basket remains at 3.2 percent, and based on FY 2005 LTCH claims data 
from the March 2006 update of the MedPAR files, the most recent 
estimate of apparent CMI increase in the prior period (FY 2005), that 
is, case-mix increase due to changes in coding practices, also remains 
at 2.49 percent. Additionally, since we did not receive any comments 
suggesting alternative data sources to use in

[[Page 26890]]

determining a proxy for real case mix and for the reasons stated 
previously, we are continuing to use 1.0 percent as the proxy for the 
real case mix. Therefore, the RY 2008 update factor to the LTCH PPS 
Federal rate will be 0.71 percent (3.2-2.49 = 0.71), which reflects the 
adjustment to the most recent market basket estimate and accounts for 
the increase in case-mix in the prior period that resulted from changes 
in coding practices rather than an increase in patient severity. 
Accordingly, under the same broad authority conferred upon the 
Secretary under the BBRA and the BIPA referenced above in this section, 
we are specifying under Sec.  412.523(c)(3)(iv), that, for discharges 
occurring on or after July 1, 2007 and on or before June 30, 2008, the 
standard Federal rate from the previous year would be updated by 0.71 
percent, determined based on an adjustment to the most recent estimate 
of the market basket to account for case-mix increase in the prior 
period (FY 2005) that is due to changes in coding practices rather than 
patient severity.
    Comment: Numerous commenters stated that we have made changes to 
the LTCH PPS in the last several years that have slowed the growth in 
the number of new LTCHs and has controlled margins. The commenters 
believe that the cumulative effect of these payment changes, including 
the reweighting of the DRGs in October 2005 and October 2006, the 
adoption of the original 25 percent rule, the adjustments to the SSO 
policy, and a zero percent update for RY 2007, has been to bring LTCH 
margins close to zero. With the addition of the proposed payment 
changes for RY 2008, the commenters believe that payment to LTCHs will 
be inadequate. Using our impact analysis table from the proposed rule 
and MedPAC's estimated margins for FY 2007 as a base for comparison, 
two commenters attempted to estimate LTCHs' margins for RY 2008. The 
commenters asserted that, according to their analyses, estimated 
margins for RY 2008 could be as low as -3.7 percent to -5.7 percent. 
Numerous commenters expressed concern that the combined effect of 
changes to the LTCH PPS (from the last 2 years, as well as the proposed 
changes for RY 2008) would reduce reimbursement below the estimates of 
costs. Furthermore, one commenter wrote, ``A fundamental premise of the 
Medicare program and its payment systems is that Medicare should not 
knowingly reimburse providers and suppliers below the cost of care.''
    Response: We acknowledge that the changes to the payment system 
implemented in the last several years have affected the LTCH industry. 
In fact, we have observed that LTCHs adapt to our regulatory changes by 
modifying their business model to maximize profitability while 
operating under the new changes. For example, when we implemented the 
25 percent (or applicable percentage) threshold payment adjustment in 
FY 2005 for co-located LTCHs and satellites, we are aware that LTCHs 
shifted emphasis from developing co-located facilities to developing 
freestanding LTCHs. With the proposed expansion of the 25 percent (or 
applicable percentage) threshold payment adjustment to apply to LTCH or 
satellite patients that were admitted from referring hospitals not co-
located with the LTCH or the satellite of a LTCH, we anticipate that 
LTCHs could adapt by increasing the number of admissions of patients 
that are HCOs from referring hospitals (exempt from the 25 percent 
rule). In addition, since LTCHs on average get 20 percent of their 
discharges from sources other than acute care hospitals, it will be 
possible for LTCHs to adapt by admitting more of those types of 
patients, thus making it easier for a LTCH to stay within the 
applicable threshold. We have also been informed by members of the LTCH 
industry that in places where there are multiple acute care hospitals, 
the LTCHs will be able to plan their discharges to assure that they do 
not exceed the threshold.
    Consequently, while the commenters have conducted margins analyses 
based on current LTCH behaviors and assert that our changes may result 
in negative margins, we do not believe this will prove to be the case. 
Indeed, commenters made similar allegations in their objection to the 
changes for RY 2007, and predicted that we would see many LTCHs put out 
of business due to our drastically-changed policies. In actuality, we 
did not see a drastic reduction in either the number of LTCHs or the 
overall number of LTCH cases. Furthermore, reports in trade journals 
suggest that certain members of the LTCH industry believe they are well 
situated to expand in the future. Similarly, we believe LTCHs have the 
ability to screen patients coming to a LTCH to assure that they are 
truly LTC patients. However, in the case of the revised SSO policy, we 
believe that a payment, for those patients that have a LOS comparable 
to an IPPS patient for that DRG (that is, the IPPS comparable 
threshold) at a level comparable to the IPPS payment, is an appropriate 
payment.
3. Standard Federal Rate for the 2008 LTCH PPS Rate Year
    In the RY 2007 LTCH PPS final rule (71 FR 27827), we established a 
standard Federal rate of $38,086.04 for the 2007 LTCH PPS rate year 
that was based on the best available data and policies established in 
that final rule. In this final rule, under the broad authority 
conferred upon the Secretary by section 123 of the BBRA as amended by 
section 307(b) of the BIPA, consistent with the proposed rule, we are 
applying an annual update to the standard Federal rate for RY 2008 that 
reflects an adjustment for the most recent market basket estimate and 
an adjustment to account for the increase in case-mix in a prior period 
(FY 2005) that resulted from changes in coding practices rather than an 
increase in patient severity. Therefore, based on the update factor for 
RY 2008 of 0.71 percent, the standard Federal rate for RY 2008 will be 
$38,356.45. Since the standard Federal rate for the 2008 LTCH PPS rate 
year has already been adjusted for differences in case-mix, wages, 
COLAs, and HCO payments, we are not making any additional adjustments 
in the standard Federal rate for these factors.

D. Calculation of LTCH Prospective Payments for the 2008 LTCH PPS Rate 
Year

    The basic methodology for determining prospective payment rates for 
LTCH inpatient operating and capital-related costs is set forth in 
Sec.  412.515 through Sec.  412.532. In accordance with Sec.  412.515, 
we assign appropriate weighting factors to each LTC-DRG to reflect the 
estimated relative cost of hospital resources used for discharges 
within that group as compared to discharges classified within other 
groups. The amount of the prospective payment is based on the standard 
Federal rate, established under Sec.  412.523, and adjusted for the 
LTC-DRG relative weights, differences in area wage levels, COLA in 
Alaska and Hawaii, HCOs, and other special payment provisions (SSOs 
under Sec.  412.529 and interrupted stays under Sec.  412.531).
    In accordance with Sec.  412.533, during the 5-year transition 
period, which is currently in its final year for LTCH cost reporting 
periods beginning on or after October 1, 2006 (FY 2007), a total LTCH 
PPS payment was based on the applicable transition blend percentage of 
the adjusted Federal rate and a percentage based on reasonable cost 
principles, unless the LTCH made a one-time election to receive payment 
based on 100 percent of the Federal rate.

[[Page 26891]]

In the final year of the 5-year transition period, which began with 
LTCH cost reporting periods beginning on or after October 1, 2006, as 
specified at Sec.  412.533, a total LTCH PPS payment is based on 100 
percent of the Federal rate. An LTCH defined as ``new'' under Sec.  
412.23(e)(4) is paid based on 100 percent of the Federal rate with no 
blended transition payments as specified in Sec.  412.533(d). As 
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 56038), the 
applicable transition blends are set forth in Sec.  412.533(a).
    Accordingly, for cost reporting periods that began during FY 2006 
(that is, on or after October 1, 2005 and on or before September 30, 
2006), blended payments under the transition methodology were based on 
20 percent of the LTCH's rate based on reasonable cost principles and 
80 percent of the adjusted LTCH PPS Federal rate. For cost reporting 
periods beginning on or after October 1, 2006 (FY 2007), Medicare 
payment to LTCHs are determined entirely (100 percent) under the LTCH 
PPS Federal rate.
1. Adjustment for Area Wage Levels
a. Background
    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS Federal rate to account for differences in LTCH area wage levels at 
Sec.  412.525(c). The labor-related share of the LTCH PPS Federal rate, 
currently estimated by the FY 2002-based RPL market basket (as 
discussed in greater detail in section IV.D.1.c. of this preamble), is 
adjusted to account for geographic differences in area wage levels by 
applying the applicable LTCH PPS wage index. The applicable LTCH PPS 
wage index is computed using wage data from inpatient acute care 
hospitals without regard to reclassification under sections 1886(d)(8) 
or 1886(d)(10) of the Act. Furthermore, as we discussed in the August 
30, 2002 LTCH PPS final rule (67 FR 56015), we established a 5-year 
transition to the full wage adjustment. The applicable wage index 
phase-in percentages are based on the start of an LTCH's cost reporting 
period as shown in Table 1.

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

    For example, for cost reporting periods beginning on or after 
October 1, 2005 and on or before September 30, 2006 (FY 2006), the 
applicable LTCH wage index value is four-fifths of the applicable full 
LTCH PPS wage index value. The wage index adjustment will be completely 
phased-in beginning with cost reporting periods beginning in FY 2007, 
that is, for cost reporting periods beginning on or after October 1, 
2006, the applicable LTCH wage index value will be the full (five-
fifths) LTCH PPS wage index value. Therefore, the majority of LTCHs are 
currently receiving either the four-fifths or full (five-fifths) LTCH 
PPS wage index value. As we established in the August 30, 2002 LTCH PPS 
final rule (67 FR 56018), the applicable full LTCH PPS wage index value 
is calculated from acute-care hospital inpatient wage index data 
without taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act.
b. Geographic Classifications/Labor Market Area Definitions
    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in establishing 
an adjustment for area wage levels under Sec.  412.525(c), the labor-
related portion of a LTCH's Federal prospective payment is adjusted by 
using an appropriate wage index based on the labor market area in which 
the LTCH is located. In the 2006 LTCH PPS rate year final rule (70 FR 
24184 through 24185), in Sec.  412.525(c), we revised the labor market 
area definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005 based on the Office of Management 
and Budget's (OMB's) Core Based Statistical Area (CBSA) designations 
based on 2000 Census data because we believe that those new labor 
market area definitions will ensure that the LTCH PPS wage index 
adjustment most appropriately accounts for and reflects the relative 
hospital wage levels in the geographic area of the hospital as compared 
to the national average hospital wage level. As set forth in Sec.  
412.525(c)(2), a LTCH's wage index is determined based on the location 
of the LTCH in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C). An urban area under the LTCH PPS is 
defined at Sec.  412.64(b)(1)(ii)(A) and (B). In general, an urban area 
is defined as a Metropolitan Statistical Area (MSA) as defined by the 
OMB. (In addition, a few counties located outside of MSAs are 
considered urban as specified at Sec.  412.64(b)(1)(ii)(B).) Under 
Sec.  412.64(b)(1)(ii)(C), a rural area is defined as any area outside 
of an urban area.
    We note that these are the same CBSA-based designations implemented 
for acute care inpatient hospitals under the IPPS at Sec.  412.64(b) 
effective October 1, 2004 (69 FR 49026 through 49034). For further 
discussion of the labor market area (geographic classification) 
definitions used under the LTCH PPS, see the 2006 LTCH PPS rate year 
final rule (70 FR 24182 through 24191).
c. Labor-Related Share
    In the August 30, 2002 LTCH PPS final rule (67 FR 56016), we 
established a labor-related share of 72.885 percent based on the 
relative importance of the labor-related share of operating costs 
(wages and salaries, employee benefits, professional fees, postal 
services, and all other labor-intensive services) and capital costs of 
the excluded hospital with capital market basket based on FY 1992 data.
    As we discussed in LTCH PPS final rules subsequent to the FY 2003 
LTCH PPS final rule in which we established the original LTCH PPS 
labor-related share (68 FR 34142, 69 FR 25685 through 25686, and 70 FR 
24182), once our research into the labor-related share methodology was 
complete, we would update the IPPS and excluded hospital labor-related 
shares based on that research and the best available data if necessary. 
Accordingly, we conducted analysis of our labor share methodology, 
which was completed prior to the development of the RY 2007 LTCH PPS 
proposed and final rules. In the RY 2007 LTCH PPS final rule (71 FR 
27829), we updated the LTCH PPS labor-related share based on the FY 
2002-based RPL market basket (discussed in section IV.B. of this 
preamble) because we believe that this market basket was developed 
based on the best available data that reflect the cost structures of 
LTCHs.
    Consistent with our historical practice, the labor-related share 
currently used under the LTCH PPS is determined by identifying the 
national average proportion of operating costs and capital costs that 
are related to, influenced by, or vary with the local labor market. 
Specifically, in the RY 2007 LTCH PPS final rule (71 FR 27829 through 
27832), we revised the LTCH PPS labor-related share from 72.885

[[Page 26892]]

percent (as established in the August 30, 2002 final rule (67 FR 56016) 
based on the FY 1997-based excluded hospital with capital market 
basket) to 75.665 percent based on the relative importance of the 
labor-related share of operating costs (wages and salaries, employee 
benefits, professional fees, and all other labor-intensive services) 
and capital costs of the proposed RPL market basket based on FY 2002 
data from the first quarter of 2006.
    In the RY 2008 LTCH PPS proposed rule (72 FR 4794), under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA, consistent with our historical 
practice of determining the labor-related share by identifying the 
national average proportion of operating costs and capital costs that 
are related to, influenced by, or varies with the local labor market, 
and consistent with our historical practice of using the best data 
available, we proposed to update the LTCH PPS labor-related share from 
75.665 percent to 75.511 percent based on the relative importance of 
the labor-related share of operating costs (wages and salaries, 
employee benefits, professional fees, and all other labor-intensive 
services) and capital costs of the FY 2002-based RPL market basket from 
the 3rd quarter of 2006. The labor-related share is the sum of the 
relative importance of wages and salaries, fringe benefits, 
professional fees, labor-intensive services, and a portion of the 
capital share from an appropriate market basket. We received no 
comments on our proposal to update the LTCH PPS labor-related share.
    Consistent with our historical practice of using the best data 
available, we also proposed that if more recent data were available to 
determine the labor-related share of the RPL market basket (used under 
the LTCH PPS), we would use such data for determining the labor-related 
share for the 2008 LTCH PPS rate year in the final rule. As discussed 
above in section IV.B.2. of this preamble, we now have data from the 
1st quarter of 2007 (with history through the 4th quarter of 2006). 
Therefore, in this final rule, for RY 2008, we are using the FY 2002-
based RPL market basket costs based on data from the 1st quarter of 
2007 to determine the labor-related share for the LTCH PPS effective 
for discharges occurring on or after July 1, 2007, as this is the most 
recent available data. The labor-related share for the 2008 LTCH PPS 
rate year will continue to be the sum of the relative importance of 
each labor-related cost category, and will reflect the different rates 
of price change for these cost categories between the base year (FY 
2002) and the 2008 LTCH PPS rate year. Accordingly, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA, consistent with our historical 
practice of determining the labor-related share by identifying the 
national average proportion of operating costs and capital costs that 
are related to, influenced by, or varies with the local labor market, 
we are revising the LTCH PPS labor-related share from 75.665 percent to 
75.788 percent based on the relative importance of the labor-related 
share of operating costs (wages and salaries, employee benefits, 
professional fees, and all other labor-intensive services) and capital 
costs of the FY 2002-based RPL market basket from the 1st quarter of 
2007, as discussed below and shown below in Table 2.
    Based on the most recent available data, the sum of the relative 
importance for 2008 LTCH PPS rate year for operating costs (wages and 
salaries, employee benefits, professional fees, and labor-intensive 
services) is 71.767, as shown in Table 2. The portion of capital that 
is influenced by the local labor market is still estimated to be 46 
percent, which is the same percentage used when we established the 
current labor-related share in the RY 2007 LTCH PPS final rule. Since, 
based on the most recent available data, the relative importance for 
capital is 8.742 percent of the FY 2002-based RPL market basket for the 
2008 LTCH PPS rate year, we are multiplying the estimated portion of 
capital influenced by the local labor market (46 percent) by the 
relative importance for capital (8.742 percent) to determine the labor-
related share of capital for the 2008 LTCH PPS rate year. The result is 
4.021 percent (0.46 x 8.742 percent), which we add to the 71.767 
percent for the operating cost amount to determine the total labor-
related share for the 2008 LTCH PPS rate year. Thus, based on the 
latest available data, we are establishing a labor-related share of 
75.788 percent (71.767 percent + 4.021 percent) under the LTCH PPS for 
the 2008 LTCH PPS rate year. As noted above in this section, this 
labor-related share is determined using the same methodology as 
employed in calculating the current LTCH labor-related share (71 FR 
27830) and the labor-related shares used under the IRF PPS and IPF PPS, 
which also use the RPL market basket.
    Table 2 shows the 2007 LTCH PPS rate year relative importance 
labor-related share of the FY 2002-based RPL market basket (established 
in the RY 2007 LTCH PPS final rule) and the 2008 LTCH PPS rate year 
relative importance labor-related share of the FY 2002-based RPL market 
basket.

  Table 2.--RY 2007 Labor-Related Share Relative Importance and RY 2008
 Labor-Related Share Relative Importance of the FY 2002-Based RPL Market
                                 Basket
------------------------------------------------------------------------
                                              RY 2007         RY 2008
              Cost category                  relative        relative
                                            importance*     importance
------------------------------------------------------------------------
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 share of capital costs............           4.079           4.021
                                         -------------------------------
    Total Labor-related share...........          75.665         75.788
------------------------------------------------------------------------
* As established in the RY 2007 LTCH PPS final rule (71 FR 27830).
** Other labor intensive services includes landscaping services,
  services to buildings, detective and protective services, repair
  services, laundry services, advertising, auto parking and repairs,
  physical fitness facilities, and other government enterprises.


[[Page 26893]]

d. Wage Index Data
    In the RY 2007 LTCH PPS final rule (71 FR 27830 through 27831), we 
established LTCH PPS wage index values for the 2007 LTCH PPS rate year 
calculated from the same data (generated in cost reporting periods 
beginning during FY 2002) used to compute the FY 2006 acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act because that was the best available data at that time. The LTCH 
wage index values applicable for discharges occurring on or after July 
1, 2006 through June 30, 2007 are shown in Table 1 (for urban areas) 
and Table 2 (for rural areas) in the Addendum to the RY 2007 LTCH PPS 
final rule (71 FR 27906 through 27930). Acute care hospital inpatient 
wage index data are also used to establish the wage index adjustment 
used in the IRF PPS, HHA PPS, and SNF PPS. As we discussed in the 
August 30, 2002 LTCH PPS final rule (67 FR 56019), since hospitals that 
are excluded from the IPPS are not required to provide wage-related 
information on the Medicare cost report and because we would need to 
establish instructions for the collection of this LTCH data to 
establish a geographic reclassification adjustment under the LTCH PPS, 
the wage adjustment established under the LTCH PPS is based on a LTCH's 
actual location without regard to the urban or rural designation of any 
related or affiliated provider.
    In the RY 2008 proposed rule (72 FR 4795-4796), under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of BIPA to determine appropriate adjustments 
under the LTCH PPS, for the 2008 LTCH PPS rate year, we proposed to use 
the same data (generated in cost reporting periods beginning during FY 
2003) used to compute the FY 2007 acute care hospital inpatient wage 
index data without taking into account geographic reclassification 
under sections 1886(d)(8) and (d)(10) of the Act to determine the 
applicable wage index values under the LTCH PPS because these data (FY 
2003) are the most recent complete data. We proposed to continue to use 
IPPS wage data as a proxy to determine the LTCH wage index values for 
the 2008 LTCH PPS rate year because both LTCHs and acute-care hospitals 
are required to meet the same certification criteria set forth in 
section 1861(e) of the Act to participate as a hospital in the Medicare 
program and they both compete in the same labor markets, and, 
therefore, experience similar wage-related costs. These data are the 
same FY 2003 acute care hospital inpatient wage data that were used to 
compute the FY 2007 wage indices currently used under the IPPS, skilled 
nursing facility (SNF) PPS and home health agency (HHA) PPS. The LTCH 
wage index values that would be applicable for discharges occurring on 
or after July 1, 2007 through June 30, 2008, are shown in Table 1 (for 
urban areas) and Table 2 (for rural areas) in Addendum A to the RY 2008 
proposed rule (72 FR 4849 through 4872).
    We received no comments on the proposed LTCH wage index values that 
would be applicable for discharges occurring on or after July 1, 2007 
through June 30, 2008. Therefore, in this final rule, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of BIPA to determine appropriate adjustments 
under the LTCH PPS, for the 2008 LTCH PPS rate year, we are using the 
same data (generated in cost reporting periods beginning during FY 
2003) used to compute the FY 2007 acute care hospital inpatient wage 
index data without taking into account geographic reclassification 
under sections 1886(d)(8) and (d)(10) of the Act to determine the 
applicable wage index values under the LTCH PPS because these data (FY 
2003) are the most recent complete data. We are continuing to use IPPS 
wage data as a proxy to determine the LTCH wage index values for the 
2008 LTCH PPS rate year for the reasons stated in the RY 2008 proposed 
rule (as noted above). The LTCH wage index values that will be 
applicable for discharges occurring on or after July 1, 2007 through 
June 30, 2008, are shown in Table 1 (for urban areas) and Table 2 (for 
rural areas) in the Addendum to this final rule.
    As discussed in section IV.D.1.a. of this preamble, the applicable 
wage index phase-in percentages are based on the start of a LTCH's cost 
reporting period beginning on or after October 1st of each year during 
the 5-year transition period. Thus, cost reporting periods beginning on 
or after October 1, 2005 and before October 1, 2006 (FY 2006), the 
labor-related portion of the standard Federal rate is adjusted by four-
fifths of the applicable LTCH wage index value. The wage index 
adjustment will be completely phased-in beginning with cost reporting 
periods beginning in FY 2007. That is, for cost reporting periods 
beginning on or after October 1, 2006, the labor-related portion of the 
standard Federal rate is adjusted by the full (five-fifths) applicable 
LTCH wage index value.
    Because the phase-in of the wage index does not coincide with the 
LTCH PPS rate year (July 1st through June 30th), most LTCHs will 
experience a change in the wage index phase-in percentages during the 
LTCH PPS rate year. For example, during the 2008 LTCH PPS rate year, 
for a LTCH with a September 1st fiscal year, the four-fifths wage index 
will be applicable for the first 2 months of the 2007 LTCH PPS rate 
year (July 1, 2007 through August 31, 2007) and the full (five-fifths) 
wage index will be applicable for the next 10 months of the 2008 LTCH 
PPS rate year (September 1, 2007 through June 30, 2008). For the 
remainder of such a LTCH's FY 2006 cost reporting periods, which 
coincides with the first 2 months of RY 2008, the applicable wage index 
value would be four-fifths of the full FY 2007 acute-care hospital 
inpatient wage index data, without taking into account geographic 
reclassification under sections 1886(d)(8) and (d)(10) of the Act (as 
shown in Tables 1 and 2 in the Addendum to this final rule). Beginning 
with this LTCH's FY 2007 cost reporting period that will begin during 
RY 2008, the applicable wage index value would be the full (five-
fifths) FY 2007 acute care hospital inpatient wage index data, without 
taking into account geographic reclassification under sections 
1886(d)(8) and (d)(10) of the Act (as shown in Tables 1 and 2 in the 
Addendum to this final rule). We note that since there are no longer 
any LTCHs in their cost reporting periods that began during FY 2003 
through FY 2005 (the first three years of the 5-year wage index phase-
in), we are no longer showing the \1/5\\th\, \2/5\\ths\ and \3/5\\ths\ 
wage index values in Tables 1 and 2 in the Addendum to this final rule.
2. Adjustment for Cost-of-Living in Alaska and Hawaii
    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a COLA for LTCHs located in Alaska and Hawaii 
to account for the higher costs incurred in those States. In the RY 
2007 LTCH PPS final rule (71 FR 27832), for the 2007 LTCH PPS rate 
year, we established a COLA to payments for LTCHs located in Alaska and 
Hawaii by multiplying the standard Federal payment rate by the 
appropriate factor listed in Table 8 of that same final rule.
    Similarly, in the RY 2008 proposed rule (72 FR 4796), under the 
broad authority conferred upon the Secretary by section 123 of the BBRA 
as amended by section 307(b) of BIPA to determine appropriate 
adjustments under the

[[Page 26894]]

LTCH PPS, for the 2008 LTCH PPS rate year we proposed to apply a COLA 
to payments to LTCHs located in Alaska and Hawaii by multiplying the 
proposed standard Federal payment rate by the factors listed in Table 3 
of that proposed rule because those were the most recent available data 
at that time. Those factors were obtained from the U.S. Office of 
Personnel Management (OPM) and are currently used under the IPPS. In 
addition, we proposed that if OPM released revised COLA factors before 
March 1, 2007, we would use them for the development of the payments 
for the 2008 LTCH rate year and publish them in the LTCH PPS final 
rule.
    We received no comments on our proposed COLA factors for LTCHs 
located in Alaska and Hawaii for RY 2008. However, we note that OPM 
released revised COLA factors for certain areas in Alaska prior to 
March 1, 2007. Specifically, OPM released revised COLA factors for the 
city of Anchorage and 80-kilometer (50-mile) radius by road, the city 
of Fairbanks and 80-kilometer (50-mile) radius by road, and the city of 
Juneau and 80-kilometer (50-mile) radius by road. The COLA factors for 
all other areas of Alaska were not revised from their current values. 
(We note that currently there are no LTCHs located in Alaska.)
    Therefore, in this final rule were are adopting the revised COLA 
factors for those areas in Alaska, along with the proposed COLA factors 
for the other areas of Alaska and Hawaii, for use under the LTCH PPS in 
RY 2008. We note that the revised COLA factors for certain areas of 
Alaska have been proposed for use under the IPPS for FY 2008, as 
discussed in the FY 2008 IPPS proposed rule.
    In this final rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA as amended by section 307(b) of 
BIPA to determine appropriate adjustments under the LTCH PPS, for the 
2008 LTCH PPS rate year we are applying a COLA to payments to LTCHs 
located in Alaska and Hawaii by multiplying the standard Federal 
payment rate by the factors listed below in Table 3 because these are 
currently the most recent available data from OPM (as noted above).

    Table 3.--Cost-of-Living Adjustment Factors for Alaska and Hawaii
                Hospitals for the 2008 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
    City of Anchorage and 80-kilometer (50-mile) radius by        1.24
     road....................................................
    City of Fairbanks and 80-kilometer (50-mile) radius by        1.24
     road....................................................
    City of Juneau and 80-kilometer (50-mile) radius by road.     1.24
    All other areas of Alaska................................     1.25
Hawaii:
    Honolulu County..........................................     1.25
    Hawaii County............................................     1.165
    Kauai County.............................................     1.2325
    Maui County..............................................     1.2375
    Kalawao County...........................................     1.2375
------------------------------------------------------------------------

3. Adjustment for High-Cost Outliers (HCOs)
a. Background
    Under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. Providing additional 
payments for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise be 
incurred when treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We set 
the outlier threshold before the beginning of the applicable rate year 
so that total estimated outlier payments are projected to equal 8 
percent of total estimated payments under the LTCH PPS. Outlier 
payments under the LTCH PPS are determined consistent with the IPPS 
outlier policy.
    Under Sec.  412.525(a), we make outlier payments for any discharges 
if the estimated cost of a case exceeds the adjusted LTCH PPS payment 
for the LTC-DRG plus a fixed-loss amount. The fixed-loss amount is the 
amount used to limit the loss that a hospital will incur under the 
outlier policy for a case with unusually high costs. This results in 
Medicare and the LTCH sharing financial risk in the treatment of 
extraordinarily costly cases. Under the LTCH PPS HCO policy, the LTCH's 
loss is limited to the fixed-loss amount and a fixed percentage of 
costs above the outlier threshold (LTCH DRG payment plus the fixed-loss 
amount) determined by the marginal cost factor. We calculate the 
estimated cost of a case by multiplying the overall hospital cost-to-
charge ratio (CCR) by the Medicare allowable covered charge. In 
accordance with Sec.  412.525(a)(3), we pay outlier cases 80 percent of 
the difference between the estimated cost of the patient case and the 
outlier threshold (the sum of the adjusted Federal prospective payment 
for the LTC-DRG and the fixed-loss amount).
    Under the LTCH PPS, we determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the LTCH PPS for a case with 
unusually high costs before the LTCH will receive any additional 
payments. We calculate the fixed-loss amount by estimating aggregate 
payments with and without an outlier policy. The fixed-loss amount will 
result in estimated total outlier payments being projected to be equal 
to 8 percent of projected total LTCH PPS payments. Currently, MedPAR 
claims data and CCRs based on data from the most recent provider 
specific file (PSF) (or to the applicable Statewide average CCR if a 
LTCH's CCR data are faulty or unavailable) are used to establish a 
fixed-loss threshold amount under the LTCH PPS.
b. Cost-to-Charge Ratios (CCRs)
    In determining outlier payments, we calculate the estimated cost of 
the case by multiplying the LTCH's overall CCR by the Medicare 
allowable charges for the case. As we discussed in greater detail in 
the June 9, 2003 IPPS HCO final rule (68 FR 34506 through 34516), 
because the LTCH PPS HCO policy at Sec.  412.525 is modeled after the 
IPPS outlier policy, we believed that it and the SSO policy at Sec.  
412.529 are susceptible to the same payment vulnerabilities that became 
evident under the IPPS and, therefore, merited revision. Thus, we 
revised the HCO policy at Sec.  412.525(a) and the SSO policy at Sec.  
412.529 in that same final rule for the determination of LTCHs' CCRs 
and the reconciliation of outlier payments.
    Under the LTCH PPS, a single prospective payment per discharge is 
made for both inpatient operating and capital-related costs, and, 
therefore, we compute a single ``overall'' or ``total'' CCR for LTCHs 
based on the sum of their operating and capital costs (as described in 
Chapter 3, section 150.24, of the Medicare Claims Processing Manual 
(CMS Pub. 100-4)) as compared to total charges. Specifically, a LTCH's 
CCR is calculated by dividing a LTCH's total Medicare costs (that is, 
the sum of its operating and capital inpatient routine and ancillary 
costs) by its total Medicare charges (that is, the sum of its operating 
and capital inpatient routine and ancillary charges). (Instructions 
regarding the changes established in the

[[Page 26895]]

June 9, 2003 IPPS HCO final rule for both LTCHs and IPPS hospitals can 
be found in Transmittal A-03-058 (Change Request 2785; July 3, 2003).)
    As a result of the changes established in the June 9, 2003 IPPS HCO 
final rule, as we discussed in the RY 2007 LTCH PPS final rule (71 FR 
27832 through 27833) and the FY 2007 IPPS final rule (71 FR 48119 
through 48121), a LTCH is assigned the applicable Statewide average CCR 
if, among other things, a LTCH's CCR is found to be in excess of the 
applicable maximum CCR threshold (that is, the LTCH CCR ceiling). As we 
explained in the FY 2007 IPPS final rule (71 FR 48117), CCRs above this 
threshold are most likely due to faulty data reporting or entry, and, 
therefore, these CCRs should not be used to identify and make payments 
for outlier cases. Such data are clearly errors and should not be 
relied upon. Thus, under our established policy, if a LTCH's CCR is 
above the applicable ceiling, the applicable LTCH PPS Statewide average 
CCR is assigned to the LTCH instead of the CCR computed from its most 
recent (settled or tentatively settled) cost report data.
    Under Sec.  412.525(a)(4)(ii), for discharges occurring on or after 
August 8, 2003, and before October 1, 2006, we determined the 
applicable LTCH PPS Statewide average CCRs using the ``combined'' IPPS 
operating and capital Statewide average CCRs (that is, adding the 
separate IPPS operating and capital CCRs together to determine the LTCH 
PPS Statewide average CCRs). Also, under Sec.  412.525(a)(4)(ii), for 
discharges occurring on or after August 8, 2003, and before October 1, 
2006, if a LTCH's CCR is above the applicable ``combined'' IPPS 
operating and capital ceiling (that is, adding the separate IPPS 
operating and capital CCR ceiling together), the applicable Statewide 
average CCR may be assigned to the LTCH.
    As we explained in the FY 2007 IPPS final rule (71 FR 48117 through 
48121), we revised our methodology for determining the annual CCR 
ceiling and Statewide average CCRs under the LTCH PPS because we 
believe that those changes are consistent with the LTCH PPS single 
payment rate for inpatient operating and capital costs. Therefore, 
under the broad authority of section 123 of the BBRA and section 
307(b)(1) of BIPA, in that same final rule, we revised our methodology 
used to determine the LTCH CCR ceiling. For discharges occurring on or 
after October 1, 2006, we established that the LTCH CCR ceiling 
specified under Sec.  412.525(a)(4)(iv)(C)(2) is calculated as three 
standard deviations above the corresponding national geometric mean 
total CCR (established and published annually by CMS). (The fiscal 
intermediary (FI) may use a Statewide average CCR if, among other 
things, a LTCH's CCR is in excess of the LTCH CCR ceiling.) The LTCH 
total CCR ceiling is determined based on IPPS CCR data, by first 
calculating the ``total'' (that is, operating and capital) IPPS CCR for 
each hospital and then determining the average ``total'' IPPS CCR for 
all IPPS hospitals. (Our rationale for using IPPS hospital data is 
discussed in the FY 2007 IPPS final rule (71 FR 48117) and reiterated 
below in this section.) The LTCH CCR ceiling is then established at 3 
standard deviations from the corresponding national geometric mean 
total CCR. (For further detail on our methodology for annually 
determining the LTCH CCR ceiling, refer to the FY 2007 IPPS final rule 
(71 FR 48117 through 48119).) We also established that the LTCH 
``total'' CCR ceiling used under the LTCH PPS will continue to be 
published annually in the IPPS proposed and final rules, and the public 
should continue to consult the annual IPPS proposed and final rules for 
changes to the LTCH total CCR ceiling that would be effective for 
discharges occurring on or after October 1 each year. Accordingly, in 
the FY 2007 IPPS final rule (71 FR 48119), we established a FY 2007 
LTCH PPS total CCR ceiling of 1.321, effective for discharges occurring 
on or after October 1, 2006. (We note that the proposed FY 2008 LTCH 
PPS total CCR ceiling, that would be effective for discharges occurring 
on or after October 1, 2007, was presented in the FY 2008 IPPS proposed 
rule.)
    In addition, under the broad authority of section 123 of the BBRA 
and section 307(b)(1) of BIPA, we revised our methodology to determine 
the Statewide average CCRs under Sec.  412.525(a)(4)(iv)(C) for use 
under the LTCH PPS in a manner similar to the way we compute the 
``total'' CCR ceiling using IPPS CCR data (71 FR 48120). Specifically, 
under this revised methodology we first calculate the total (that is, 
operating and capital) CCR for each IPPS hospital. We then calculate 
the weighted average ``total'' CCR for all IPPS hospitals in the rural 
areas of the State and the weighted average ``total'' CCR for all IPPS 
hospitals in the urban areas of the State. (For further detail on our 
methodology for annually determining the LTCH urban and rural Statewide 
average CCRs, refer to the FY 2007 IPPS final rule (71 FR 48119 through 
48121).) We also established that the applicable Statewide average 
``total'' (operating and capital) CCRs used under the LTCH PPS will 
continue to be published annually in the IPPS proposed and final rules, 
and the public should continue to consult the annual IPPS proposed and 
final rules for changes to the applicable Statewide average total CCRs 
that would be effective for discharges occurring on or after October 1 
each year. Accordingly, in the FY 2007 IPPS final rule (71 FR 48122), 
the FY 2007 LTCH PPS Statewide average total CCRs for urban and rural 
hospitals, effective for discharges occurring on or after October 1, 
2006, were presented in Table 8C of the Addendum of that final rule (71 
FR 48303.) (We note that the proposed FY 2007 LTCH PPS Statewide 
average total CCRs for urban and rural hospitals, that would be 
effective for discharges occurring on or after October 1, 2007, were 
presented in Table 8C of the FY 2008 IPPS proposed rule.)
    As we explained in the FY 2007 IPPS final rule (71 FR 48117), we 
continue to believe it is appropriate to use IPPS operating and capital 
CCRs to compute the LTCH total CCR ceiling and the Statewide average 
CCRs because LTCHs' cost and charge structures are similar to that of 
IPPS acute-care hospitals. For instance, LTCHs are certified as acute 
care hospitals, as set forth in section 1861(e) of the Act to 
participate as a hospital in the Medicare program, and these hospitals, 
in general, are paid as LTCHs only because their Medicare ALOS is 
greater than 25 days as specified in Sec.  412.23(e). Furthermore, 
prior to qualifying as a LTCH under Sec.  412.23(e)(2)(i), a hospital 
generally is paid as an acute-care hospital under the IPPS during the 
period in which it demonstrates that it has an ALOS of greater than 25 
days. In addition, since there are less than 400 LTCHs, which are 
unevenly geographically distributed throughout the United States, there 
may not be sufficient LTCH CCR data to determine an appropriate LTCH 
PPS CCR ceiling using LTCH data.
    In the FY 2007 IPPS final rule, in addition to revising our 
methodology for determining the annual CCR ceiling and Statewide 
average CCRs under the LTCH PPS for discharges occurring on or after 
October 1, 2006, under the broad authority of section 123 of the BBRA 
and section 307(b)(1) of BIPA, we revised Sec.  412.525(a)(4)(iv) for 
discharges occurring on or after October 1, 2006, to codify in 42 CFR 
part 412, subpart O the remaining LTCH PPS outlier policy changes that 
were established in the June 9, 2003 IPPS HCO final rule (68 FR 34506 
through 34513), including modifications and editorial clarifications to 
those existing policies

[[Page 26896]]

established in that final rule. We made these revisions because we 
believe that they more precisely describe the application of those 
policies as they relate to the determination of LTCH CCRs because these 
changes are consistent with the changes to the calculation of the LTCH 
CCR ceiling.
    Specifically, in the FY 2007 IPPS final rule (71 FR 48119), under 
the broad authority of section 123 of the BBRA and section 307(b)(1) of 
BIPA, we established under the LTCH PPS HCO policy at Sec.  
412.525(a)(4)(iv)(C) that the FI may use a Statewide average CCR, which 
is established annually by CMS, if it is unable to determine an 
accurate CCR for a LTCH in one of the following three circumstances: 
(1) New LTCHs that have not yet submitted their first Medicare cost 
report (for this purpose, consistent with current policy, a new LTCH 
would be defined as an entity that has not accepted assignment of an 
existing hospital's provider agreement in accordance with Sec.  
489.18); (2) LTCHs whose CCR is in excess of the LTCH CCR ceiling; and 
(3) other LTCHs for whom data with which to calculate a CCR are not 
available (for example, missing or faulty data). (Other sources of data 
that the FI may consider in determining a LTCH's CCR included data from 
a different cost reporting period for the LTCH, data from the cost 
reporting period preceding the period in which the hospital began to be 
paid as a LTCH (that is, the period of at least 6 months that it was 
paid as a short-term acute care hospital), or data from other 
comparable LTCHs, such as LTCHs in the same chain or in the same 
region.)
    Additionally, in the FY 2007 IPPS final rule (71 FR 48121), we 
established under Sec.  412.525(a)(4)(iv)(B) and Sec.  
412.529(c)(3)(iv)(B) that, for discharges occurring on or after October 
1, 2006, the CCR applied at the time a claim is processed will be based 
on either the most recently settled cost report or the most recent 
tentatively settled cost report, whichever is from the latest cost 
reporting period. Under the broad authority of section 123 of the BBRA 
and section 307(b)(1) of BIPA, in that same final rule, we also 
established at Sec.  412.525(a)(4)(iv)(A) that, for discharges 
occurring on or after October 1, 2006, we may specify an alternative to 
the CCR computed under Sec.  412.525(a)(4)(iv)(B) (that is, computed 
from the most recently settled cost report or the most recent 
tentatively settled cost report, whichever is later), or a hospital may 
also request that the FI use a different (higher or lower) CCR based on 
substantial evidence presented by the hospital. In addition, under the 
broad authority of section 123 of the BBRA and section 307(b)(1) of 
BIPA, we revised Sec.  412.525(a)(3) to change the plural reference 
from cost-to-charge ``ratios'' to the singular reference to a cost-to-
charge ``ratio'' in that final rule. For a complete discussion on all 
these revisions to our methodology for determining a LTCH's CCR, refer 
to the FY 2007 IPPS final rule (71 FR 48119 through 48121). We note 
that in that same FY 2007 IPPS final rule, we made similar revisions to 
the SSO policy at Sec.  412.529(c)(3), as discussed in V.A.1.b. of the 
preamble of this proposed rule.
    Comment: A commenter asked that we consider making an exception to 
the outlier payment reconciliation requirements for the affected 
hospitals by Hurricane Katrina because they would have experienced an 
aberrant change in their CCR during the first and second cost reporting 
periods that began on or after August 29, 2005.
    Response: In order for a hospital to meet the requirements of 
outlier reconciliation, a 10 percentage point change in a LTCHs CCRs 
from the time of payment to the time of cost report settlement is 
required in addition to SSO and HCO payment being greater then $500,000 
for the cost reporting period being settled. Without further 
explanation from the commenter, it is not clear what type of aberrant 
changes to the CCR the commenter is referring. Changes to costs or 
charges can either result in reducing or increasing a CCR in any given 
cost reporting period. Based on the events of Katrina, we would 
anticipate an increase in costs and a reduction in total charges as 
effected hospitals probably experienced fewer discharges in the period 
after Katrina. These types of changes would increase a hospital's CCR, 
and therefore, a hospital would not owe CMS additional funds if a 
hospital met the criteria for reconciliation. We also note that even if 
a unique circumstance arose as a result of Hurricane Katrina and 
resulted in a situation where a hospital would be required to pay CMS 
as a result of a reconciliation, we believe the existing regulation may 
allow us to consider the unique needs of this hospital, and no changes 
to the existing regulations at Sec.  412.525(a)(4)(ii), Sec.  
412.525(a)(4)(iv)(D), Sec.  412.529(c)(3)(ii), or Sec.  
412.529(c)(3)(iv)(E).
c. Establishment of the Fixed-Loss Amount
    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56022 through 56026), under the broad 
authority of section 123 of the BBRA as amended by section 307(b) of 
BIPA, we established a fixed-loss amount so that total estimated 
outlier payments are projected to equal 8 percent of total estimated 
payments under the LTCH PPS. To determine the fixed-loss amount, we 
estimate outlier payments and total LTCH PPS payments for each case 
using claims data from the MedPAR files. Specifically, to determine the 
outlier payment for each case, we estimate the cost of the case by 
multiplying the Medicare covered charges from the claim by the LTCH's 
hospital specific CCR. Under Sec.  412.525(a)(3), if the estimated cost 
of the case exceeds the outlier threshold (the sum of the adjusted 
Federal prospective payment for the LTC-DRG and the fixed-loss amount), 
we pay an outlier payment equal to 80 percent of the difference between 
the estimated cost of the case and the outlier threshold (the sum of 
the adjusted Federal prospective payment for the LTC-DRG and the fixed-
loss amount).
    In the RY 2007 LTCH PPS final rule (71 FR 27838), in calculating 
the fixed-loss amount that would result in estimated outlier payments 
projected to be equal to 8 percent of total estimated payments for the 
2007 LTCH PPS rate year, we used claims data from the December 2005 
update of the FY 2005 MedPAR files and CCRs from the December 2005 
update of the PSF, as that was the best available data at that time. We 
believe that CCRs from the PSF are the best available CCR data for 
determining estimated LTCH PPS payments for a given LTCH PPS rate year 
because they are the most recently available CCRs actually used to make 
LTCH PPS payments.
    As we also discussed in the RY 2007 LTCH PPS rate year final rule 
(71 FR 27838), we calculated a single fixed-loss amount for the 2007 
LTCH PPS rate year based on the version 23.0 of the GROUPER, which was 
the version in effect as of the beginning of the LTCH PPS rate year 
(that is, July 1, 2006 for the 2007 LTCH PPS rate year). In addition, 
we applied the outlier policy under Sec.  412.525(a) in determining the 
fixed-loss amount for the 2007 LTCH PPS rate year; that is, we assigned 
the applicable Statewide average CCR only to LTCHs whose CCRs exceeded 
the ceiling (and not when they fell below the floor). Accordingly, we 
used the FY 2006 LTCH PPS CCR ceiling of 1.423 (71 FR 27838). As noted 
in that same final rule, in determining the fixed-loss amount for the 
2007 LTCH PPS rate year using the CCRs from the PSF, there were no 
LTCHs with missing CCRs or with CCRs in excess of the current ceiling 
and, therefore, there was no need for us to independently assign the 
applicable Statewide average CCR to any LTCHs in

[[Page 26897]]

determining the fixed-loss amount for the 2007 LTCH PPS rate year (as 
this may have already been done by the FI in the PSF in accordance with 
the established policy).
    Accordingly, in 2007 LTCH PPS rate year final rule (71 FR 27838), 
we established a fixed-loss amount of $14,887 for the 2007 LTCH PPS 
rate year. Thus, we pay an outlier case 80 percent of the difference 
between the estimated cost of the case and the outlier threshold (the 
sum of the adjusted Federal LTCH PPS payment for the LTC-DRG and the 
fixed-loss amount of $14,887).
    In the RY 2008 LTCH PPS proposed rule (72 FR 4798 through 4799), 
for the 2008 LTCH PPS rate year, we used the March 2006 update of the 
FY 2005 MedPAR claims data to determine a fixed-loss amount that would 
result in estimated outlier payments projected to be equal to 8 percent 
of total estimated payments, based on the policies described in that 
proposed rule, because those data are the most recent complete LTCH 
data available. Consistent with our historical practice of using the 
best data available, we also proposed that if more recent LTCH claims 
data become available, we would to use it for determining the fixed-
loss amount for the 2008 LTCH PPS rate year in the final rule. In 
addition, we determined the proposed fixed-loss amount based on the 
version of the GROUPER that would be in effect as of the beginning of 
the 2008 LTCH PPS rate year (July 1, 2007), that is, Version 24.0 of 
the GROUPER (as established in the FY 2007 IPPS final rule (71 FR 
47973)).
    In the RY 2008 LTCH PPS proposed rule (72 FR 4799), we proposed to 
use CCRs from the June 2006 update of the PSF for determining the 
proposed fixed-loss amount for the 2008 LTCH PPS rate year as they are 
currently the most recent complete available data. Consistent with our 
historical practice of using the best data available, we also proposed 
that if more recent CCR data are available, we would use it for 
determining the fixed-loss amount for the 2008 LTCH PPS rate year in 
the final rule. As we discussed in that same proposed rule, in 
determining the proposed fixed-loss amount for the 2008 LTCH PPS rate 
year, we used the current FY 2007 applicable LTCH ``total'' CCR ceiling 
of 1.321 and LTCH Statewide average ``total'' CCRs established under 
our revised methodology in the FY 2007 IPPS final rule (71 FR 48118 and 
48121) such that the current applicable Statewide average CCR would be 
assigned if, among other things, a LTCH's CCR exceeded the current 
ceiling (1.321). We noted that in determining the proposed fixed-loss 
amount for the 2008 LTCH PPS rate year using the CCRs from the June 
2006 update of the PSF, there was no need for us to independently 
assign the applicable Statewide average CCR to any LTCHs (as this may 
have already been done by the FI in the PSF in accordance with our 
established policy).
    Accordingly, based on the data and policies described in the RY 
2008 LTCH PPS proposed rule, we proposed to apply a fixed-loss amount 
of $18,774 for the 2008 LTCH PPS rate year. Thus, we proposed to pay an 
outlier case 80 percent of the difference between the estimated cost of 
the case and the proposed outlier threshold (the sum of the adjusted 
proposed Federal LTCH payment for the LTC-DRG and the proposed fixed-
loss amount of $18,774).
    In the RY 2008 LTCH PPS proposed rule (72 FR 4799 through 4800), we 
noted that the fixed-loss amount for the 2008 LTCH PPS rate year is 
higher than the current fixed-loss amount of $14,887. We also discussed 
that we were not proposing to adjust the existing 8 percent outlier 
target or 80 percent marginal cost factor under the current LTCH PPS 
HCO policy at that time. However, we explained that we continue to be 
interested in any comments that would support revisiting the analysis 
that was used to establish the existing 8 percent outlier target and 
the existing 80 percent marginal cost factor, using the most recent 
available data to evaluate whether any changes to the current HCO 
policy should be made, and therefore, may result in less of an increase 
in the fixed-loss amount for RY 2008.
    Comment: While we received no comments in support of revisiting the 
analysis that was used to establish the existing 8 percent outlier 
target and the existing 80 percent marginal cost factor, using the most 
recent available data, to evaluate whether any changes to the current 
HCO policy should be made, some commenters expressed concern over the 
impact of raising the fixed-loss threshold for HCOs to $18,774, an 
increase of $3,887 over the RY 2007 threshold. According to one 
commenter's analysis, the proposed fixed-loss threshold would mean that 
26 percent of cases would no longer meet the HCO threshold for 
receiving additional payments. Specifically, a commenter wrote, 
``reducing access to HCO payments for this many cases is not 
warranted.''
    Response: As we explained in the RY 2008 LTCH PPS proposed rule (72 
FR 4799), in addition to being based on the most recent available LTCH 
data to estimate the cost of each LTCH case, the proposed change in the 
fixed-loss amount is primarily due to the projected decrease in 
estimated aggregate LTCH PPS payments that is expected to result from 
the approach discussed for the SSO policy under Sec.  412.529, in 
conjunction with the proposed changes to the area wage adjustment and 
the proposed changes to the LTC-DRG relative weights for FY 2007. In 
that same proposed rule, we also explained that we believe that an 
increase in the fixed-loss amount is appropriate and necessary to 
maintain the requirement that estimated outlier payments would be 
projected to be equal to 8 percent of estimated total LTCH PPS 
payments, as required under Sec.  412.525(a), because of the estimated 
decrease in aggregate LTCH PPS payments for the 2008 LTCH PPS rate 
year. Based on the regression analysis that was performed when we 
implemented the LTCH PPS, we established the outlier target at 8 
percent of estimated total LTCH PPS payments to allow us to achieve a 
balance between the ``conflicting considerations of the need to protect 
hospitals with costly cases, while maintaining incentives to improve 
overall efficiency'' (67 FR 56024). That regression analysis also 
showed that additional increments of outlier payments over 8 percent 
(that is, raising the outlier target to a larger percentage than 8 
percent) would reduce financial risk, but by successively smaller 
amounts. Outlier payments are budget neutral, and therefore, outlier 
payments are funded by prospectively reducing the non-outlier PPS 
payment rates by projected total outlier payments. The higher the 
outlier target, the greater the (prospective) reduction to the base 
payment would need to be applied to the Federal rate to maintain budget 
neutrality.
    Maintaining the fixed-loss amount at the current level would result 
in HCO payments that exceed the current regulatory requirement that 
estimated outlier payments would be projected to equal 8 percent of 
estimated total LTCH PPS payments. In fact, our analysis shows that if 
we were to keep the fixed-loss amount at the current amount of $14,887, 
we project that estimated outlier payments would be over 10 percent of 
total estimated LTCH PPS payments in RY 2008. As noted above, the 
results of our regression analysis concluded that an outlier target in 
excess of 8 percent would not allow us to achieve our stated goal of 
the HCO policy of balancing the need to protect hospitals with costly 
cases, while providing an incentive for hospitals to operate 
efficiently.

[[Page 26898]]

    We also note that we received no comments in support of revisiting 
the regression analysis to evaluate whether current LTCH data would 
support a change in the current HCO policy, such as increasing (or 
decreasing) the outlier target. While we understand the commenter's 
concern that raising the fixed-loss threshold would mean that fewer 
cases would qualify to receive additional payments for extraordinarily 
high cost, as discussed above, we would have to reduce the standard 
Federal rate to account for the additional estimated outlier payments 
that exceed the current 8 percent outlier target since outlier payments 
are budget neutral. This would reduce payments to all LTCH cases, not 
just those that would receive a HCO payment based on the amount of the 
current fixed-loss threshold, which could result in inappropriately low 
payment amounts for typical LTCH cases (as shown by our analysis of 
payment-to-cost ratios when we developed the existing HCO policy when 
we implemented the LTCH PPS (67 FR 56022 through 56027)).
    In the RY 2008 LTCH PPS proposed rule (72 FR 4799 through 4800) as 
an alternative to the proposal to raise the fixed-loss amount, we 
discussed adjusting the marginal cost factor (that is, the percentage 
that Medicare will pay of the estimated cost of a case that exceeds the 
sum of the adjusted Federal prospective payment for the LTC-DRG and the 
fixed-loss amount for LTCH PPS outlier cases as specified in Sec.  
412.525(a)(3)), which is currently equal to 80 percent, as a means of 
ensuring that estimated outlier payments would be projected to equal 8 
percent of estimated total LTCH PPS payments. We explained that when we 
initially established the 80 percent marginal cost factor, our analysis 
of payment-to-cost ratios for HCO cases showed that a marginal cost 
factor of 80 percent appropriately addresses outlier cases that are 
significantly more expensive than nonoutlier cases, while 
simultaneously maintaining the integrity of the LTCH PPS (67 FR 56022 
through 56027).
    In that same proposed rule, we also discussed that although 
proposing to raise the fixed-loss amount from $14,887 to $18,774 would 
increase the amount of the ``loss'' that a LTCH must incur under the 
LTCH PPS for a case with unusually high costs before the LTCH would 
receive any additional Medicare payments, we continue to believe that 
the existing 8 percent outlier target and 80 percent marginal cost 
factor continue to adequately maintain the LTCHs' share of the 
financial risk in treating the most costly patients and ensure the 
efficient delivery of services. Accordingly, we did not propose to 
adjust the existing 8 percent outlier target or 80 percent marginal 
cost factor under the LTCH PPS HCO policy at this time. We also noted 
that the proposed fixed-loss amount of $18,774 is lower than the FY 
2003 fixed-loss amount of $24,450 (67 FR 56023) and the 2004 LTCH PPS 
rate year fixed-loss amount of $19,590 (68 FR 34144), and only slightly 
higher than the 2005 LTCH PPS rate year fixed-loss amount of $17,864 
(69 FR 25688), all of which were in effect during the time period that 
we estimate positive Medicare margins (as discussed in the RY 2007 LTCH 
PPS final rule (71 FR 27820 through 27825)).
    In conclusion, for the reasons discussed above in this section, we 
continue to believe a marginal cost factor of 80 percent and an outlier 
target of 8 percent best identifies LTCH patients that are truly 
unusually costly cases. Furthermore, we still believe that such a 
policy appropriately addresses LTCH HCO cases that are significantly 
more expensive than non-outlier cases, which is consistent with our 
intent of the LTCH HCO policy as stated when we implemented the LTCH 
PPS. Therefore, we are not making any changes to the marginal cost 
factor or outlier target in that final rule. Consequently, in order to 
maintain that estimated outlier payments are projected to be equal to 8 
percent of estimated total LTCH PPS payments, as required under Sec.  
412.525(a), under the broad authority of section 123(a)(1) of the BBRA 
and section 307(b)(1) of BIPA, we are establishing a fixed-loss amount 
of $22,954 based on the best available LTCH data and the policies 
presented in this final rule (as described in greater detail below). 
For the reasons discussed above, we believe a fixed-loss amount of 
$22,954 would appropriately identify unusually costly LTCH cases while 
maintaining the integrity of the LTCH PPS. We note that, as discussed 
in the RY 2008 proposed rule (72 FR 4800), we intend to revisit a 
budget neutral policy change in the outlier policy (among other 
things), which would affect future LTCH PPS payment rates, after the 
conclusion of the 5-year transition period when we expect to have 
several years of data generated after the implementation of the LTCH 
PPS.
    In this final rule, as we proposed and consistent with our 
historical practice of using the best data available (as noted above), 
for the 2008 LTCH PPS rate year, we used the December 2006 update of 
the FY 2006 MedPAR claims data to determine a fixed-loss amount that 
would result in estimated outlier payments projected to be equal to 8 
percent of total estimated payments, based on the policies described in 
this final rule, because these data are the most recent complete LTCH 
data available. Furthermore, as noted previously, we determined the 
fixed-loss amount based on the version of the GROUPER that would be in 
effect as of the beginning of the 2008 LTCH PPS rate year (July 1, 
2007), that is, Version 24.0 of the GROUPER (as established in the FY 
2007 IPPS final rule (71 FR 47973)).
    In addition, as we proposed and consistent with our historical 
practice of using the best data available (as noted above), we used 
CCRs from the December 2006 update of the PSF for determining the 
fixed-loss amount for the 2008 LTCH PPS rate year as they are currently 
the most recent complete available data. As we discussed above in this 
section, we revised our methodology for our annual determination of the 
applicable LTCH CCR ceiling and applicable Statewide average CCRs in 
determining a LTCH's CCR effective for discharges occurring on or after 
October 1, 2006 in the FY 2007 IPPS final rule (71 FR 48117 through 
48122). Accordingly, as proposed, in determining the fixed-loss amount 
for the 2008 LTCH PPS rate year, we used the current FY 2007 applicable 
LTCH ``total'' CCR ceiling of 1.321 and LTCH Statewide average 
``total'' CCRs established under our revised methodology in the FY 2007 
IPPS final rule (71 FR 48118 and 48121) such that the current 
applicable Statewide average CCR would be assigned if, among other 
things, a LTCH's CCR exceeded the current ceiling (1.321). We note that 
in determining the fixed-loss amount for the 2008 LTCH PPS rate year 
using the CCRs from the December 2006 update of the PSF, there was no 
need for us to independently assign the applicable Statewide average 
CCR to any LTCHs (as this may have already been done by the FI in the 
PSF in accordance with our established policy). (Currently, the 
applicable FY 2007 LTCH Statewide average CCRs can be found in Table 8C 
of the FY 2007 IPPS final rule (71 FR 48303).)
    Accordingly, based on the data and policies described in this final 
rule, we are applying a fixed-loss amount of $22,954 for the 2008 LTCH 
PPS rate year. Thus, we will pay an outlier case 80 percent of the 
difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal LTCH payment for the LTC-DRG 
and the fixed-loss amount of $22,954). As discussed above, the fixed-

[[Page 26899]]

loss amount for the 2008 LTCH PPS rate year is higher than the current 
fixed-loss amount of $14,887. In addition to being based on the most 
recent available LTCH data to estimate the cost of each LTCH case (as 
discussed in detail below in this section), this change in the fixed-
loss amount is due to the projected decrease in estimated aggregate 
LTCH PPS payments that is expected to result from the revision to the 
SSO policy under Sec.  412.529 (discussed in greater detail in section 
V.A.2. of this preamble), in conjunction with the changes to the area 
wage adjustment (discussed in greater detail in section IV.D.1. of this 
preamble) and the changes to the LTC-DRG relative weights for FY 2007 
(as discussed in the FY 2007 IPPS final rule (71 FR 47971 through 
47994)). Specifically, as discussed in greater detail in the impact 
analysis presented in section XV.B.4. of this final rule, we are 
projecting that the changes presented in this final rule will result in 
an estimated 3.8 percent decrease in estimated payments per discharge 
in RY 2008 as compared to RY 2007, on average, for all LTCHs. While we 
are projecting that the 0.71 percent update to the Federal rate 
(discussed in section IV.C. of this preamble) will result in an 
increase in estimated payments per discharge in RY 2008 as compared to 
RY 2007, this increase will be offset by the projected decrease in 
estimated payments per discharge from RY 2007 to RY 2008 of 0.9 percent 
due to the revision to the SSO policy and a projected decrease in 
estimated payments per discharge from RY 2007 to RY 2008 of 1.0 percent 
due to the changes to the area wage adjustment (including the 
progression of the established phase-in of that adjustment). We also 
project an estimated 2.5 percent decrease in estimated payments per 
discharge from RY 2007 to RY 2008 due to the changes in the fixed-loss 
amount resulting from the use of more recent LTCH data to estimate the 
cost of each LTCH case.
    We also note that the final fixed-loss amount for RY 2008 of 
$22,954 is higher than the proposed fixed-loss amount for RY 2008 of 
$18,778. This change in the fixed-loss amount is primarily due to the 
updated LTCH data (that is, LTCH claims data and CCR data) used in 
determining the fixed-loss amount. That is, to determine the proposed 
fixed-loss amount for RY 2008, we used claims data from the March 2006 
update of the FY 2005 MedPAR file and CCRs from the July 2006 update of 
the PSF, as that was the best available data at that time.
    However, to determine the fixed-loss amount for RY 2008 in this 
final rule, the most recent available data are the December 2006 update 
of the FY 2006 MedPAR claims data and the CCRs from the December 2006 
update of the PSF. Our analysis of the data showed that, in general, 
the average cost per case has increased in the FY 2006 claim data as 
compared to the FY 2005 claims data, which if we had kept the fixed-
loss amount at $18,778 would have caused the HCO target to exceed 8 
percent. In fact, our analysis shows that if we were to keep the 
proposed fixed-loss amount of $18,774, we project that estimated 
outlier payments would be over 10 percent of total estimated LTCH PPS 
payments in RY 2008. As discussed at length above, when we implemented 
the LTCH PPS, under the HCO policy we established the outlier target at 
8 percent of estimated total LTCH PPS payments to allow us to achieve a 
balance between the need to protect hospitals with costly cases, while 
providing an incentive for hospitals to operate efficiently, and an 
outlier target in excess of 8 percent would not allow us to achieve 
this goal. In fact, our analysis shows that if we were to keep the 
proposed fixed-loss amount of $18,774, we project that estimated 
outlier payments would be over 10 percent of total estimated LTCH PPS 
payments in RY 2008. As discussed at length above in this section, when 
we implemented the LTCH PPS, under the HCO policy we established the 
outlier target at 8 percent of estimated total LTCH PPS payments to 
allow us to achieve a balance between the need to protect hospitals 
with costly cases, while providing an incentive for hospitals to 
operate efficiently, and an outlier target in excess of 8 percent would 
not allow us to achieve this goal. Consequently, the fixed-loss amount 
is increased to maintain the HCO target at 8 percent. Furthermore, 
although in the past we have found LTCHs' CCRs have been relatively 
stable, in establishing the fixed-loss amount for RY 2008, we noticed 
that the CCRs used to estimate cost per case are more volatile in 
recent years. This causes us concern, and therefore, we intend to 
monitor LTCHs' CCRs in the future. As specified at Sec.  
412.525(a)(4)(iv)(D), HCO payments are subject to the outlier 
reconciliation process described below in this section.
d. Reconciliation of Outlier Payments Upon Cost Report Settlement
    In the June 9, 2003 HCO final rule (68 FR 34508 through 34512), we 
established our policy for LTCHs that provided that effective for LTCH 
PPS discharges occurring on or after August 8, 2003, any reconciliation 
of outlier payments will be based upon the actual CCR computed from the 
costs and charges incurred in the period during which the discharge 
occurs. In that same final rule, we also established that, for 
discharges occurring on or after August 8, 2003, at the time of any 
reconciliation, outlier payments may be adjusted to account for the 
time value of any underpayments or overpayments based upon a widely 
available index to be established in advance by the Secretary and will 
be applied from the midpoint of the cost reporting period to the date 
of reconciliation. (Additional information on the administration of the 
reconciliation process under the IPPS is provided in CMS Program 
Transmittal 707 (October 12, 2005; Change Request 3966). We note that 
we are currently developing additional instructions on the 
administration of the reconciliation process under the LTCH PPS that 
would be similar to the IPPS reconciliation process.)
    In the FY 2007 IPPS final rule (71 FR 48121 through 48122), for 
discharges occurring on or after October 1, 2006, we codified into the 
LTCH PPS section of the regulations (42 CFR part 412, subpart O) the 
provisions governing the determination of LTCHs' CCRs, including 
modifications and editorial clarifications to our existing methodology 
for determining the annual LTCH CCR ceiling and applicable Statewide 
average CCRs under the LTCH PPS. (We note that we also made the same 
changes under the SSO policy at Sec.  412.529(c)(3), as discussed in 
section V.A.1.c. of this preamble).
    In the FY 2007 IPPS final rule (71 FR 48122), under the broad 
authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we 
revised Sec.  412.525(a)(4)(iv)(D) through (E), for discharges 
occurring on or after October 1, 2006, to codify in subpart O of 42 CFR 
part 412 the provisions discussed concerning the reconciliation of LTCH 
PPS outlier payments, including editorial clarifications discussed in 
greater detail in this section, that would more precisely describe the 
application of those policies. Specifically, at Sec.  
412.525(a)(4)(iv)(D), we specified that for discharges occurring on or 
after October 1, 2006, any reconciliation of outlier payments will be 
based on the CCR calculated based on a ratio of costs-to-charges 
computed from the relevant cost report and charge data determined at 
the time the cost report coinciding with the discharge is settled. In 
addition, at Sec.  412.525(a)(4)(iv)(E), we specified that for 
discharges occurring on or after October 1, 2006, at the time of any 
reconciliation, outlier payments may be adjusted to account for the 
time value of any underpayments or overpayments. We also specified that

[[Page 26900]]

such an adjustment will be based upon a widely available index to be 
established in advance by the Secretary and will be applied from the 
midpoint of the cost reporting period to the date of reconciliation. We 
made these additional revisions to Sec.  412.525(a)(4) because we 
believe that these changes are more consistent with the LTCH PPS single 
payment rate for inpatient operating and capital costs (as discussed in 
greater detail previously), and because we believe it is more 
appropriate and administratively simpler to include all of the 
regulatory provisions concerning the determination of LTCH PPS outlier 
payments applicable under the LTCH PPS regulations in subpart O of 42 
CFR part 412 of the CFR.
    Comment: One commenter requested that we clarify how we interpret 
the 10 percentage point criterion of the SSO and HCO reconciliation 
policy.
    Response: We did not propose any changes to the current 
reconciliation policy. Therefore, we do not believe this final rule is 
the appropriate vehicle to address this comment. As we have stated, we 
intend to issue subregulatory guidance on LTCH reconciliation that 
would be similar to the IPPS reconciliation process and would address 
the commenters question at that time.
e. Application of Outlier Policy to Short-Stay Outlier (SSO) Cases
    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a SSO 
case (as defined under Sec.  412.529 and discussed in section V.A.1.a. 
of this preamble) and also as a HCO case. In this scenario, a patient 
could be hospitalized for less than five-sixths of the geometric ALOS 
for the specific LTC-DRG, and yet incur extraordinarily high treatment 
costs. If the costs exceeded the outlier threshold (that is, the SSO 
payment plus the fixed-loss amount), the discharge would be eligible 
for payment as a HCO. Thus, for a SSO case in the 2008 LTCH PPS rate 
year, the HCO payment will be 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
fixed-loss amount of $22,954 and the amount paid under the SSO policy).
4. Other Payment Adjustments
    As indicated earlier, we have broad authority under section 
123(a)(1) of the BBRA as amended by section 307(b) of BIPA to determine 
appropriate adjustments under the LTCH PPS, including whether (and how) 
to provide for adjustments to reflect variations in the necessary costs 
of treatment among LTCHs. Thus, in the August 30, 2002 LTCH PPS final 
rule (67 FR 56014 through 56027), we discussed our extensive data 
analysis and rationale for not implementing an adjustment for 
geographic reclassification, rural location, treating a 
disproportionate share of low-income patients (DSH), or indirect 
medical education (IME) costs. In that same final rule, we stated that 
we would collect data and reevaluate the appropriateness of these 
adjustments in the future once more LTCH data become available after 
the LTCH PPS is implemented.
    As we discussed in the RY 2007 LTCH PPS final rule (71 FR 27839), 
we now believe that after the completion of the 5-year transition, 
sufficient new data that will have been generated while LTCHs are 
subject to the LTCH PPS may be available for a comprehensive 
reevaluation of payment adjustments such as geographic 
reclassification, rural location, DSH, and IME. The end of the 5-year 
transition occurs with cost reporting periods beginning on or after 
October 1, 2007. Therefore, in the RY 2008 LTCH PPPS proposed rule (72 
FR 4801), we did not propose to make any adjustments for geographic 
reclassification, rural location, DSH, or IME. However, we noted that 
we will continue to collect and interpret new data as they become 
available in the future to determine if these data support proposing 
any additional payment adjustments. We also reiterated our belief that 
it is appropriate to wait for the conclusion of the 5-year transition 
to 100 percent of the Federal rate under the LTCH PPS, to maximize the 
availability of data that are reflective of LTCH behavior in response 
to the implementation of the LTCH PPS to be used to conduct a 
comprehensive evaluation of the potential payment adjustment policies 
(such as rural location, DSH and IME) in conjunction with our 
evaluation of the possibility of making a one-time prospective 
adjustment to the LTCH PPS rates provided for at Sec.  412.523(d)(3).
    Therefore, in this final rule, we are not making any adjustments 
for geographic reclassification, rural location, DSH, or IME under the 
LTCH PPS for RY 2008. As noted above, we will continue to collect and 
interpret new data as they become available in the future to determine 
if these data support proposing any additional payment adjustments. We 
plan to conduct a comprehensive evaluation of the potential payment 
adjustment policies (such as rural location, DSH and IME) in 
conjunction with our evaluation of the possibility of making a one-time 
prospective adjustment to the LTCH PPS rates provided for at Sec.  
412.523(d)(3) after the conclusion of the 5-year transition to 100 
percent of the Federal rate under the LTCH PPS.
5. Budget Neutrality (BN) Offset To Account for the Transition 
Methodology
    Under Sec.  412.533, we implemented a 5-year transition, during 
which a LTCH is paid a total LTCH PPS payment that is comprised of an 
increasing percentage of the LTCH PPS Federal prospective payment rate 
and a decreasing percentage of its payments based on the reasonable 
cost-based payment principles for each discharge. Furthermore, we allow 
a LTCH (other than those defined as ``new'' under Sec.  412.23(e)(4)) 
to elect to be paid based on 100 percent of the standard Federal rate 
in lieu of the blended methodology.
    The standard Federal rate was determined as if all LTCHs will be 
paid based on 100 percent of the standard Federal rate. As stated 
earlier, we provided for a 5-year transition period that allows LTCHs 
to receive LTCH PPS payments in which a component incorporates 
reasonable cost principles. To maintain BN for FY 2003 as required by 
section 123(a)(1) of the BBRA during the 5-year transition period, we 
reduce all LTCH Medicare payments (whether a LTCH elects payment based 
on 100 percent of the Federal rate or whether a LTCH is being paid 
under the transition blend methodology) to account for the cost of the 
applicable transition period methodology in a given LTCH PPS rate year.
    Specifically, during the LTCH PPS rate years governed under the 5-
year transition policy at Sec.  412.533(a), we reduce all LTCH Medicare 
payments during the 5-year transition by a factor that is equal to 1 
minus the ratio of the estimated TEFRA reasonable cost-based payments 
that would be made if the LTCH PPS was not implemented, to the 
projected total Medicare program PPS payments (that is, payments made 
under the transition methodology and the option to elect payment based 
on 100 percent of the Federal rate).
    In the RY 2007 LTCH PPS final rule (71 FR 27841), based on the best 
available data at that time, we projected that approximately 98 percent 
of LTCHs will be paid based on 100 percent of the standard Federal rate 
rather than receive payment under the transition blend methodology for 
the 2006 LTCH PPS rate year. Using the same methodology described in 
the August 30, 2002 LTCH PPS final rule (67 FR 56034), this projection, 
which used updated data and inflation factors, was based on our

[[Page 26901]]

estimate that either: (1) A LTCH has already elected payment based on 
100 percent of the Federal rate prior to the start of the 2007 LTCH PPS 
rate year (July 1, 2006); or (2) a LTCH would receive higher payments 
based on 100 percent of the 2007 LTCH PPS rate year standard Federal 
rate compared to the payments it would receive under the transition 
blend methodology. Similarly, we projected that the remaining 2 percent 
of LTCHs would choose to be paid based on the applicable transition 
blend methodology (as set forth under Sec.  412.533(a)) because they 
would receive higher payments than if they were paid based on 100 
percent of the 2007 LTCH PPS rate year standard Federal rate.
    Also in the RY 2007 LTCH PPS final rule (71 FR 24202), based on the 
best available data at that time and policy revisions described in that 
same rule, we projected that in absence of a transition BN offset, the 
full effect of the final full year of the transition period (including 
the election option) as compared to payments as if all LTCHs would be 
paid based on 100 percent of the Federal rate would result in a 
negligible cost to the Medicare program (that is, less than $1 million 
in RY 2007). Because the $1 million in estimated costs to the Medicare 
program was such a small percentage of the estimated total LTCH 
payments for RY 2007 (over $5 billion), the formula that we use to 
establish the BN offset resulted in a factor, which we reduce all 
Medicare payments by to account for the additional costs of the 
transition methodology of zero (due to rounding). Therefore, we 
established a zero percent transition period BN offset to all LTCH PPS 
payments for discharge occurring on or after July 1, 2006 through June 
30, 2007, to account for the estimated cost of the transition period 
methodology (including the option to elect payment based on 100 percent 
of the Federal rate) in RY 2007. Furthermore, in that same final rule 
(71 FR 27841), we explained that we are no longer projecting a small 
cost for the 2008 LTCH PPS rate year (July 1, 2007 through June 30, 
2008) even though some LTCHs will have a cost reporting period for the 
5th year of the transition period which will be concluding in the first 
3 months of the 2008 LTCH PPS rate year. This is because, based on the 
most available data, we are projecting that the vast majority of LTCHs 
would have made the election to be paid based on 100 percent of the 
Federal rate rather than the transition blend which would result in a 
negligible cost to the Medicare program. In fact, as discussed in the 
RY 2008 LTCH PPS proposed rule (72 FR 4802), based on the most recent 
available data at that time from the July 2006 update of the PSF, we 
continue to estimate that nearly all (over 98 percent) LTCHs are 
currently being paid based on 100 percent of the Federal rate (rather 
than the transition blend methodology). Even for those few remaining 
LTCHs paid under the transition blend methodology set forth at Sec.  
412.533(a), the majority of their LTCH PPS payments are now based on at 
least 80 percent of the Federal rate and 20 percent of the reasonable 
cost amount (for cost reporting periods beginning during FY 2006) since 
there are no longer any LTCHs in their cost reporting periods that 
began during FY 2003 through FY 2005 (the first three years of the 5-
year transition period). Therefore, in that same proposed rule, we 
explained that we continue to believe that there would be no measurable 
estimated cost to the Medicare program due to the transition period 
methodology (including the option to elect payment based on 100 percent 
of the Federal rate) in RY 2008. Accordingly, we did not propose a 
transition BN offset to all LTCH PPS payments for discharges occurring 
on or after July 1, 2007 through June 30, 2008, to account for the 
estimated cost of the transition period methodology (including the 
option to elect payment based on 100 percent of the Federal rate, since 
some LTCHs may still be paid under the 4th year of the transition blend 
methodology, specified at Sec.  412.533, for the first 3 months of RY 
2008) in RY 2008.
    We received no comments on this proposal, and based on the most 
recent available data from the December 2006 update of the PSF, we 
continue to estimate that nearly all (over 98 percent) LTCHs are 
currently being paid based on 100 percent of the Federal rate (rather 
than the transition blend methodology). Therefore, we continue to 
believe that there would be no measurable estimated cost to the 
Medicare program due to the transition period methodology (including 
the option to elect payment based on 100 percent of the Federal rate) 
in RY 2008. Accordingly, in this final rule, based on updated data and 
using the same methodology established in the August 30, 2002 final 
rule (67 FR 56034), we are not implementing a transition BN offset to 
all LTCH PPS payments for discharges occurring on or after July 1, 2007 
through June 30, 2008, to account for the estimated cost of the 
transition period methodology (including the option to elect payment 
based on 100 percent of the Federal rate, since some LTCHs may still be 
paid under the 4th year of the transition blend methodology, specified 
at Sec.  412.533, for the first 3 months of RY 2008) in RY 2008.
6. One-Time Prospective Adjustment to the Standard Federal Rate.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56036), consistent with the statutory requirement for BN in section 
123(a)(1) of the BBRA, we estimated aggregate payments under the LTCH 
PPS for FY 2003 to be equal to the estimated aggregate payments that 
would be made if the LTCH PPS were not implemented. Our methodology for 
estimating payments for purposes of the BN calculations used the best 
available data at the time and necessarily reflected assumptions. As 
the LTCH PPS progresses, we are monitoring payment data and will 
evaluate the ultimate accuracy of the assumptions used in the BN 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH PPS) 
described in the August 30, 2002 LTCH PPS final rule (67 FR 56027 
through 56037). To the extent these assumptions significantly differ 
from actual experience, the aggregate amount of actual payments may 
turn out to be significantly higher or lower than the estimates on 
which the BN calculations were based.
    Section 123(a)(1) of the BBRA as amended by section 307(b) of BIPA 
provides broad authority to the Secretary in developing the LTCH PPS, 
including the authority for establishing appropriate adjustments. Under 
this broad authority to make appropriate adjustments, as implemented in 
the existing Sec.  412.523(d)(3) (as revised in the RY 2007 LTCH PPS 
final rule), we have provided for the possibility of making a one-time 
prospective adjustment to the LTCH PPS rates by July 1, 2008, so that 
the effect of any significant difference between actual payments and 
estimated payments for the first year of the LTCH PPS would not be 
perpetuated in the LTCH PPS rates for future years.
    In the RY 2007 LTCH PPS final rule (71 FR 27842), based on the best 
available data at that time, we estimated that total Medicare program 
payments for LTCH services over the next 5 LTCH PPS rate years would be 
$5.27 billion for the 2007 LTCH PPS rate year; $5.43 billion for the 
2008 LTCH PPS rate year; $5.63 billion for the 2009 LTCH PPS rate year; 
$5.86 billion for the 2010 LTCH PPS rate year; and $6.13 billion

[[Page 26902]]

for the 2011 LTCH PPS rate year. In the RY 2008 LTCH PPS proposed rule 
(72 FR 4802 through 4803), based on the best available data at that 
time, we estimated that total Medicare program payments for LTCH 
services over the next 5 LTCH PPS rate years would be $4.65 billion for 
the 2008 LTCH PPS rate year; $4.84 billion for the 2009 LTCH PPS rate 
year; $5.02 billion for the 2010 LTCH PPS rate year; $5.24 billion for 
the 2011 LTCH PPS rate year; and $5.48 billion for the 2012 LTCH PPS 
rate year.
    In this final rule, consistent with the methodology established in 
the August 30, 2002 final rule (67 FR 56036), based on the most recent 
available data, we estimate that total Medicare program payments for 
LTCH services for the next 5 LTCH PPS rate years would be as shown in 
Table 4.

                                 Table 4
------------------------------------------------------------------------
                                              Estimated payments  ($ in
            LTCH PPS rate year                        billions)
------------------------------------------------------------------------
2008......................................  $4.65
2009......................................  4.85
2010......................................  5.04
2011......................................  5.25
2012......................................  5.50
------------------------------------------------------------------------

    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 56037), these estimates are based on 
the most recent available data, including the projection that nearly 
all LTCHs will be paid based on 100 percent of the LTCH PPS standard 
Federal rate during the majority of RY 2008 (in accordance with the 
transition blend percentages set forth at Sec.  412.533(a)). These 
estimates are also based on our estimate of LTCH PPS rate year payments 
to LTCHs using CMS's Office of the Actuary's (OACT) most recent 
estimate of the RPL market basket of 3.2 percent for the 2008 LTCH PPS 
rate year, 3.2 percent for the 2009 LTCH PPS rate year, 2.8 percent for 
the 2010 LTCH PPS rate year, 3.1 percent for the 2011 LTCH PPS rate 
year, and 3.2 percent for the 2012 LTCH PPS rate year. (We note that 
OACT develops its spending projections based on existing policy. 
Therefore, changes that have not yet been implemented are not reflected 
in the spending projections shown in this section.) We also considered 
OACT's most recent projections of changes in Medicare beneficiary 
enrollment that estimate a change in Medicare fee-for-service 
beneficiary enrollment of -0.1 percent in the 2008 LTCH PPS rate year, 
0.7 percent in the 2009 LTCH PPS rate year, 0.3 percent in the 2010 
LTCH PPS rate year, 0.6 percent in the 2011 LTCH PPS rate year, and 1.1 
percent in the 2012 LTCH PPS rate year.
    In the August 30, 2002 LTCH PPS final rule implementing the LTCH 
PPS (67 FR 55954), we set forth the implementing regulations, based 
upon the broad authority granted to the Secretary, under section 123 of 
the BBRA as amended by section 307(b) of the BIPA. Section 123(a)(1) of 
the BBRA required that the system ``maintain budget neutrality'' for FY 
2003, that is, that estimated aggregate payments under the LTCH PPS 
would be projected to be equal to the estimated aggregate payments that 
would be made if the LTCH PPS would not be implemented for FY 2003. The 
methodology for determining the LTCH PPS standard Federal rate for FY 
2003 that would ``maintain budget neutrality'' is described in 
considerable detail in the August 30, 2002 final rule (67 FR 56027 
through 56037). As we discussed in that same final rule, our 
methodology for estimating payments for the purposes of BN calculations 
used the best available data and necessarily reflects assumptions in 
estimating aggregate payments that would be made if the LTCH PPS was 
not implemented. We also stated our intentions to monitor LTCH PPS 
payment data to evaluate the ultimate accuracy of the assumptions used 
in the BN calculations (for example, inflation factors, intensity of 
services provided, or behavioral response to the implementation of the 
LTCH PPS). To the extent that those assumptions significantly differ 
from actual experience, the estimated aggregate amount of actual 
payments during FY 2003 may result in significantly higher or lower 
estimated payments than the estimates upon which the BN calculations 
were based. In that same final rule, the Secretary exercised his broad 
authority in establishing the LTCH PPS and provided for the possibility 
of a one-time prospective adjustment to the LTCH PPS rates by October 
1, 2006, in Sec.  412.523(d)(3) (this deadline was revised to July 1, 
2008, in the RY 2007 LTCH PPS final rule). The purpose of that 
provision was to prevent any significant difference between actual 
payments and estimated payments for the 1st year of the LTCH PPS, when 
we established the budget neutral Federal rate as required by the 
statute (discussed previously), from being perpetuated in the PPS rates 
for future years.
    As we discussed in the RY 2007 LTCH PPS final rule (71 FR 27842 
through 27844), because the LTCH PPS was only recently implemented, 
sufficient new data had not been generated that would enable us to 
conduct a comprehensive reevaluation of our BN calculations. Therefore, 
in that same final rule, we did not implement a one-time adjustment 
under Sec.  412.523(d)(3) so that the effect of any significant 
difference between actual payments and estimated payments for the 1st 
year of the LTCH PPS would not be perpetuated in the PPS rates for 
future years. However, we stated that we will continue to collect and 
interpret new data as it becomes available in the future to determine 
if this adjustment should be proposed. Therefore, in the RY 2007 LTCH 
PPS final rule (71 FR 27842), we revised Sec.  412.523(d)(3) by 
changing the original October 1, 2006 deadline (established in the 
August 30, 2002 final rule that implemented the LTCH PPS) to July 1, 
2008, to postpone the requirement due to the time lag in the 
availability of Medicare data upon which this adjustment would be 
based.
    As we discussed in the RY 2007 LTCH PPS final rule (71 FR 27843 
through 27844), we now believe that after the conclusion of the 5-year 
transition period, sufficient new data will be generated by the LTCH 
PPS for a comprehensive reevaluation of our FY 2003 BN calculations. 
Specifically, we explained that the final year of the 5-year transition 
to LTCH PPS payments based on 100 percent of the Federal rate for all 
LTCHs will begin for cost reporting periods beginning on or after 
October 1, 2006 (FY 2007), and end with cost reporting periods 
beginning before October 1, 2007 (FY 2008). After the conclusion of the 
5-year transition period (October 1, 2007), we expect to have between 3 
and 4 years (FY 2003 through FY 2006) of LTCH data generated since the 
implementation of the LTCH PPS. We note that there is a lag time 
between the submission of claims data and cost report data, and the 
availability of that data in the MedPAR files and HCRIS, respectively. 
Based on a comprehensive analysis of that data, we may then propose to 
make a one-time prospective adjustment to the LTCH PPS rates as 
provided for in Sec.  412.523(d)(3). As also explained in that same 
final rule, we believe that postponing the deadline of the possible 
one-time prospective adjustment to the LTCH PPS rates provided for in 
Sec.  412.523(d)(3) to July 1, 2008, would result in the availability 
of additional data generated under the LTCH PPS and, therefore, our 
decisions regarding a possible adjustment would be based on more 
complete and up-to-date data. This data would be reflective of LTCH 
behavior in response to the implementation of the LTCH PPS.
    Evaluating the appropriateness of the possible one-time prospective

[[Page 26903]]

adjustment will entail a thorough review of the actual Medicare costs 
incurred by LTCHs during the first year of the LTCH PPS, that is, for 
LTCH cost reporting periods beginning on or after October 1, 2002 
through September 30, 2003. When we established the FY 2003 standard 
Federal rate to be budget neutral, we used the most recent LTCH cost 
data available at that time, and trended that data forward to estimate 
what Medicare would have paid to LTCHs under the TEFRA payment system 
if the PPS were not implemented (67 FR 56033). Our methodology for 
estimating payments for the purposes of BN calculations, utilized the 
best available data and necessarily reflected assumptions in estimating 
aggregate payments that would have been made had the LTCH PPS not been 
implemented. (The methodology for determining the LTCH PPS standard 
Federal rate for FY 2003 that would ``maintain budget neutrality'' is 
described in considerable detail in the August 30, 2002 LTCH PPS final 
rule (67 FR 56027 through 56037).) In that same final rule (67 FR 
56036), we also stated our intentions to monitor LTCH PPS data to 
evaluate the ultimate accuracy of the assumptions used in the BN 
calculations (for example, inflation factors, intensity of services 
provided, or behavioral response to the implementation of the LTCH 
PPS). To the extent that those assumptions significantly differed from 
actual experience, the aggregate amount of actual payments during FY 
2003 could be significantly higher or lower than the estimates upon 
which the BN calculations were based.
    At the outset of the LTCH PPS, we provided for the possibility of a 
one-time prospective adjustment at Sec.  412.523(d)(3). Among other 
things, we wanted the opportunity to adjust the LTCH PPS Federal 
payment rate once data were available that reflected the actual cost-
based payments that would have been made under the Medicare program 
during FY 2003 if the LTCH PPS had not been implemented, rather than 
perpetuate any significant difference between actual payments and 
estimated payments in the 1st year of the LTCH PPS used in determining 
the Federal rate into future years. Therefore, in the RY 2007 LTCH PPS 
final rule, we revised Sec.  412.523(d)(3) to postpone the adjustment 
until July 1, 2008, because by that time, given the lag time typically 
involved in the entire cost report settlement procedure, we believe we 
will be able to utilize the most accurate data reflecting the actual 
costs incurred by LTCHs for cost reporting periods beginning during FY 
2003.
    As we discussed in the RY 2008 LTCH PPS proposed rule (72 FR 4804), 
we continue to believe that collecting and evaluating new data as it 
becomes available will allow us to have the best data from the first 
year of the LTCH PPS upon which to base an adjustment such as this. As 
we explained in the RY 2007 LTCH PPS final rule (71 FR 27844), there 
are many LTCHs with cost reporting periods from September 1 through 
August 30 which first became subject to the LTCH PPS on September 1, 
2003. Given the lag time required for typical cost report settlement 
involving submission, desk review, and in some cases an audit, which 
can take approximately 2 additional years to complete (and we expect to 
audit a number of LTCH cost reports for the purpose of this analysis), 
we explained that the October 1, 2006 deadline established Sec.  
412.523(d)(3) was no longer reasonable or realistic. In fact, we 
believe that for cost reports for providers on August 2004 fiscal year 
ending date, we would be in possession of the most reliable cost report 
data, indicating the actual costs of the Medicare program of the LTCH 
PPS during the year in which we established the Federal payment rate by 
July 2007. Any proposed adjustment under Sec.  412.523(d)(3), if 
finalized could then be implemented on July 1, 2008. Therefore, in the 
RY 2008 LTCH PPS proposed rule, we did not propose to make a one-time 
adjustment under Sec.  412.523(d)(3) since we believe that we still do 
not have sufficient new data to enable us to conduct a comprehensive 
reevaluation of our FY 2003 BN calculations (as discussed in greater 
detail above in this section).
    Comment: We received a few comments in support of waiting another 
year (that is, until RY 2009) to make the one-time BN adjustment to 
benefit from the availability of better data. However, some other 
commenters noted that considering all of the payment adjustments we 
have made to the LTCH PPS since it was implemented on October 1, 2002, 
there is no need for a one-time BN adjustment to ensure that aggregate 
payments under the LTCH PPS would equal approximately the amount that 
would have been paid to LTCHs under TEFRA had the LTCH PPS not been 
implemented.
    Response: We agree with the commenters that any one-time adjustment 
under Sec.  412.523(d)(3) should be based on the most complete and up-
to-date data available for a comprehensive analysis of the actual 
Medicare costs incurred by LTCHs during the first year of the LTCH PPS. 
As discussed in greater detail above, given the lag time required for 
typical cost report settlement and the lag time in data availability, 
after the conclusion of the 5-year transition period (October 1, 2007), 
we expect to have between 3 and 4 years (FY 2003 through FY 2006) of 
LTCH data generated since the implementation of the LTCH PPS. 
Specifically, we expect that we will be in possession of the most 
reliable cost report data, indicating the actual costs of the Medicare 
program of the LTCH PPS during the year in which we established the 
standard Federal base payment rate by July 2007, and any proposed 
adjustment under Sec.  412.523(d)(3), if finalized could then be 
implemented on July 1, 2008.
    We recognize that there have been many changes to the payment rates 
and policies under the LTCH PPS since its implementation over 5 years 
ago. Many of these changes have been implemented as a result of our on-
going monitoring of LTCH data and changes in LTCHs' behavior in 
response to the implementation of the LTCH PPS. As discussed above, the 
purpose of the one-time adjustment under Sec.  412.523(d)(3) is to 
prevent any significant difference between actual payments and 
estimated payments from the first year of the LTCH PPS, when we 
established the budget neutral Federal rate as required by the statute, 
from being perpetuated in the PPS rates for future years. As discussed 
above, our methodology for estimating payments for the purposes of BN 
calculations when the LTCH PPS was implemented used the best available 
data and necessarily reflects assumptions in estimating aggregate 
payments that would be made if the LTCH PPS was not implemented. To the 
extent that those assumptions significantly differ from actual 
experience, the aggregate amount of actual payments may result in 
significantly higher or lower payments than the estimates upon which 
the BN calculations were based. Therefore, we established in 
regulations at Sec.  412.523(d)(3) the possibility of a one-time 
prospective adjustment to the LTCH PPS rates to prevent any significant 
difference between actual payments and estimated payments from being 
perpetuated in the LTCH PPS rates for future years (as described in 
greater detail above in this section). Among the changes that have been 
made to the LTCH PPS since its implementation include updates to the 
standard Federal rate as set forth under Sec.  412.523(c)(3). We note 
that we will take into consideration such changes

[[Page 26904]]

when we evaluate the most recent complete available data for the 
purposes of determining whether to propose a one-time prospective 
adjustment to the LTCH PPS rates under Sec.  412.523(d)(3) in the RY 
2009 proposed rule.
    For the reasons discussed in this section, we believe that we still 
do not have sufficient new data to enable us to conduct a comprehensive 
reevaluation of our FY 2003 BN calculations. Accordingly, in this final 
rule, we are not making a one-time adjustment under Sec.  412.523(d)(3) 
at this time.

V. Other Policy Changes for the 2008 LTCH PPS Rate Year

A. Short Stay Outlier (SSO) Cases

1. Background
    In the Prospective Payment System for LTCHs: Implementation and FY 
2003 Rates final rule (67 FR 55954, August 30, 2002) (hereinafter 
referred to as the FY 2003 LTCH PPS final rule), under Sec.  412.529, 
we established a special payment policy for SSO cases, that is cases 
with a covered LOS that is less than or equal to five-sixths of the 
geometric average LOS for each LTC-DRG. When we established the SSO 
policy, we explained in the FY 2003 LTCH PPS final rule that ``[a] 
short-stay outlier case may occur when a beneficiary receives less than 
the full course of treatment at the LTCH before being discharged.'' (67 
FR 55995) Also in the FY 2003 LTCH PPS final rule, we stated that when 
we first described the policy, in the Prospective Payment System for 
LTCHs: Implementation and FY 2003 Rates proposed rule (67 FR 55995, 
March 27, 2002), ``* * * we based the proposed policy on the belief 
that many of these patients could have been treated more appropriately 
in an acute hospital subject to the acute care hospital inpatient 
prospective payment system''. Therefore, under the LTCH PPS, we 
implemented a special payment adjustment for SSO cases. Under the 
original SSO policy, for LTCH PPS discharges with a covered LOS of up 
to and including five-sixths the geometric average LOS for the LTC-DRG, 
we adjusted the per discharge payment under the LTCH PPS by the least 
of 120 percent of the estimated cost of the case, 120 percent of the 
LTC-DRG specific per diem amount multiplied by the covered LOS of that 
discharge, or the full LTC-DRG payment 67 FR 55995 through 56000).
    As noted previously, generally LTCHs are defined by statute as 
having an ALOS of greater than 25 days. We stated that we believed that 
the SSO payment adjustment results in more appropriate payments, since 
these cases most likely did not receive a full course of a LTCH-level 
of treatment in such a short period of time and the full LTC-DRG 
payment would generally not be appropriate. Payment-to-cost ratio 
analyses indicated that if LTCHs received a full LTC-DRG payment for 
those cases, they would have been significantly ``overpaid'' for the 
resources they have actually expended in treating those patients (67 FR 
55995 through 56000).
    Furthermore, in establishing the SSO policy, we stated that we 
believed that providing a reduced payment for SSO cases would 
discourage hospitals from admitting these patients. We also believed 
that the policy did not severely penalize providers that, in good 
faith, had admitted a patient and provided some services before 
realizing that the beneficiary could receive more appropriate treatment 
at another site of care. As we explained in the FY 2003 LTCH PPS final 
rule, establishing a SSO payment for these types of cases addresses the 
incentives inherent in a discharge-based PPS for LTCHs for treating 
patients with a short LOS (67 FR 55995 through 56000).
2. Additional Discussion of the SSO Payment Formula
    In the FY 2003 LTCH PPS final rule, when we first presented our 
rationale for establishing the SSO policy, we had proposed an 
adjustment to ensure appropriate payment for cases that we believed may 
have been transferred from an acute hospital prematurely. Even if a 
patient was an appropriate admission to the LTCH, we also believed that 
a short stay case at a LTCH most likely did not receive a full course 
of medical treatment during the short stay and that a full LTC-DRG 
payment would therefore, be inappropriate (67 FR 55995 through 56000).
    In keeping with these concerns, and based on an evaluation of data 
from more than 3 years of the LTCH PPS, which revealed that a large 
percentage of SSOs had a covered LOS of 14 days or less, we revised our 
payment policy for SSO cases in the RY 2007 LTCH PPS final rule for 
subclause (I) LTCHs (71 FR 27845 through 27870).
    Consistent with the Secretary's broad authority ``to provide for 
appropriate adjustments to the long-term hospital payment system * * 
*'' established under section 123 of the BBRA as amended by section 
307(b)(1) of BIPA, for RY 2007, we reduced the cost-based option of the 
SSO policy adjustment to 100 percent of the estimated costs of the case 
for discharges occurring on or after July 1, 2006. We believed that by 
reducing the Medicare payment to a LTCH for a specific SSO case so that 
it would not exceed the estimated costs incurred for that case, we 
would be removing what we believed could be a financial incentive to 
admit and treat SSO cases that the then existing policy had established 
for LTCHs. We did not change the payment option of 120 percent of the 
per diem for a specific LTC-DRG multiplied by the covered LOS for that 
case because as described in detail in the FY 2003 final rule LTCH PPS, 
when we first established the SSO policy, we found that by adjusting 
the per discharge payment by paying at 120 percent of the per diem LTC-
DRG payment, once a stay reaches five-sixths of the geometric average 
LOS for the LTC-DRG, the full LTC-DRG payment will have been made (67 
FR 55999). We continue to believe that this specific methodology, which 
results in a gradual increase in payment as the LOS increases without 
producing a significant payment ``cliff'' at any one point, provides a 
reasonable payment option under the SSO policy.
    However, an analysis of the FY 2004 MedPAR data indicated that even 
under the existing SSO policy, LTCHs were admitting short stay patients 
that we believe could have continued treatment at the acute care 
hospitals (paid for under the IPPS) but could have been actually being 
prematurely discharged to LTCHs. Therefore, in the RY 2007 LTCH PPS 
final rule, we added a fourth payment option. This fourth payment 
alternative, a blend of an LTCH PPS amount that is comparable to the 
IPPS per diem payment amount, and 120 percent of the LTC-DRG per diem 
payment amount, as described below in this section, reflects our belief 
that as the length of a SSO stay increases, the case begins to resemble 
a more ``typical'' LTCH stay and, therefore, it is appropriate that 
incrementally, payment should be based more on what would otherwise be 
payable under the LTCH PPS and less on the IPPS-comparable amount. 
(Specifics of calculating the IPPS-comparable amount are set forth in 
considerable detail in the RY 2007 LTCH PPS final rule (71 FR 27852 
through 27853).
    We noted at the outset of the LTCH PPS for FY 2003, that the LTCH 
standard rate was calibrated based on LTCH resources expended in 
treating a patient population requiring long stays. Therefore, in 
establishing the SSO policy at the beginning of the LTCH PPS, we 
determined that it was appropriate that we not pay a full LTC-DRG 
payment for a patient stay not requiring those resources (67 FR 55995 
through 56000). Our revision of the payment formula for SSOs for RY 
2007 reflected our belief that where a case

[[Page 26905]]

met our definition of a SSO at Sec.  412.529(a), as the covered LOS 
increased, the case began to more closely resemble a characteristic 
LTCH case (and less like a short term acute care hospital case). 
Therefore, it was appropriate to base an increasing percentage of 
payment for SSOs on the LTC-DRG payment amount and a decreasing 
percentage of the LTCH PPS payment amount based upon the IPPS-
comparable amount.
    We continue to believe that in defining a LTCH as a hospital with 
an inpatient ALOS of greater than 25 days in section 
1886(d)(1)(B)(iv)(I) of the Act, that the Congress was focusing on LOS 
as the essential characteristic of this provider category. Furthermore, 
we believe that the statutory change requiring the establishment of the 
LTCH PPS emphasized that the payment system should reflect the 
different resource use related to inpatient hospital services provided 
by hospitals specified by section 1886(d)(1)(B)(iv) of the Act, that 
is, by LTCHs (71 FR 27865). Specifically, we believe that the language 
of the statute indicates that the Congress believed that LTCHs treat or 
should be treating patients with different medical needs which results 
in those patients having a significantly longer LOS than those acute 
care hospital patients that we pay for under the IPPS.
    In section 4422 of the BBA of 1997, which required that the 
Secretary develop a legislative proposal for the establishment of a PPS 
for LTCHs, the Congress specified that the system ``shall include an 
adequate patient classification system that reflects the differences in 
patient resource use and costs among such hospitals.'' Section 123 of 
the BBRA of 1999, which required implementation of a PPS for LTCHs for 
cost reporting periods beginning on or after October 1, 2002, 
specified, among other things, that the system be a per discharge 
payment system, based on diagnosis-related groups (DRGs), and 
``reflects the differences in patient resource use and costs'' of LTCH 
patients. Section 307(b) of the BIPA of 2000 required the Secretary 
``to examine the feasibility and the impact of basing payment under 
such a system on the use of existing (or refined) hospital DRGs that 
have been modified to account for different resource use of LTCH 
patients.''
    When we developed the LTCH PPS for FY 2003, the most recently 
available MedPAR data (generally, for FYs 1998 and 1999) revealed that 
52 percent of the Medicare patients at LTCHs nationwide had a LOS of 
less than two-thirds of the ALOS for the LTC-DRG to which they were 
grouped. Of these cases, 20 percent had stays of less than 8 days. 
Since payments under the LTCH PPS were based on the resources necessary 
for treatment requiring long term hospital-level stays, beginning with 
the start of the LTCH PPS, we established the SSO policy, to provide 
appropriate payment for stays that were significantly shorter than the 
ALOS for each specific LTC-DRG.
    The original SSO policy focused on our concerns that a SSO patient 
would generally receive less than the full course of treatment at the 
LTCH before being discharged and a full LTC-DRG payment would not be 
appropriate (67 FR 55943, 55995 through 55996). As we noted in the RY 
2007 LTCH PPS final rule, when we revised the SSO policy based on our 
analysis of the nearly 3 years of data since we designed the LTCH PPS, 
we believed that our SSO policy should reflect our conviction that many 
SSO patients could otherwise have continued to receive appropriate care 
in the acute care hospital from which they were admitted. Had these 
patients not been discharged from the acute care hospital, the 
additional days of treatment would have continued to have been paid for 
under the IPPS (71 FR 27845 through 27865).
    Section 123 of the BBRA, as amended by section 307(b) of the BIPA, 
confers broad authority on the Secretary to implement a PPS for LTCHs, 
including provisions for appropriate adjustments to the payment system. 
This broad authority gives the Secretary flexibility to fashion a LTCH 
PPS based on both original policies, as well as concepts borrowed from 
other payment systems that are adapted, where appropriate to the LTCH 
context. In the RY 2007 LTCH PPS final rule, we formulated a payment 
adjustment under the LTCH PPS that we believed would result in an 
appropriate payment adjustment for those inpatient stays that we 
believe are not characteristic of LTCHs but could more appropriately be 
treated in another setting.
    Subsequent to the RY 2007 LTCH PPS final rule, we have performed 
additional analysis of more recent data FY 2005 MedPAR data, and have 
determined that 42 percent of LTCH SSO discharges, or approximately 
19,750 cases, had lengths of stay that were less than or equal to the 
average LOS plus one standard deviation of an IPPS discharge that is 
the same DRG as the LTC-DRG to which the case was assigned. (One 
standard deviation is a statistical test which measures the certainty 
of the average of a set of measurements for the purpose of data 
analysis. The standard deviation is the quantity commonly used by 
statisticians to measure the variation in a data set.) We believe that 
it is appropriate to compare the covered LOS of a LTCH case grouped to 
a particular LTC-DRG to the ALOS plus one standard deviation for the 
corresponding DRG under the IPPS. At one standard deviation, we have 
identified approximately 68 percent of the IPPS cases within that DRG 
that were discharged from acute care hospitals and paid for under the 
IPPS. Using the statistical test of one standard deviation of the ALOS 
for each DRG under the IPPS, identifies the majority of IPPS discharges 
in any DRG.
    We believe that the 42 percent of LTCH SSO cases in the RY 2005 
MedPAR files with lengths of stay that are equal to or less than the 
IPPS ALOS plus one standard deviation for the same DRGs under the IPPS 
appear to be comparable to typical stays at acute care hospitals.
    Although LTCHs are certified by Medicare as acute care hospitals, 
we believe that the Congress intended for the higher LTCH PPS payments 
to be made to LTCHs that treat patients requiring prolonged hospital-
level care. Payments under the LTCH PPS, in compliance with the 
statutory mandates, have been calibrated based on ``the different 
resource use'' of LTCHs. We believe that we are ``overpaying,'' under 
the LTCH PPS, for those SSO cases in LTCHs with covered lengths of stay 
that are equal to or less than the typical IPPS ALOS (that is, a LOS 
that is less than or equal to the average IPPS LOS plus one standard 
deviation for the same DRG under the IPPS).
    We further believe that in excluding LTCHs from being paid under 
the IPPS, the Congress also recognized several types of hospital-level 
providers that offered a different type of treatment than could 
reasonably be paid for under the IPPS. Specifically, in the FY 2002 
LTCH PPS final rule, we reviewed the history of LTCHs as hospitals 
excluded from the IPPS. At that time we quoted the legislative history 
of the 1983 Social Security Amendments which stated, with regard to 
LTCHs, that the ``DRG system was developed for short-term acute care 
general hospitals and as currently constructed does not adequately 
account for special circumstances of diagnoses requiring long stays'' 
(Report of the Committee on Ways and Means, U.S. House of 
Representatives, to Accompany HR 1900, H.R. Rept. No. 98025, at 141 
(1983) (67 FR 55957)). Therefore, from the very outset of the IPPS, the 
Congress distinguished LTCHs from short term acute care hospitals by 
patients' lengths

[[Page 26906]]

of stay. The PPS for LTCHs that we implemented in FY 2003, complied 
with the statutory mandate, cited above in this section, that payments 
under the LTCH PPS be calibrated based on ``the different resource 
use'' of these long-stay LTCH patients. Consequently, as we stated in 
the RY 2007 LTCH PPS final rule, we believe that ``LTCHs that admit SSO 
patients with lengths of stay more typical of an acute care hospital 
may be, in fact, behaving like acute care hospitals'' (71 FR 27847), 
and we also believe that it is reasonable for payments under the LTCH 
PPS for such cases to reflect this behavior.
    MedPAR data indicate that for the approximately 350 LTCHs in 
existence during FY 2005 that discharged approximately 130,000 cases, 
46,600 discharges were SSO patients. During that same period, the 
approximately 3,600 acute care hospitals throughout the United States 
discharged approximately 12.7 million Medicare beneficiaries. At the 
approximately 3,600 acute care hospitals, treatment for Medicare 
patients is paid for under the IPPS, including those cases with a LOS 
that is the same as the LOS for SSO treated at a LTCH. However at a 
LTCH, even under the blend payment option of the SSO policy that we 
established for RY 2007, a percentage of the payment for those short 
stay patients at LTCHs may be based on a payment rate that was 
calculated to reflect the ``different resource use'' at LTCHs as 
compared to payment based on DRGs at acute care hospitals paid for 
under the IPPS. We believe that based on this analysis under the 
existing SSO policy for short stay patients where the patient's LOS is 
less than or equal to the average LOS plus one standard deviation for 
the same DRG at an acute care hospital, paid for under the IPPS, our 
blended payment methodology could result in an excessive payment.
    Our data further indicates that typically LTCHs admit approximately 
80 percent of their patients from acute care hospitals where their 
urgent conditions have been diagnosed, treated, and stabilized. We 
believe that when these patients are admitted to a LTCH for an 
extremely short stay, the LTCH appears to be serving as a step-down 
unit of the acute care hospital (71 FR 27857 through 27858). (Section 
1886(d)(1)(B) of the Act, provides for the establishment of 
rehabilitation and psychiatric units of section 1886(d) hospitals (that 
is, acute care hospitals paid for under the IPPS) but not LTCH units.)
    As we stated in the RY 2007 LTCH PPS final rule, ``* * * an 
analysis of the CY 2004 MedPAR files revealed that for specified DRGs 
for acute care cases following ICU/CCU days, there were significantly 
fewer `recuperative' days (nearly 50 percent) for acute care outlier 
patients that were discharged from the acute care hospital and then 
admitted to a LTCH than for those patients that were discharged from 
the acute care hospital and not subsequently admitted to a LTCH. For 
example, under the IPPS for DRG 475 (Respiratory system diagnosis with 
ventilator support) and DRG 483 (Trach with mechanical vent 96+ hours 
or PDX except face, mouth and neck diagnosis), the number of 
`recuperative' days were considerably shorter at the acute care 
hospital if there was a discharge at the acute care hospital followed 
by an admission to a LTCH.'' (71 FR 27857) The data in Table 5 is 
consistent with our belief that many LTCHs appear to be admitting some 
SSO patients that could have received the care at the acute care 
hospital.

    Table 5.--HCO LOS, ICU/CCU LOS, and Post-ICU/CCU LOS for Selected Inpatient DRGs by Post-discharge Status
                                             [Live discharges only]
----------------------------------------------------------------------------------------------------------------
                                                                                            Outlier
                                DRG                                   Cases       LOS       ICU/CCU    Post ICU/
                                                                                             days      CCU days
----------------------------------------------------------------------------------------------------------------
475 (no LTCH).....................................................      3,887       32.5        20.5        12
475 (with LTCH)...................................................        515       29.6        22.6         7
483 (no LTCH).....................................................      3,257       73.6        53.6        20
483 (with LTCH)...................................................      2,353       45.7        41           4.7
----------------------------------------------------------------------------------------------------------------

    In our analysis of what we believe are excessive payments under the 
existing LTCH PPS for the shortest SSOs, we focused on those SSO cases 
where a LTCH patient's covered LOS at the LTCH is less than or equal to 
the ALOS plus one standard deviation for the same DRG at acute care 
hospitals (the ``IPPS comparable threshold'') and distinguishing 
between those SSO cases with lengths of stay that are less than or 
equal to the ``IPPS comparable threshold'' from those that exceed that 
threshold.
    For the purposes of this discussion, whether the LTCH SSO case is 
within the ``IPPS comparable threshold'' is determined by comparing the 
covered LOS of that SSO case which has been assigned to a particular 
LTC-DRG to the ALOS for the same DRG under the IPPS. For example, if 
the covered LOS of the LTCH SSO case is equal to or less than the 
average LOS plus one standard deviation for the same DRG under the 
IPPS, the LTCH SSO case would be within the ``IPPS comparable 
threshold.'' In the RY 2008 LTCH PPS proposed rule, we stated that an 
alternative payment option would be appropriate for such a case. We 
indicated that we were considering the following approach: in cases 
where the covered LOS was equal to or less than the ``IPPS comparable 
threshold'' (defined above in this section) of the same DRG under the 
IPPS, the SSO payment methodology could be revised so that payment 
would be based upon the least of 100 percent of estimated costs of the 
case as determined under Sec.  412.529(d)(2); 120 percent of the LTC-
DRG per diem multiplied by the covered LOS of the case as determined 
under Sec.  412.529(d)(1); the Federal prospective payment for the LTC-
DRG as determined under Sec.  412.529(d)(3); or an LTCH PPS amount 
comparable to the IPPS per diem amount as defined at Sec.  
412.529(d)(4), not to exceed the full IPPS comparable amount.
    We noted that the RTI Report discussed in Section XI. of the RY 
2008 LTCH PPS proposed rule (72 FR 4818) included an RTI recommendation 
that ``* * * for LTCH cases whose LOS is within 1 standard deviation of 
the IPPS average LOS, LTCHs should be paid the IPPS rate. When this 
occurs, it suggests that LTCH is providing general acute care for these 
patients. This will allow LTCHs to treat these cases but be paid on an 
equitable basis with other acute hospitals since the shorter length 
stay would suggest general acute treatment is being provided.'' 
(Recommendation 11, p. 139) (We also included the Executive Summary of 
the RTI Report as

[[Page 26907]]

Addendum B in the RY 2008 LTCH PPS proposed rule (72 FR 4884).)
    Under the approach that we discussed in the RY 2008 LTCH PPS 
proposed rule, SSO cases with covered lengths of stay exceeding the 
``IPPS comparable threshold'' would continue to be paid under the 
existing SSO payment policy at Sec.  412.529(c)(2) which is the least 
of: 100 percent of the estimate cost of the case as determined under 
Sec.  412.529 (d)(2); 120 percent of the per diem of the LTC-DRG 
multiplied by the covered LOS of the case as determined under Sec.  
412.529(d)(1); the Federal prospective payment for the LTC-DRG as 
determined under Sec.  412.529(d)(3); or a blend of the 120 percent of 
the LTC-DRG specific per diem amount and an amount comparable to the 
IPPS per diem amount as set forth in Sec.  412.529 (c)(2)(iv). (The 
methodology for the calculation of these amounts is specified at Sec.  
412.529(d).)
    However, for the shortest SSO cases (that is, if the LTCH patient's 
covered LOS is less than or equal to the ``IPPS-comparable 
threshold''), the IPPS comparable per diem amount, capped at the full 
IPPS comparable amount that is used under the blend option of the 
current SSO policy, could be the fourth payment option in the SSO 
payment formula, replacing the blend option in the adjusted LTCH PPS 
payment formula at existing Sec.  412.529(c)(2)(iv). We indicated that 
we believed this approach to be appropriate because it would continue 
to ensure that the LTCH PPS payments are appropriate for all cases; 
including those with a LOS that resemble cases typically treated at 
acute care hospitals.
    However, we also indicated that, in considering this policy 
direction, we did not believe that this approach for SSOs would be 
appropriate for the specific situation of a subsection (II) LTCH (that 
is, a LTCH meeting the definition specified in section 
1886(d)(1)(B)(iv)(II) of the Act). We have addressed the uniqueness of 
this type of LTCH in several notices ((62 FR 45966, 46016, and 46026), 
(67 FR 55954 and 55974), (68 FR 34147 through 34148) (71 FR 27863)). We 
believe that subclause (II) LTCHs operate under a unique Congressional 
mandate which, as set forth in section 1886(d)(1)(B)(iv)(II) of the 
Act, circumscribes such a LTCHs' admission policies to the extent that 
it is being identified as a LTCH in order to provide a particular type 
of service (for which the ALOS is greater than 20 days) to a particular 
population (at least 80 percent have a principal diagnosis of 
neoplastic disease) (68 FR 34147). Therefore, in the RY 2008 LTCH PPS 
proposed rule (72 FR 4807), we indicated that exempting subsection (II) 
LTCHs under this approach is consistent with positions regarding the 
application of SSO policies to subclause (II) LTCHs. For example, in RY 
2004, we provided a distinctive phase-in formula for subclause (II) 
LTCHs (Sec.  412.529(e)), and in the RY 2007 LTCH PPS final rule, we 
did not apply SSO policy revisions for subclause (I) LTCHs (Sec.  
412.529(c)(2)) to subclause (II) LTCHs ((68 FR 34122, 34147 through 
34148) (71 FR 27798, 27863)).
    To encourage a thorough and accurate evaluation of this approach, 
we included a column in Table 3 of Addendum A of the RY 2008 LTCH PPS 
proposed rule (72 FR 4872 through 4884), which set forth the IPPS-
comparable threshold for each LTC-DRG. We noted that to determine the 
``IPPS Comparable Threshold'' for some DRGs it was sometimes necessary 
to supplement IPPS hospital statistical data due to a low volume of 
IPPS cases grouped to those DRGs. In addition, although IPPS hospital 
statistical data for the six transplant DRGs (103, 302, 480, 495, 512 
and 513) and two error DRGs (469 and 470) may be available, we noted 
that we could assign a value of zero for the ``IPPS Comparable 
Threshold'' for these LTC-DRGs. This approach was consistent with our 
on-going policy under the LTCH PPS to assign a value of 0.0000 to the 
relative weights for these LTC-DRGs, as discussed in section III.D of 
this final rule.
    As we detailed in this discussion, we are concerned as to whether 
it is appropriate to pay cases that have a covered LOS in the LTCH that 
is less than or equal to the IPPS ALOS plus one standard deviation for 
the same DRG more than would be paid under the IPPS for a similar case. 
In the RY 2008 LTCH PPS proposed rule, we solicited comments on the 
approach described above, as well as suggestions as to alternative ways 
in which to address our concerns.
    We received many comments on the possible revision to the SSO 
policy that we discussed in the proposed rule. The commenters expressed 
the views of trade associations representing LTCHs, both for-profit and 
not-for-profit LTCH groups, medical corporations that include LTCHs, 
State medical societies, a Chamber of Commerce, legislators, physicians 
and other hospital staff, and several interested citizens. In general, 
commenters did not support the policy approach that we discussed and 
the payment effects that would result for LTCHs if the policy were 
adopted.
    Comment: A number of commenters stated that the IPPS-comparable 
option that we discussed for payment under the SSO policy would be a 
violation of the express will of the Congress in establishing the 
category of hospitals that were excluded from the IPPS under section 
1886(d)(1)(B) of the Act. In addition, these commenters stated that 
under that provision the Congress acknowledged that these excluded 
hospitals (that is, LTCHs, IRFs, IPFs, childrens hospitals, and cancer 
hospitals) could not reasonably be paid under a PPS system that had 
been designed to pay for treatment in acute care hospitals. Further, 
these commenters stated that the approach we discussed would violate 
the intent of the Congress (that is, as expressed in the BBRA of 1999 
and the BIPA of 2000) to establish a unique PPS that is specific to 
LTCHs.
    Some of these commenters claimed that the proposed IPPS-comparable 
option to the SSO payment policy would be forbidden under the statute 
because such a payment option would ignore the ``differences in patient 
resource use and cost'' at LTCHs. Some commenters criticized our use of 
the phrase ``a payment otherwise comparable to what would have been 
paid under the IPPS'' as a disingenuous attempt to ``side-step'' the 
Congressional mandate that the LTCHs not be paid based on the acute 
care IPPS. Generally, commenters expressed the view that, if we adopted 
the approach described in the RY 2008 LTCH PPS proposed rule, we would 
be violating the statutory intent that LTCHs be excluded from the IPPS 
in adopting the proposed IPPS-comparable payment adjustment under the 
revised SSO policy.
    Some commenters specifically cited the Court's two-prong test for 
validity of a regulation established under Chevron U.S.A., Inc. v. 
Natural Resources Defense Counsel, Inc. 467 U.S. 837, 842-843 (1984), 
and asserted that the policy we discussed would fail to pass that test. 
Under the ruling, the Court asks whether the Congress addressed, in 
clear language, the issue in question and, if the answer is 
affirmative, the effect is given to the ``unambiguously expressed 
intent of the Congress.'' If the ``statute is silent or ambiguous with 
respect to the specific issue,'' the Agency's interpretation is allowed 
to stand as long as it is based on a permissible construction of the 
statute.'' Id. at 843. Deference to the Agency's interpretation is 
``only appropriate when the agency has exercised its own judgment'' and 
is not based upon an erroneous view of the statute. Commenters asserted 
that the adoption

[[Page 26908]]

of the revised SSO policy that we discussed would clearly violate the 
statutory requirement to pay LTCHs under a PPS separate and distinct 
from the IPPS.
    Response: We disagree with commenters' contention that the LTCH PPS 
SSO policy that we described in the RY 2008 LTCH PPS proposed rule, 
based on an IPPS comparable payment amount, constitutes payment under 
the IPPS. Rather, the policy that we discussed adapts methodologies and 
approximate payment amounts from the IPPS to specific cases under the 
LTCH PPS. We have adapted many different features originally developed 
under the IPPS for use in the LTCH PPS, including the DRG structure, 
wage index adjustments (and wage index values), outlier payments, and 
many others. We believe that none of these adaptations constitute 
establishment of payment under the IPPS for LTCH hospitals.
    In addition, section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA, confers broad discretionary authority on the 
Secretary to develop and implement a PPS for LTCHs, specifically 
mandating a few specific features of the new system including ``a per 
discharge prospective payment system'' that includes an ``adequate 
payment classification system'' based on diagnosis-related groups 
(DRGS) that reflects the differences in patient resource use and costs, 
and shall maintain budget neutrality.'' Section 307(b)(1) of the BIPA 
further provides that the Secretary ``may provide for appropriate 
adjustments to the long-term hospital payment system, including * * * 
outliers * * * '' We believe that these statutory provisions provide 
broad authority and allow the Secretary great flexibility to fashion a 
LTCH PPS based on both original policies, as well as concepts borrowed 
from other payment systems that are adapted, where appropriate, to the 
LTCH context. In the instant case, the SSO policy that we discussed in 
the RY 2008 LTCH PPS proposed rule utilizes principles from the IPPS 
payment methodology and builds upon those concepts to create a LTCH PPS 
payment adjustment that results in an appropriate payment for those 
inpatient stays that we believe do not necessarily belong in LTCHs but 
could be treated in another setting. In this final rule, we are 
adopting the approach we discussed to supplement our existing SSO 
policy. Therefore, we disagree with commenters that the Secretary is 
acting in contradiction of the statute and inconsistently with the 
Chevron doctrine. On the contrary, we believe that this policy is 
consistent with the direction given to the Secretary by the Congress in 
the BBRA. The Congress specifically provided for the adoption of 
appropriate adjustments to the LTCH PPS.
    Comment: Several commenters similarly objected that adopting the 
policy we discussed in the proposed rule would constitute a violation 
of the Administrative Procedures Act (APA). Specifically, these 
commenters objected that our discussion of the policy failed to satisfy 
the APA's requirement that a notice of proposed rulemaking include 
``the terms or substance of the proposed rule'' because we did not 
provide ``specific regulatory language to implement'' the policy. 
Commenters contended that, in the absence of this specific regulatory 
language, interested parties are ``improperly limited in the degree to 
which they are able to participate in the rulemaking process,'' even if 
CMS receives comments on the policy discussed.
    Response: We do not agree that adopting the policy approach 
discussed in the proposed rule, in this final rule, would constitute a 
violation of the APA. Specifically, we believe that we have complied 
with all the applicable requirements in 5 U.S.C. 553. Among the 
requirements of section 553, the notice shall include the terms or 
substance of the proposed rule, or a description of the subjects or 
issues involved. Our comprehensive discussion in the proposed rule set 
forth the substance of the final SSO policy we are adopting in this 
final rule and provided a complete description of the subject and 
issues involved. Therefore, we believe we satisfied this and all other 
applicable APA requirements. Our discussion of the policy in the RY 
2008 LTCH PPS proposed rule that we are adopting in this final rule was 
detailed and specific, and even detailed the impact the change would 
have on payments to LTCHs, despite the absence of regulatory language. 
We received 270 comments on the RY 2008 LTCH PPS proposed rule. As is 
evident in our detailed discussion of these comments, commenters were 
able to provide complex, specific, and pertinent discussion of ``the 
terms or substance'' and ``description of the subjects and issues 
involved'' of the policy that we discussed.
    It may be worth noting that, despite the absence of proposed, 
formal regulatory text, a number of commenters (including some who 
raised this objection) referred to the revised SSO policy that we 
discussed in the proposed rule with terms such as ``proposal,'' 
``proposed change,'' ``proposed SSO payment methodology,'' and 
``proposed policy.'' We believe that commenters clearly understood both 
the substance of the possible revised policy, and the fact that we 
might adopt the revised policy in the final rule after review of the 
comments.
    Comment: Several commenters stated that adopting the policy 
discussed in the RY 2008 LTCH PPS proposed rule would be premature, 
since the existing SSO policy only became fully effective on October 1, 
2006. Specifically, the commenters believe that there has not been 
sufficient time to evaluate the impact and effectiveness of the policy 
change adopted last year to provide for a blend of unadjusted LTCH 
payment rates and IPPS-comparable LTCH PPS payment rates as one of the 
formulas for determining payment of SSOs. Some commenters stated that, 
as a result of last year's change, LTCHs no longer have an incentive to 
knowingly admit these kinds of patients.
    Response: While we understand the concerns of the commenters, we 
believe that it is not premature to implement this revision to the SSO 
policy. We have been studying these cases intensively since the 
implementation of the LTCH PPS (which was fully effective for cost 
reporting periods on or after October 1, 2002, contrary to the 
implications of some commenters) and remain concerned that, in a 
considerable number of cases, LTCHs may be receiving higher payment 
than is warranted for cases that are also treated with similar lengths 
of stay at IPPS hospitals. We have a responsibility to ensure that 
Medicare trust fund is appropriately spent, and therefore, we do not 
believe that we should delay adoption of a provision to preserve the 
program's resources. However, if the commenters are indeed correct that 
last year's policy change removed any incentive to admit these kinds of 
SSO patients, the actual effect of the policy that we are now adopting 
may be relatively small and we believe that it is the CMS's 
responsibility to conserve the Medicare program's resources to the 
maximum extent that is appropriate. Therefore, we are finalizing the 
policy in this final rule.
    Comment: Several commenters supported our goal of analyzing the 
role of LTCHs as one of several treatment settings among post-acute 
providers for Medicare beneficiaries. However, they urged us not to 
finalize the SSO policy that we discussed in the proposed rule that 
would include the alternative payment option for an SSO payment 
comparable to the IPPS payment amount. These commenters believe that 
finalizing this policy would result in drastic payment reductions and

[[Page 26909]]

consequential losses to the LTCHs. These commenters noted that our 
discussion related to serious issues about the proper place for LTCHs 
along the continuum of care for Medicare beneficiaries. The commenters 
urged us not to address these issues through payment mechanisms, but to 
arrive at ``clinically-based'' answers to these issues. Commenters also 
recommended that we wait until Research Triangle Institute (RTI) 
completes the next phase of its work, which includes a review of 
proposed and existing criteria to restrict admission to LTCHs to 
medically complex cases.
    Response: The commenters are correct that the issue involves the 
role of LTCHs in the continuum of beneficiary care. As a provider 
category, LTCHs were created by section 1886(d)(1)(B)(iv)(I) of the Act 
and defined by the statute as ``a hospital which has an average 
inpatient length of stay (as determined by the Secretary) of greater 
than 25 days.'' (Subclause (II) LTCHs, discussed below in these 
responses, which were established under the BBA of 1997, qualify as 
LTCHs under highly specific requirements.) As a ``prudent purchaser of 
care,'' we believe that we have the mandate to pay appropriately for 
the hospital-level services provided to Medicare beneficiaries. The RTI 
study, as discussed in section XI. of the preamble to this final rule, 
represents a highly significant step in evaluating the clinical role 
for LTCHs. In addition to the RTI study, there is considerable 
attention being focused by CMS on issues of substitution of services 
among provider types, and the potential for the development of a 
uniform assessment tool across post-acute providers. As RTI evaluates 
the feasibility of identifying clinically-based criteria for LTCH 
patients, we are concerned that patients with the same general medical 
profile as the same types of patients that constitute some SSO cases in 
the LTCH setting are also being treated at acute care hospitals, often 
as HCO cases. Therefore, we are finalizing this specific revision to 
the SSO policy, as discussed in the RY 2008 LTCH PPS proposed rule, 
because we are concerned about the significant number of very short 
stay patients currently receiving treatment at LTCHs. These are 
patients with a LOS that is comparable to the LOS for many patients 
(under the same DRG) treated in acute care hospitals and paid under the 
IPPS. LTCHs in actuality are also acute care hospitals, they are a 
provider type that is distinguished solely by its focus on long-stay 
hospital-level care as compared to patients paid under the IPPS.
    Comment: We received numerous comments that praised the quality 
care given to Medicare beneficiaries by the LTCHs in their areas and 
commenters urged us not to make significant cuts in Medicare payments 
which they fear would result in reduced services. The commenters 
asserted that the revision of the payment adjustment for SSO patients 
as discussed in the RY 2008 LTCH PPS proposed rule will be detrimental 
to the industry as costs of providing care will exceed payment. 
Further, the commenters stated that underpayment to LTCHs will cause 
patients with complex medical conditions to lose access to appropriate 
care and increase costs to acute care hospitals which will be forced to 
continue caring for these sicker patients. The commenters believed that 
the proposed revisions to the SSO payment policy would have a profound 
impact on the entire health care system of their communities since 
their LTCHs are a critical component of the State health care delivery 
system. They stated that since LTCHs offer specialized services not 
available elsewhere, severe cutbacks for LTCHs could resonate 
throughout the entire health care system.
    One commenter noted that CMS made a statement that it does not 
expect any changes in quality of care or access to services for 
Medicare beneficiaries under the LTCH PPS based on proposed rule 
policies. However, one of the commenters stated that a decrease in 
payments will have pervasive effects on LTCHs. Moreover, the commenter 
stated that the impact of changes in our payments to LTCHs because of 
the proposed SSO policy revisions will not only affect services offered 
to ``the most vulnerable patients,'' but also will have an impact on 
the staff of the LTCHs. Several of the commenters specified that they 
envision that acute care hospitals will be overtaxed and incur 
additional costs without being able to provide ICU beds for patients 
requiring short-term acute care services. They also stated that the 
acute care hospitals in their communities may not be able to meet 
patient needs for those needing LTCH services.
    One commenter cited the experience of a local faith-based, not-for-
profit LTCH system that admits only very high acuity, long-term 
patients and realizes exceptional quality, outcomes, and cost 
effectiveness. But other LTCHs within the industry admit low acuity 
patients. The commenter stated, ``* * * many LTCH providers seek to 
admit chronically ill `slow-recovery' patients as a primary target 
population. These patients have little difficulty meeting the 25-day 
LTCH ALOS criteria, and while these patients may meet continued stay 
criteria, we believe many could be cared for in a less acute setting.''
    Response: We understand the serious concerns expressed by the 
commenters and, although we are finalizing the SSO policy revisions as 
were discussed in the RY 2008 LTCH PPS proposed rule, we want to assure 
the commenters that we are aware of their concerns. We agree that if a 
Medicare beneficiary is appropriately referred, and admitted, to one of 
the approximately 400 LTCHs in the United States for a complex medical 
condition, the beneficiary could receive excellent medical care from a 
highly-trained and committed professional staff. However, we do not 
believe that the revisions to the SSO policy that we are finalizing 
will result in LTCHs going out of business or that significant services 
would have to be curtailed with dire consequences for beneficiaries, 
staff or the local medical care system. As noted elsewhere, our data 
indicates the aggregate margins for LTCHs were 7.8 percent for FY 2003 
and 12.7 percent for 2004. When we proposed the RY 2007 change to the 
SSO policy, commenters also warned that the policy would result in the 
closure of LTCHs with disastrous effects on the health care delivery 
system in those areas of the country. However, after implementing the 
proposed changes, we have not observed any significant reduction in the 
number of available LTCH beds in the country. On the contrary, we 
continue to observe that LTCHs are opening new LTCHs. Therefore, we 
believe that even with decreased Medicare payments for SSO patients, 
such as we are envisioning based on this finalized payment policy and 
detailed in the Impact (see section XV. to this final rule), we believe 
that LTCHs will generally be able to continue delivering high quality 
medical care to their patients. However, we continue to believe that 
acute care hospitals should not be discharging patients to LTCHs 
without having provided a full episode of care and we also continue to 
have concerns about LTCHs admitting those relatively short stay 
patients who could otherwise be treated in acute care hospitals.
    Comment: Many commenters stated that our proposed IPPS-comparable 
payment option under the SSO policy could discourage physicians from 
discharging patients from acute care hospitals and admitting them to 
LTCHs. Thus, they charged that we were establishing a system in which 
clinical judgment is trumped by determinations based solely on payment. 
The commenters further stated that since

[[Page 26910]]

physicians discharge patients to LTCHs because it is in the patients' 
best interests, we would be substituting our judgment for a physician, 
setting a very dangerous precedent. The commenters also noted that 
there is available data supporting the medical determination that 
physicians are discharging patients to the LTCH setting because the 
patient's needs are better served in the LTCH setting than in an acute 
care hospital setting.
    Response: Our objective for the revised SSO policy discussed in the 
RY 2008 LTCH PPS proposed is to preclude LTCHs and physicians from 
taking advantage of a system that significantly ``overpays'' (that is, 
relative to what would be paid for the same DRG under the IPPS) for 
patients that do not require the extensive resources that such high 
payments are intended to support. As discussed subsequently in this 
final rule, we recognize that some SSO cases are unavoidable due to 
death or an unexpected clinical improvement and early discharge. 
However, we have noted that in a community where both acute care and 
LTCH beds are available, patients are routinely transferred from the 
acute care hospital to the LTCH for the remainder of care because the 
LTCH resource is available.
    As we discuss below in this section, we further compared MedPAR 
data on acute care hospitals regarding their LOS during CY 2003 to 
their LOS during CY 2005 in markets where LTCHs opened in CY 2004. We 
compared 304,650 acute care cases in CY 2004 to 316,816 cases in CY 
2005. In CY 2003, there were 7,586 outliers, and in CY 2005, there were 
5,858. The percentage of outliers in the acute care hospitals decreased 
from 2.5 percent to 1.8 percent and the numbers of patients that were 
admitted to LTCHs in those communities increased from 2,128 in CY 2003 
to 6,597 in CY 2005. Furthermore, the percentage of acute care hospital 
discharges to LTCHs increased from 0.7 percent in CY 2003 to 2.1 
percent in CY 2005. The percentage decline in total outliers between 
the CY 2003 and CY 2005 was -25.7 percent. The increase in LTCH 
discharges from CY 2003 to CY 2005 was 198.1 percent.
    We are concerned that this trend has increased exponentially 
because it provides an acceptable disposition of the patient for the 
physician, and because it is an expeditious means of lowering the acute 
hospital's LOS and costs. We understand that the multidisciplinary 
approach for certain complex patients (for example, ventilator weaning) 
is appropriate. However, we are very concerned that the LTCH is 
assuming the role of the acute care hospital for many patients, at a 
far higher cost, which it is possible to do as long as the LTCH 
continues to maintain an ALOS of 25 days for purposes of qualifying for 
payments under the LTCH. Moreover, we do not believe that the payment 
policy option that we are finalizing for SSO discharges will deter 
physicians from delivering appropriate care to beneficiaries or from 
making appropriate referrals in the interests of their patients to 
LTCHs. Furthermore, LTCHs remain free to accept these patients. In 
finalizing this payment policy, we are seeking to remove any financial 
incentive that could encourage a LTCH to admit a patient from an acute 
care hospital prior to that patient having received a full episode of 
care at the acute care hospital.
    Comment: Several commenters cited a study centered at Barlow 
Respiratory Hospital that charted the course of ventilator weaning 
treatment for 1419 medically unstable patients at 23 LTCHs from March 
2002 through February 2003. The study reported that more than 50 
percent of this group of patients were weaned from the ventilators and 
showed improvement, both neurologically and functionally. The 
commenters asserted that this study exemplifies the excellent level of 
care for such patients at LTCHs.
    Response: We agree with the commenters that the results of the 
``Barlow'' study indicate a significant rate of very positive outcomes 
for the very sick LTCH patients who were included in the study. In the 
late 1990s, we sponsored a ventilator demonstration study which 
included, among other acute care settings the Mayo Clinic and Temple 
University Hospital that also reported impressive results. Furthermore, 
we understand that the results of the Barlow study were used for the 
establishment of national ventilator-weaning protocols issued by the 
National Institutes of Health (NIH) and utilized by all acute care 
hospitals. We also understand that input from the Temple University 
program continues to be critical in formulating national standards. We 
believe that these programs established a level of excellence that 
should be emulated by all hospital-level facilities that treat 
ventilator-dependent patients, including acute care hospitals, LTCHs, 
and IRFs. Accordingly, we believe it is not simply the fact that the 
patient is treated at a LTCH that is critical to predicting positive 
results. Rather, it is the type of clinical intervention that is 
furnished to the patient at the hospital. In many cases that 
intervention is currently exemplified at acute care IPPS hospitals, as 
well as at LTCHs.
    Comment: Several commenters claimed that even for what we would 
term ``appropriate'' admissions, our proposed payment option under the 
SSO policy that could generate an IPPS-comparable payment will erect 
barriers to the use of LTCHs. One commenter asserted that typical LTCH 
patients (described by the commenter as elderly patients with 
persistent multiple-system failures who are de-conditioned and 
protocol-resistant) respond impressively to the aggressive blending of 
therapeutic interventions, interdisciplinary teams, and medical 
intervention that is not otherwise available in the community or 
tertiary hospital setting. The commenter stated that from ``a case rate 
reimbursement perspective,'' grouping such a ``treatment-resistant'' 
population with the rest of the general acute care population is highly 
inappropriate. Some commenters asserted that even when adjusted for 
HCOs, acute care hospitals are not designed or intended to provide 
service to long-term care-type patients. The commenters emphasized that 
acute care hospitals are not designed to provide extended care 
services, unlike LTCHs, with their specially-trained expert staff and 
clinicians and multi-disciplinary approaches. One commenter noted that 
LTCHs are like acute care hospitals but must sustain a high level of 
care for longer periods.
    Response: We disagree with the contention that acute care hospitals 
are not capable of providing extended hospital level care services such 
as the care provided in LTCHs. Although there may be communities with 
LTCHs where the acute care hospitals may have functionally 
``restricted'' their services because of the presence of these LTCHs, 
as well as because of the financial advantages and clinical niche that 
they have sought to fill, acute care hospitals are equipped to provide 
services to the same population, and the IPPS under which they are 
paid, is calibrated based on the resources needed to treat those 
patients. Moreover, because there are over 3,500 acute care hospitals 
and approximately only 400 LTCHs, which are not distributed uniformly 
throughout the U.S. (for example, few are located in California), 
currently many acute care hospitals are providing care for the vast 
majority of Medicare beneficiaries requiring the type of care described 
by the these commenters. Our FY 2005 MedPAR files indicate that 20 
percent of cases treated at acute care hospitals nationwide have 
lengths of stay between 7 and 14 days (that is, 2,386,057 out of a 
total of 11,855,205

[[Page 26911]]

cases). Additionally, 5.2 percent of acute care hospital cases 
(617,219) or have LOS greater than 14 days. In those acute care 
hospitals, we believe that during these longer periods those patients 
are receiving the same high level of care in an acute care hospital 
paid under the IPPS as they would receive as patients at a LTCH.
    Comment: Several commenters claimed that we based our proposed 
revision of the SSO policy that could have resulted in an IPPS-
comparable payment for a particular SSO case, on the incorrect 
assumption that ``short stay'' LTCH patients are clinically similar to 
short term acute care hospital patients. They stated that the SSO 
thresholds (\5/6\ of the geometric ALOS for each LTC-DRG) were never 
intended to be a measure of the appropriateness of a LTCH admission, 
but rather, were mathematically-derived from the per diem payment 
amounts, which were based on a methodology that would produce a 
payment-to-cost ratio for SSO cases close to one. Furthermore, a 
commenter stated the presence of a SSO patient does not indicate a 
premature discharge from an acute care hospital, and cited that 11 
percent of the patients had previously qualified as HCOs at the 
referring acute care hospital.
    Additionally, the commenters asserted that we are mistaken in our 
claim that LTCHs can foresee the LOS for patients admitted to LTCHs or 
predict likely deaths, where in actuality, upon admission, there is 
generally no substantial clinical difference between long stay and 
``short stay'' patients. Commenters found it to be incongruous that a 
patient in LTC-DRG 475 (Respiratory System Diagnosis with Ventilator 
Support) would still be an SSO patient (for example, 28 days for LTC-
DRG 475) and could be hospitalized in a LTCH for greater than 25 days 
(the definition of a LTCH). A case such as this could be appropriately 
treated in a LTCH. The commenters noted that physicians cannot and 
should not be asked to predict the LOS or the likely death of severely 
ill patients.
    Commenters further asserted that we have made an erroneous 
assumption that LOS equates to ``severity of illness'' (SOI) and is a 
proxy for the appropriateness of an admission. However, the commenters 
assert that this is not the case. They outlined another incorrect 
belief in the proposed rule that LTCHs function like acute care 
hospitals when they have patients for the same LOS. On the contrary, 
the commenters asserted that SSO patients are being admitted because 
they look just like ``inliers,'' and we have proposed that LTCHs absorb 
payment rates that bear no relationship to the costs of furnishing 
patient care at the LTCH level.
    Furthermore, based on claims analysis, using the APR-DRGs, the 
medical complexity and mortality rates of SSO patients, as measured by 
the SOI and ``risk of mortality'' (ROM) standards are very similar to 
that of the LTCH ``inlier'' patient population. The commenters further 
presented comparisons between these measures for SSO patients and for 
patients with the same DRGs in acute care hospitals, indicating that 52 
percent of all patients admitted to LTCHs were in the highest APR-DRG 
ROM categories, whereas only 24 percent of acute care patients are in 
those same categories, resulting in a total percentage of APR-DRGs 3 
and 4 at LTCHs among the SSO population that is approximately double 
that of acute care hospitals. The commenters noted that higher patient 
acuity correlates to higher utilization of facility resources, and 
hence, higher costs, which argues against our proposed policy that 
would significantly lower reimbursements for SSO cases. Several 
commenters also provided a comparison of case mix indices (CMI) for 
LTCH SSO cases and cases at acute care hospitals. The commenters 
asserted that SSOs at LTCHs have a relative CMI that parallels the CMI 
of LTCH ``inlier'' cases at LTCHs and which is 72 percent higher than 
the comparable CMI at acute care hospitals.
    Response: We understand that not every SSO patient can be so 
identified at the time of admission to a LTCH. Further, we recognize 
that many patients who will eventually be defined as SSO patients 
because their LTCH stay is equal to or less than \5/6\ of the geometric 
ALOS for their particular LTC-DRG, may, upon admission, present the 
same severity of illness and risk of mortality as ``inlier'' LTCH 
patients. As we discuss subsequently in this final rule, we selected 
the threshold of one standard deviation above the average LOS of an 
IPPS discharge as an appropriate measure to select the subset of SSO 
cases that are typically treated in acute care hospitals. We agree that 
the general SSO threshold (\5/6\ of the geometric ALOS for each LTC-
DRG) was never meant to be a measure of the appropriateness of a LTCH 
admission, but rather, was mathematically-derived from the per diem 
payment amounts. We believe this enabled us to arrive at a reasonable 
payment policy at the outset of the LTCH PPS for cases that had lengths 
of stay significantly shorter than those patients fitting the typical 
profile of those who are treated at LTCHs. We recognize that a LTCH 
admission could be a medically-complex admission (an appropriate LTCH 
admission) with a relatively long LOS and still be considered an SSO 
case. We also acknowledge that, in some cases, LTCH admissions could 
also have qualified as HCOs at the referring acute care hospital. 
However, we still have concerns that patients in LTC-DRGs with 
significantly shorter stays than the ALOS for that particular DRG might 
have been unnecessarily admitted to the LTCH rather than receiving 
their care at an acute care hospital. In addition, we are adjusting the 
LTCH PPS to appropriately pay for those SSO stays that have a LOS that 
is comparable to the LOS for that DRG under the IPPS and consume far 
less than a full array of services in the LTCH for the particular LTC-
DRG.
    We believe this policy is appropriate since our data indicates a 
correlation between the LOS at an acute care hospital for a patient 
following treatment at the highest level of intensity (ICU or CCU), 
that is, the number of ``recuperative'' days, and whether or not the 
patient was admitted to a LTCH upon discharge from the acute care 
hospital. An analysis of the CY 2004 MedPAR files revealed that for the 
specified DRGs for acute care cases following ICU/CCU days, there were 
significantly fewer ``recuperative'' days for acute care HCO patients 
that were discharged and admitted to a LTCH than for those patients 
that were discharged directly from the acute care hospital. For 
example, for acute care cases in DRGs 475 (Respiratory system diagnosis 
with ventilator support) and DRG 483 (Trach with mechanical vent 96+ 
hours or PDX except face, mouth and neck diagnosis), the number of 
``recuperative'' days were considerably shorter at the acute care 
hospital if there was a discharge followed by an admission to a LTCH. 
We believe that this data confirms MedPAC's assertion in the June 2004 
Report to Congress that ``patients who use LTCHs have shorter acute 
hospital lengths of stay than similar patients'' (p. 125).
    Furthermore, we agree that some SSO patients become so by virtue of 
death or a faster than expected recovery and early discharge, and that 
in certain LTC-DRGs, the SSO threshold still requires a relatively long 
hospital stay (for example, DRG 475, Respiratory System Diagnosis with 
Ventilator Support). However, in the absence of better admission 
criteria, we are concerned that LTCHs are admitting some SSO patients 
that could have received their full care at the acute care hospital or 
SNF-level facility.

[[Page 26912]]

    We disagree with comparisons made by some commenters concerning the 
SOI and ROM of LTCH SSO patients to those of acute care patients based 
on similar lengths of stay and case-mix indices. Generally, LTCH 
patients that had been previously hospitalized in an acute care 
hospital received the diagnostic work up and major interventional 
treatment during that initial stay. Assuming that the patient continued 
to need hospital-level care after being somewhat stabilized and was 
discharged to a LTCH, the discharge to a LTCH could have been 
determined as clinically appropriate. The clinical status of this 
patient at this point cannot be reasonably compared to a typical 
patient who is treated in the acute care hospital and who is grouped to 
the same DRG. This is the case because the original patient has already 
been treated at that initial level and has required additional 
hospital-level care either by remaining at the acute care hospital, 
which would be paid for under the IPPS (perhaps as a HCO), or by being 
admitted to a LTCH where the stay could either be a SSO or an 
``inlier.'' The only valid comparison of the SOIs and ROMs of two such 
patients in the context of the commenter's concerns would be to 
contrast the SOI and ROMs of the patient at the LTCH with the patient 
who, following the same initial intervention at the acute care 
hospital, continued treatment at the acute care hospital. In addition, 
it is not appropriate to compare the average CMI at acute care 
hospitals to the average CMI at LTCHs. The acute care hospital CMI is 
affected by a broad range of cases, so that the only appropriate 
comparison is between DRGs in acute care settings and DRGs in LTCHs, 
which is the approach we have adopted in the revised SSO policy we are 
finalizing in this final rule. In regions of the country where LTCHs 
are scarce, acute care hospitals treat the same cases that are treated 
in LTCHs where those facilities are available. In those areas, acute 
care hospitals do indeed treat the most severe cases, and the 
calibration of the DRG weights takes into account the resource 
requirements for such cases. In the light of this fact, we do not 
believe that it is necessary or appropriate to pay LTCHs more for cases 
that can be successfully treated in acute care hospitals. We understand 
that the option that we are finalizing, paying for some SSO stays based 
on the IPPS-comparable amount, will result in significant payment 
reductions to LTCHs for some SSO cases. However, we still believe that 
this modification to the SSO policy is appropriate since it ensures 
that payments to the LTCH are not greater than the program would pay in 
a different setting of care, where these patients can also be 
successfully treated. At the outset of the LTCH PPS, we established the 
SSO payment adjustment to address this distinction which we continue to 
believe is a valid and reasonable consideration for Medicare payments 
to LTCHs (67 FR 55995, August 30, 2002).
    Comment: Many commenters asked that we not finalize the proposed 
SSO policy revisions, stating that the SSO payment option that could 
pay the LTCH based on an amount comparable to what would otherwise have 
been paid under the IPPS was not based on solid data analysis and 
supportable conclusions. In fact, a number of commenters asserted that 
the proposed policy was not based on data but rather on ``erroneous and 
unsubstantiated assumptions'' that all SSO patients are inappropriately 
admitted to LTCHs and inappropriately discharged from acute care 
hospitals. The commenters noted that, because of the way in which the 
policy was formulated, the percentage of LTCH cases that are paid under 
the SSO payment policy was a function of the SSO threshold and the 
dispersion of cases above and below the ALOS for the LTC-DRGs. That is, 
statistically, the SSO definition at \5/6\ of the geometric ALOS would 
necessarily produce approximately 37 percent of cases as SSOs. 
Therefore, under the commenters belief that given the regulatory \5/6\ 
definition of SSOs, which we had not proposed to change, the percentage 
of SSO cases was not amenable to change just based upon LTCHs admission 
policies. One commenter noted that for a significant number of patients 
to fall below \5/6\ ALOS for a LTC-DRG is expected in a LTCH. 
Additionally, commenters noted that a case may qualify as a SSO because 
the patient has run out of covered days, regardless of the actual LOS 
in the LTCH and that in establishing our policy for qualifying as a 
LTCH (that is, meeting the average greater than 25-day LOS for a 
particular cost reporting period), we have recognized the 
``appropriateness'' of including ``total'' rather than just ``covered'' 
days of a stay, since regardless of the payer, if the patient is still 
receiving hospital-level care, the facility is functioning like a LTCH. 
For this reason, these commenters urged us to remove such cases from 
the calculations we used to develop a SSO payment policy. Some 
commenters expressed concerns about the reliability of the data that 
underlay our policy proposals and asserted that our proposals are based 
on faulty assumptions, insufficient data, and a fundamental lack of 
understanding of the valuable care LTCHs provide. Moreover, the 
commenters asserted that LTCH patients are just not the same type of 
patients as acute patients; they believe that our proposed policies 
indicate that we are unaware of the distinction between acute care 
patients and patients at LTCHs. They further stated that they did not 
believe that the public was able to submit meaningful comments to our 
proposed policies because of our data flaws, our biases, and the 
resulting policies that we proposed.
    Response: As we have stated previously, we are aware that the vast 
majority of LTCH patients are admitted following treatment at acute 
care hospitals. The patient's stay at the acute care hospital generated 
a Medicare payment under the IPPS, and the subsequent admission to a 
LTCH, an acute care hospital with an ALOS of greater than 25 days, will 
generate an additional Medicare payment. To protect the Medicare Trust 
Fund from what may be inappropriate and unnecessary payments, and to 
ensure that the program is not paying twice for the same episode of 
care, we believe it is essential that we evaluate those cases that are 
admitted for an unusually short stay following an initial treatment at 
another acute care hospital to acute care hospitals that specialize in 
long-stay care, since that second stay will generate another Medicare 
payment. In MedPAC's June 2004 Report to the Congress, the Commission 
stated that, ``* * * Living near a LTCH increases a beneficiary's 
probability of using such a facility. For example, living in a market 
area with a LTCH quadruples the probability of LTCH use. Being 
hospitalized in an acute hospital with a LTCH located within the 
hospital also quadruples the probability that a beneficiary will use a 
long-term care hospital'' (page 125).
    Although we acknowledge that our establishment of the \5/6\th of 
the geometric ALOS threshold, from a statistical standpoint, will 
result in approximately 37 percent of LTCH cases being defined as SSOs, 
we are extremely concerned with the number of cases that are being 
treated in LTCHs that fall considerably below the geometric ALOS for 
any given LTC-DRG. In fact, as stated previously, in the commenters' 
specific suggestions for how to reasonably and fairly pay SSOs, the 
commenters themselves drew a distinction between those cases that fall 
within the definition of a SSO but are more in keeping with the LOS 
generally

[[Page 26913]]

associated with a LTCH (for example, a case assigned to LTC-DRG 482 
with SSO threshold of 32.1 days, would still be paid as a SSO if the 
patient was treated in the LTCH for 25 days) and those cases that many 
commenters referred to as ``very short stay outliers (VSSO)'' or ``very 
short stay discharges (VSSD).'' In our revised SSO policy, the payment 
formula particularly takes into account our very strong belief that 
LTCHs are acute care hospitals that specialize in treating patients 
requiring ``long-stay'' hospital-level care.
    The LTCH PPS has been designed and calibrated to pay specifically 
for that type of care. Since the inception of the LTCH PPS, when we 
established the SSO adjustment (67 FR 5594 through 55995, August 30, 
2002) at Sec.  412.529, we have provided that if a LTCH treats patients 
not requiring a long stay for that DRG, Medicare pays the LTCH based on 
the applicable payment adjustment option. Furthermore, as we revise the 
payment options in this final rule for the SSO policy, we continue to 
believe that such a payment adjustment is reasonable for all short stay 
patients, including those that die shortly after their admission to the 
LTCH. The FY 2004 MedPAR data indicates that 43 percent of all patients 
that die in LTCHs are deaths that occur within the first 14 days of the 
stay, with 35 percent of SSO deaths occurring within the first 7 days 
following admission. As we have since the inception of the LTCH PPS, we 
continue to believe that Medicare payments for those death cases 
occurring within the SSO threshold should be determined under the SSO 
policy since the length of the patient's treatment in the LTCH did not 
utilize the full measure of hospital resources for which the full LTC-
DRG payment was calibrated.
    Conversely, MedPAR data indicate that of all SSO cases, 
approximately 60 percent of the discharges are 14 days or less and also 
that acute care hospitals treat a significant percentage of patients 
for longer than the 5-day ALOS. (In acute care hospitals, paid under 
the IPPS, over 20 percent, in the aggregate, of patients that are 
treated have a LOS of between 14 and 7 days.) Therefore, as described 
below, we believe that the SSO policy that we are finalizing under the 
LTCH PPS provides a fair and reasonable payment, in light of our stated 
concerns that the short-term hospital-level care that LTCHs provide for 
many SSO cases may be substituting for care that could otherwise be 
delivered at acute care hospitals and for which at best, Medicare would 
otherwise pay under the IPPS.
    Under Sec.  412.507(b), Medicare will pay for inpatient care 
delivered only on those days that the beneficiary has coverage until 
the LOS exceeds the SSO threshold and becomes an inlier stay. 
Therefore, since the inception of the LTCH PPS, we established the 
distinction between ``covered days'' and ``total days'' of a LTCH stay. 
At the point when a patient's benefits exhaust, the patient is 
``discharged for payment purposes'' and even though the patient may 
continue to be hospitalized at the LTCH, Medicare will pay only for the 
covered days, with the patient (or the patient's secondary insurance) 
being responsible for the remaining days' LTCH costs. For example, even 
though a patient could have been treated in an LTCH for 40 days, if 
upon admission, the patient only had 20 covered days remaining, for 
Medicare payment purposes, the stay could qualify as a SSO, unless the 
20 covered days exceeded the \5/6\th threshold for the LTC-DRG to which 
the case was grouped, at which point, the stay would become an inlier 
stay and a full LTC-DRG payment would be generated. Several commenters 
urged us to remove SSO cases occurring as a result of such lapses of 
Medicare coverage from our revised SSO policy but based on our data 
analysis, we will not be excluding benefit exhausted cases from the 
policy. According to FY 2005 MedPAR data, these cases constitute only 
3.31 percent of SSO cases. It has been our policy since the beginning 
of the LTCH PPS to count those stays during which benefits are 
exhausted as SSOs if the covered portion of the stay is less than \5/
6\th of the geometric ALOS for the DRG. In this way, we appropriately 
determine payment based on the part A-covered stay. At the same time, 
we continue counting the total days of the stay for purposes of 
qualification as a LTCH, because that calculation is intended to 
reflect the length of care provided to Medicare beneficiaries. However, 
our policy of including total days for Medicare patients to identify 
hospitals qualifying (or continuing to qualify) as LTCHs indicates our 
recognition that conceivably, a beneficiary may be appropriately 
treated in a LTCH for example, for 40 days; and yet because the 
beneficiary had only 5 remaining benefit days, would be reported in our 
claims data as a 5-day SSO case. We may revisit this issue in the 
future and, at that time, would solicit comments to that end. However, 
at present, since a very small percentage of SSO cases are caused by 
beneficiaries exhausting benefits, the ``short'' SSO cases discussed 
above in this section, will continue to be governed by the SSO policy 
finalized in this rule.
    Comment: One commenter expressed concern that the SSO policy would 
penalize LTCH providers in a situation where a patient developed a new 
or unexpected complication during his or her LTCH stay and required 
treatment that can only be provided by the referring acute care 
hospital.
    Response: The situation to which the commenter is referring is 
possible and may result in a sudden discharge from a LTCH and a 
readmission to the acute care hospital. In such a case, if the total 
covered length of stay at the LTCH is less than \5/6\ of the LOS for 
the LTC-DRG to which the case is assigned, payment would be made under 
the SSO policy. Consequentially, the additional payment option that we 
are finalizing could also be applicable if the covered LOS at the LTCH 
fell within the IPPS-comparable threshold prior to discharge. Such 
payment would be appropriate because the patient would have received 
less than a full episode of care at the LTCH prior to being discharged 
back to the acute care hospital. We note that should the patient 
subsequently be discharged from the acute and readmitted to the LTCH to 
continue treatment begun before the acute episode, Medicare payment to 
the LTCH would be governed under our interrupted stay policy at Sec.  
412.531. We would also note that this stay could also be subject to 
adjustment under the SSO policy (including the payment option that we 
are finalizing) depending upon the total covered length of stay (both 
prior to and following the acute episode).
    Comment: Many commenters stated that their objections to the policy 
discussed in the proposed rule extended to the existing SSO payment 
policy with which they have expressed disagreement in the past. Several 
of these commenters asserted that the current SSO threshold (\5/6\ of 
the geometric ALOS for each LTC-DRG) is not statistically justifiable. 
These commenters recommended that, if we are going to employ LOS as the 
only criterion for determining SSOs, we should logically select a 
threshold that better identifies cases that are dissimilar to the 
median or average, such as the 5th percentile through 10th percentile.
    Response: We believe that the policy we are adopting in this final 
rule is a consistent extension of the principles that we have employed 
in developing the SSO payment policy. In this rulemaking cycle, we have 
not introduced any discussion or proposals concerning the existing SSO 
threshold, and therefore, we are not implementing

[[Page 26914]]

the commenters' recommendation that we establish a dramatically-revised 
threshold level. However, we did provide an exhaustive discussion of 
the reasons for adopting this threshold in the FY 2003 LTCH PPS final 
rule (67 FR 55995), which included statistical analysis, various 
simulations, regressions, and consideration of various options.
    Comment: Several commenters stated that the objective of the SSO 
policy that we discussed in the RY 2008 LTCH PPS proposed rule is to 
establish a de facto exclusionary policy, prohibiting the admission of 
these patients to LTCHs by means of a payment mechanism rather than 
careful clinical review.
    Response: We disagree that we are establishing an exclusionary 
policy. On the basis of analysis that we presented in the RY 2008 LTCH 
PPS proposed rule and previously in this final rule, we believe that 
many of these cases may represent ``premature and inappropriate 
discharge from the acute care hospital and inappropriate admission to 
the LTCH'' (72 FR 4840). The intent of this policy is to establish an 
appropriate payment level for this class of cases. Hospitals remain 
free to accept these patients. As we stated in the RY 2008 LTCH PPS 
proposed rule, * * * a short stay case at a LTCH most likely did not 
receive a full course of medical treatment during the short stay and* * 
* a full LTC-DRG payment would therefore, be inappropriate'' (72 FR 
4804).
    Comment: Several commenters objected that the policy we discussed 
could apply to cases whose length of stay exceeds 25 days, the ALOS 
required for a hospital to qualify as an LTCH. Commenters indicated 
that at least 9 IPPS DRGs have an ALOS plus one standard deviation that 
is greater than 25 days, and at least 26 other IPPS DRGs have an ALOS 
plus one standard deviation that exceed 20 days. Commenters contended 
that cases exceeding the 25-day threshold for qualifying as an LTCH 
should not be considered short stay cases.
    Response: We do not believe that it is inappropriate for individual 
cases that exceed the ALOS threshold for LTCH status to be considered 
SSOs. In fact, we have treated some such cases as SSOs since the 
establishment of the SSO policy. For a number of LTC-DRGs, the SSO 
threshold, \5/6\ of the geometric ALOS, significantly exceeds 25 days. 
These include DRGs 498, 499, 520, and others. Similarly, a number of 
IPPS DRGs have an ALOS plus one standard deviation that is greater than 
25 days. As a result, many cases with lengths of stay shorter than 25 
days receive payment under the SSO methodology, and a subset of those 
cases will be paid specifically under the formula that we are adopting 
in this final rule for certain cases: For SSO cases with a length of 
stay less than ALOS plus one standard deviation of the IPPS DRG, 
payment will be no greater than the IPPS comparable amount that we have 
defined. These results are appropriate because the respective 
thresholds serve different purposes. The 25-day threshold defines an 
ALOS established by the statute to define a LTCH. The respective 
outlier thresholds (the basic SSO threshold of \5/6\ of the geometric 
LTC-DRG ALOS, and the threshold that we are now adopting to identify 
every SSOs) serve to identify subsets of LTCH cases for appropriate 
payment treatment, based on comparisons to relevantly similar cases. We 
have explained the basis for adopting the SSO threshold in the FY 2003 
LTCH PPS final rule (67 FR 55995). The threshold that we are adopting 
in this final rule, the geometric ALOS plus one standard deviation of 
the IPPS DRG, selects a subset of SSOs that are similar to cases 
successfully treated in short-stay acute care hospitals. Since these 
cases have received a course of treatment similar to the typical course 
of treatment in an IPPS hospital, we are limiting payment for them to 
an amount no greater than the comparable payment under the IPPS.
    Comment: Several commenters stated that we had not presented any 
conclusive financial or clinical evidence to support the policy 
discussed in the RY 2008 LTCH PPS proposed rule, but that we instead 
rely merely on statements such as: ``many LTCHs appear to be admitting 
some SSO patients that could have received the care at the acute care 
hospital.'' (72 FR 4806) (Emphasis supplied by commenter.) Furthermore, 
a commenter stated that our own expert consultant, RTI, had failed to 
find evidence conclusively illustrating that the typical LTCH SSO 
patient could be treated as effectively in an acute care hospital. Some 
of these commenters also maintained that, contrary to our suggestions, 
the care received by patients at LTCHs is often unique and not 
available at acute care hospitals. Commenters cited physicians who were 
consulted on the clinical aspects of transfer from an acute care 
hospital to a LTCH. These physicians provided numerous explanations and 
scenarios detailing how LTCHs provide different kinds of services even 
if the DRG for a case is nominally the same.
    Response: As we have discussed elsewhere in this final rule, LTCHs 
are certified as acute care hospitals and acute care hospitals paid 
under the IPPS are throughout the country treating beneficiaries 
requiring hospital-level care lengths of stay comparable to those that 
are typical of LTCHs. We disagree with commenters who imply that there 
is a clear distinction between the patients that are appropriate for 
successful treatment at LTCHs and patients that are appropriately and 
successfully treated at acute care hospitals. Across the United States, 
the nearly 3,600 acute care hospitals that discharge approximately 12.7 
million Medicare beneficiaries treat the full range of medical issues 
that the commenters identify as LTCH cases. We do not question that 
many LTCHs have highly regarded reputations for their success in 
treating respiratory and ventilator cases (MS-LTC-DRGs 207 and 208). 
However, as detailed in the RTI report, the 2004 MedPAR files indicate 
that where LTCHs treated 13,394 cases assigned to DRG 475 in 2004, 
acute care hospitals treated 18,727 Medicare patients with an 
additional 7,072 HCOs in DRG 475. For DRG 88, Chronic obstructive 
pulmonary disease (COPD), LTCHs treated 4,894 cases where acute care 
hospitals treated 37,523 cases. Data on other common DRGs treated in 
LTCHs as compared to the same DRGs treated in acute care hospitals 
reflect a similar pattern, particularly among the DRGs that could fall 
into the broad category of ``medically complex'' patients, which are 
the majority of LTCH patients (Table 3-2, RTI report, p. 35. We 
understand that MedPAC and RTI have noted that many LTCHs deliver a 
high level of care to very sick Medicare beneficiaries, with fine 
doctors, exemplary nursing care, and top-notch rehabilitation 
therapists, but we also know that many acute care hospitals throughout 
the nation are treating the same patients and similarly delivering 
excellent care, especially where there are few LTCHs. We also know that 
some LTCHs specialize in a particular subset of patients and achieve a 
noteworthy success in their treatment (for example, of patients 
requiring ventilator weaning or wound care). However, similar patients 
are also receiving care in acute care hospitals. Therefore, we cannot 
agree with commenters implying that acute care hospitals are incapable 
of competently treating Medicare beneficiaries that happen to fall 
within the DRGs that LTCH identify as their specialties and that any 
patients falling into such categories would receive ``substandard'' 
care at an acute care hospital.

[[Page 26915]]

    Comment: Several commenters stated that our proposed policy should 
not apply to cases that were HCOs at an acute care hospital prior to 
transfer to a LTCH. Since such cases received the full complement of 
services at the acute care hospital, and the acute care hospital 
actually incurred significant losses before receiving an outlier 
payment from the Medicare program, it cannot be stated that any 
discharge and transfer to a LTCH was premature and inappropriate.
    Response: We agree that, in such cases, the transfer to a LTCH is 
unlikely to be premature and inappropriate. In fact, typically, HCO 
cases in the acute care setting represent a full course of treatment in 
that setting. However, as our discussion in the RY 2008 LTCH PPS 
proposed rule indicates, this is not the only, or even the primary, 
factor that deserves consideration in determining an appropriate SSO 
payment level. Regardless of whether a case had reached outlier status 
in an acute care hospital prior to transfer to a LTCH, the course of 
treatment at the LTCH could more closely resemble the normal course of 
treatment at an acute care hospital than the normal course of treatment 
for cases at a LTCH. We stated in the RY 2008 LTCH PPS proposed rule 
that cases ``with lengths of stay that are equal to or less than the 
IPPS ALOS plus one standard deviation for the same DRGs under the IPPS 
appear to be comparable to typical stays at acute care hospitals'' and 
``LTCHs that admit SSO patients with lengths of stay more typical of an 
acute care hospital may be, in fact, behaving like acute care 
hospitals'' (72 FR 4806 citing 71 FR 27847). For purposes of the SSO 
policy discussed in the RY 2008 LTCH PPS proposed rule, the issue is 
primarily the course of treatment actually received at the LTCH, rather 
than the course of treatment at the acute care hospital prior to 
transfer to a LTCH. Of course, one reason the course of treatment at a 
LTCH may resemble the normal course of treatment at an acute care 
hospital may be that an acute care hospital has prematurely and 
inappropriately transferred a patient to a LTCH. However, in cases 
where a patient has received a high level of treatment at an acute care 
hospital, including levels of treatment that qualify for outlier 
payments, a subsequent stay in an LTCH may still ``be comparable to 
typical stays at acute care hospitals.'' (72 FR 4806) In these cases, 
since we believe the Congress excluded LTCHs from the IPPS because 
cases with longer lengths of stay (as compared to acute care hospitals 
paid under the IPPS) tend to be costlier than cases with shorter stays, 
we do not believe that it would be appropriate for the program to pay 
an LTCH an unadjusted LTCH PPS payment for case with such an 
abbreviated stay that it did not receive the full course of treatment 
particularly when we would pay a much lower amount in to an acute care 
hospital for a similar course of treatment.
    Comment: Several commenters urged us not to apply the policy we 
discussed to cases in which patients die in the hospital. These 
commenters noted that physicians and hospitals are not able to predict 
which patients will die subsequent to admission to an LTCH. In 
addition, many of these patients are high cost, requiring significant 
medical resources in the last days of life. One LTCH commenter 
determined that about 50 percent of its extreme SSOs were discharged 
due to death. The commenter notes that it may not be appropriate for 
these cases to receive a full LTCH payment, but that it is equally 
unfair for CMS to assume ``sinister intent'' and to financially 
penalize LTCHs operating in good faith. Some commenters emphasized 
generally that adoption of the revised SSO policy that we discussed 
would be unfair to LTCHs because they cannot predict in advance who 
will become SSO cases. There are several reasons why a patient could 
become an SSO including the patient dying or leaving against medical 
advice. Many of these commenters noted that if this policy is adopted, 
LTCHs will only receive, at best, costs for SSO cases. Other commenters 
recommended that, if we adopt this policy, it should incorporate 
outlier payments when determining an equivalent IPPS payment amount in 
the SSO payment methodology.
    Response: We certainly acknowledge that hospitals and physicians 
are not able to predict with certainty at admission which patients will 
die during an inpatient stay in a LTCH, or whether a patient will leave 
against medical advice. However, the issue with regard to these cases, 
as with the cases discussed in the previous comment, is that ``lengths 
of stay that are equal to or less than the IPPS ALOS plus one standard 
deviation for the same DRGs under the IPPS appear to be comparable to 
typical stays at acute care hospitals.'' The point is not to penalize 
LTCHs, but rather, to pay appropriately for cases that receive less 
than the full course of treatment at a LTCH. Even when a patient dies 
in a LTCH, whether unexpectedly or not, cases with lengths of stay more 
typical of an acute care hospital are not receiving the full course of 
treatment in a LTCH, and resemble more the course of treatment in acute 
care hospitals. It is therefore appropriate to limit the payment for 
such cases accordingly. We would also like to note that where a LTCH is 
finding that nearly half of its patients are discharged due to death, 
if in fact many of these patients are SSO cases, the LTCH may need to 
consider whether those patients were too fragile to be transferred from 
the acute care hospital to the LTCH. Transfer trauma is a serious issue 
that must be considered whenever a hospital considers transferring a 
patient to another facility.
    With respect to the recommendation that we take outlier payments 
into account when determining the equivalent IPPS payment amount in the 
SSO payment methodology, under existing LTCH PPS policy, a SSO case 
that meets the criteria for a LTCH PPS HCO payment at Sec.  
412.525(a)(1) (that is, if the estimated costs of the case exceed the 
adjusted LTC-DRG SSO payment plus the fixed loss amount) would receive 
an additional payment under the LTCH PPS HCO policy at Sec.  412.525(a) 
(67 FR 56026, August 30, 2002). For purposes of HCOs under the proposed 
SSO policy, we would continue to use a fixed-loss amount calculated 
under Sec.  412.525(a), and not a fixed-loss amount based on Sec.  
412.80(a). Medicare would pay the LTCH 80 percent of the costs of the 
case that exceed the sum of the applicable option of the least of the 
four proposed payment options, described above, and the fixed-loss 
amount determined under Sec.  412.525(a).
    Comment: Several commenters stated that the payment reductions 
associated with the very short SSO policy discussed in the RY 2008 LTCH 
PPS proposed rule violate the principles of a PPS in which some cases 
are expected to cost less than others.
    Response: We disagree that these policies violate the principles of 
averaging found in a PPS. As we stated in the RY 2007 LTCH PPS final 
rule, ``* * *we believe it is very important to evaluate the adjustment 
in light of the fact that in a PPS there are numerous principles that 
we try to balance simultaneously when making policy decisions. Among 
these principles are appropriate payment, predictability, averaging, 
beneficiary access to appropriate care, and equity so that while the 
averaging principle is an important one in PPSs, it is not the only 
principle that guides our policy decisions. For example, in the case of 
SSOs and HCOs, we must determine how to appropriately to pay for 
aberrant cases that are much shorter (that is, SSOs) and much costlier 
(that is, HCOs) when compared to typical cases in the

[[Page 26916]]

relevant LTC-DRG. In the case of short stays, if we failed to adjust 
the payment to reflect that the case did not receive the full resources 
of a typical LTCH stay for the particular DRG, the PPS would be greatly 
``overpaying'' for the stay, could serve as an incentive to game the 
system, and would also waste valuable Medicare Trust Fund dollars. 
Similarly, in the case of HCOs, if we did not adjust the payment to 
reflect the extraordinary high costs that LTCH was incurring for 
treating a particular patient when compared to a typical case in the 
respective LTC-DRG, we would be ``underpaying'' significantly for the 
case. We have stated that providing additional money for HCOs strongly 
improves the accuracy of the payment system as well as reduces the 
incentive to under serve these patients. Since we do not pay SSOs or 
HCOs an amount paid to ``inliers'/cases that have length of stays or 
costs commensurate with other cases in the respective but instead make 
payment adjustments to reflect the unique circumstances of these cases, 
the averaging principle is less heavily emphasized under these 
circumstances to achieve equity, appropriate payments that accurately 
reflect resource costs at the patient and hospital level, and 
beneficiary access to medical care.''
    We believe that, given that LTCHs are defined as acute care 
hospitals that have an average inpatient LOS of greater than 25 days, 
the payment policies under the LTCH PPS appropriately reflect the 
averaging principle. That is, where some cases, within the ``inlier'' 
range will have generated relatively lower costs, other cases will 
generate higher costs and Medicare will pay a LTCH the same for both 
less and more costly cases. The SSO policy, along with the HCO policy 
addresses payments for cases that fall outside of the normal types of 
averaging in the inlier range in the PPS and ensures that payment for 
SSO cases is not greatly in excess of the resources required to treat 
those cases. (71 FR 27866 through 27867)
    Comment: Some commenters asked that we comment on why the IPPS 
post-acute transfer policy does not appropriately adjust for payment 
when transferred cases ultimately become SSO discharges in the LTCH 
setting. Another commenter suggested that, we provide policies under 
the acute IPPS side to address inappropriate, or early discharges and 
asked that post-acute transfer rules, readmission rules and DRGs for 
acute care hospitals should be used to minimize the issue instead of 
penalizing LTCHs.
    Response: We note that we addressed the effect of the post-acute 
transfer policy on SSOs previously in the RY 2003 LTCH PPS final rule, 
but will reiterate that the IPPS post-acute transfer provision was 
created to address cases in which the transferring acute hospital 
provides less than the full spectrum of care for the qualified DRG and 
to avoid providing an incentive for a hospital to transfer a patient to 
another hospital early in the patient's stay to minimize costs while 
still receiving the full DRG payment. The post-acute transfer policy 
only addresses the appropriate level of payments for the course of 
treatment received in an acute care hospital. It does not address the 
appropriate level of payments at the facility to which the patients are 
then transferred.
    We note that the post-acute care transfer policy only affects DRGs 
that meet the criteria at Sec.  412.4. Although we expect the post-
acute transfer policy to have some impact on the discharge behavior of 
acute care hospitals because of the reduced payments that they will 
receive for qualified discharges, the post-acute transfer policy does 
not necessarily affect the issues being addressed by the SSO policy 
change. Both the IPPS post-acute transfer policy and the revised SSO 
policy being finalized in this rule are designed to ensure that 
Medicare payments are appropriate given the types of treatment provided 
in each setting; we note that in the instance of an acute transfer 
(that is subject to the post-acute transfer policy) to an LTCH that 
discharges the patient as an SSO, neither the acute nor the LTCH 
facility provided the full episode of care to the patient and it would 
not be appropriate to pay either facility a full DRG payment. We 
believe that the revised payment formula for SSO patients that we are 
finalizing will appropriately pay LTCHs for delivering services to 
patients who do not otherwise require the lengths of stay that are 
characteristic of LTCHs. The SSO policy will address payments to LTCHs 
for patients discharged from the acute care hospital even after the 
IPPS geometric ALOS, who are subsequently discharged from the LTCH as a 
short SSO.
    Comment: Two commenters suggested that rather than challenging the 
cases that are admitted from acute care hospitals, we should be more 
concerned about inappropriate admittances from nonhospital settings 
such as SNFs or elsewhere.
    Response: After analyzing recent data, we note that approximately 
80 percent of the patients admitted to the LTCHs come from the short 
term acute care hospitals and only 20 percent are admitted from other 
nonhospital settings. Since SNFs do not offer hospital-level care but 
are still serving patients with compromised health, we believe that a 
decision to transport a SNF patient to a hospital would generally be 
made because the patient appears to the medical professionals at the 
SNF to be in need of a higher level of medical treatment or care than 
is available at the SNF. (In fact, such patients would typically be 
admitted to the acute care hospital rather than to a LTCH.) However, 
both an acute care hospital and a LTCH offer acute hospital-level care. 
As discussed previously in this final rule, we are very concerned about 
the treatment of a short-stay patient who could reasonably and 
effectively continue to be treated in an acute care hospital and paid 
for under the IPPS, being admitted unnecessarily to a LTCH, which 
specializes in treating patients requiring long-term hospital-level 
care and paid for under a PPS which has been calibrated based upon the 
high resource use associated with long patient stays. Furthermore, 
admission of such a patient could also result in an unnecessary and 
inappropriate LTCH hospitalization, which would also result in a second 
Medicare payment under the LTCH PPS for what was essentially, one 
episode of care.
    Comment: Several commenters believe that we are incorrect that 
LTCHs could be admitting patients not requiring long stays, noting that 
LTCHs actually have a disincentive to admit short stay patients because 
LTCH certification status can be at risk if the hospital does not 
maintain an ALOS of more than 25 days.
    Response: Under the TEFRA system, all inpatient days (whether 
covered by Medicare or not) were included in the LOS computation, and 
the mathematical determination was based upon the number of patient 
days, during the cost reporting period when they occurred, divided by 
discharges occurring during that same period of time (67 FR 55954, 
55971). With the establishment of the per discharge LTCH PPS, we 
restricted the patient count for purposes of qualifying as a LTCH 
solely to Medicare patients (67 FR 55971), and we implemented the 
policy of `days following the discharges,' under which, if a patient's 
stay crosses two cost reporting periods, the total days of that stay 
(both covered and non-covered days) would be included in the 
computation during the cost-reporting period that the discharge 
occurred (69 FR 25706).
    LTCH cost report data reveal that the general ALOS of most LTCHs 
varies only slightly. Generally, LTCHs maintain an ALOS that is just 
over 25

[[Page 26917]]

days, meeting the statutory definition of a LTCH, that is, having an 
ALOS of greater than 25 days. Furthermore, we understand that LTCHs 
closely monitor their yearly ALOS and that one extremely long-stay case 
can mathematically offset for a number of short-stay cases. After 
studying the hospital-specific data, we believe that this is indeed the 
case for many LTCHs. We also believe that the payment policy that has 
been utilized since the start of the LTCH PPS for FY 2003 has not 
operated as a financial disincentive for the admission of patients who 
will not ultimately require long-stay hospital-level care. In fact, we 
note that MedPAR data show approximately 27,000 SSO cases with a LOS of 
14 days or less. This indicates that even with over 20 percent of their 
discharges having such a short ALOS, LTCHs have maintained their 
greater than 25-day statutory ALOS. Therefore, we believe that it is 
both possible for a LTCH to maintain its designation and also admit 
many very short stay cases.
    Comment: Several commenters maintained that the SSO policy we 
discussed would have unintended effect of lengthening patients stay. 
Some of these commenters specifically noted that this effect could be 
the result of a payment ``cliff'' where payments rise abruptly once the 
threshold for the application of this policy (the ALOS of the IPPS DRG 
plus one standard deviation) is reached. The commenters believe that 
the proposed rule introduced ``backwards'' incentives associated with 
the old ``cost-based'' system. Policies will result in encouraging a 
profit for longer stays, which could raise costs to the Medicare 
program.
    Response: We acknowledge that there could be such a cliff effect in 
some cases as a result of the policy that we are adopting. However, we 
believe that the merits of adopting this limitation on outlier payments 
in certain cases outweighs the risks of some possible, unintended 
consequences. We will monitor experience under the new policy to detect 
whether there is an inappropriate increase in lengths of stay that are 
slightly greater than the ALOS plus one standard deviation of the 
comparable IPPS DRGs. As part of our program integrity 
responsibilities, we may ask the FIs to review the medical necessity of 
the last few days of a LTCH stay that just exceeds the threshold, and 
if some days are determined not to be ``medically necessary,'' then if 
the remaining days result in a LOS lower than the threshold, the stay 
may be paid at the IPPS comparable rate.
    Comment: Some commenters contended that the concerns behind the 
possible revision to the SSO policy could be more appropriately 
addressed by establishing patient criteria and QIO review of medical 
necessity for admissions, as has been recommended by MedPAC and RTI.
    Response: Under our QIO program, QIOs review services to determine 
whether services are reasonable and medically-necessary, whether the 
quality of services meets professionally-recognized standards, and 
whether services in an inpatient hospital or other inpatient health 
care facility could, consistent with the provision of appropriate 
medical care, be effectively provided more economically on an 
outpatient basis or in an inpatient facility of a different type. We 
have not historically interpreted any of these areas of review to 
involve determinations of which kind of acute care facility would be 
appropriate, and QIOs do not regard short term acute care hospitals and 
LTCHs as facilities ``of a different type.'' A QIO uses criteria, based 
on typical patterns of practice. The QIOs also consult with (a) 
physician(s) and practitioner(s) actively engaged in practice in that 
State and to the extent possible, in the same specialty, when making 
the determination that care was or was not medically-necessary. 
Although a QIO review can detect whether or not the patient requires an 
acute level of care or whether care in a SNF would have been 
appropriate, since both acute care hospitals and LTCHs are certified as 
acute care hospitals, QIOs do not make the distinction between whether 
a patient should be hospitalized at an acute care hospital or at a 
LTCH, so long as the patient requires an acute level of care.
    QIOs are authorized by statute to determine whether, in case such 
services and items are proposed to be provided in a hospital or other 
health care facility on an inpatient basis, such services and items 
could, consistent with the provision of appropriate medical care, be 
effectively provided more economically on an outpatient basis or in an 
inpatient health care facility of a different type as specified in 
section 1154(a)(1)(C) of the Act. Therefore, QIOs have authority to 
determine the appropriate hospital-level setting in the face of 
objective criteria. But there is no objective criteria distinguishing 
between settings where acute care is delivered. Since the statute 
states ``a facility of a different type,'' and because short term acute 
care hospitals and LTCHs are very similar and provide the same level of 
care, we have at no time interpreted ``a facility of a different type'' 
in section 1154(a)(1)(C) of the Act to mean that QIOs must distinguish 
between them.
    In a memorandum issued to the Regional Offices, Chief Executive 
Officers, and all QIOs, from the Director of the Quality Improvement 
Group of the CMS Office of Clinical Standards on October 28, 2004, 
among other matters, the following policy was further clarified:


    Note: there are different provider types that may offer the same 
level of intensity of inpatient care. QIOs do not specify which 
provider type should be used when the level of intensity is the 
same. For example, a patient requires an acute level of care that 
could be delivered in a short--term acute care PPS hospital, a long-
term care hospital or an acute rehabilitation hospital. The QIO 
determines what intensity of care is appropriate (that is, the 
patient requires an acute level of care) but would not specify as a 
matter of admission necessity which provider type the patient should 
be admitted to. If the QIO determines that there is a quality of 
care concern implicated, that issue should be addressed through the 
quality review process.


    Under current contracts, QIOs review LTCH cases under the following 
circumstances: When a claim is selected for purposes of determining or 
lowering the payment error rate; if there is a QIO-identified need to 
perform additional review based on their contractual responsibilities; 
if there is an immediate appeal of certain beneficiary notices; as a 
result of the referral of a case or cases; or when there is a 
beneficiary complaint or other quality of care concern.
    Since one of the recommendations made by MedPAC in their June 2004 
Report to Congress was for an increased role for the QIOs in monitoring 
criteria to assure that LTCHs are treating appropriate patients, 
researchers from RTI have been in contact with several QIOs nationwide 
in order to evaluate their role. However, involving QIOs in the on-
going determination of the appropriateness of admissions, continuing 
stay or discharge for a significant proportion of LTCH patients was 
never envisioned when the QIO program was established. There will not 
be a reassignment of Medicare funds to QIOs from the LTCH PPS. However, 
we are currently developing the next Quality Improvement Organization 
Scope of Work. These comments will be considered in that process.
    After consideration of the numerous comments submitted on this 
issue, we are finalizing the policy that we discussed in the proposed 
rule. That is, in SSO cases where the covered LOS is equal to or less 
than the ``IPPS

[[Page 26918]]

comparable threshold'' (defined above in this section) of the same DRG 
under the IPPS, the SSO payment methodology will be based upon the 
least of the following: 100 Percent of estimated costs of the case as 
determined under Sec.  412.529(d)(2); 120 percent of the LTC-DRG per 
diem multiplied by the covered LOS of the case as determined under 
Sec.  412.529(d)(1); the Federal prospective payment for the LTC-DRG as 
determined under Sec.  412.529(d)(3); or an LTCH PPS amount comparable 
to the IPPS per diem.

Technical Correction

    We are making a technical correction to existing Sec.  412.529(a) 
which would add the term ``covered'' immediately before the phrase 
``length of stay'' in the initial definition of a SSO case. This 
technical correction is not a substantive policy change but rather 
corrects the regulatory definition of a SSO case so that it is 
consistent with policy determinations that we have made since the FY 
2003 implementation of the LTCH PPS. We would note that utilizing only 
Medicare covered days for payment purposes has been our policy from the 
outset of the LTCH PPS, as is specified at Sec.  412.503 where we 
defined ``discharge'' for purposes of payment, as ``* * * when the 
patient stops receiving Medicare-covered long-term care services * * 
*.'' Furthermore, in subsequent revisions of our SSO policy, we 
included the term ``covered'' at Sec.  412.529(c)(2)(iv)(A), Sec.  
412.529(d)(1) and Sec.  412.529(d)(4)(i)(B). We are making this 
technical correction to conform all references at Sec.  412.529 to our 
existing policy regarding a SSO discharge which is determined based on 
the number of ``covered'' days in the patient stay.
3. Determination of Cost-to-Charge Ratios (CCRs)
    In the FY 2007 IPPS final rule (71 FR 48117 through 48121), similar 
to the revisions to the HCO policy as discussed in IV.D.3.d. of the 
preamble of this final rule, we revised our methodology for determining 
the annual CCR ceiling and Statewide average CCRs under the LTCH PPS 
because we believe that those changes are more consistent with the LTCH 
PPS single payment rate for inpatient operating and capital costs. 
Under the broad authority of section 123 of the BBRA and section 
307(b)(1) of BIPA, for discharges occurring on or after October 1, 
2006, the LTCH CCR ceiling specified under Sec.  
412.529(c)(3)(iv)(C)(2) is calculated as three standard deviations 
above the corresponding national geometric mean total CCR (established 
and published annually by CMS). (As discussed in greater detail in this 
section, the fiscal intermediary (FI) may use a Statewide average CCR 
if, among other things, a LTCH's CCR is in excess of the LTCH CCR 
ceiling.) The LTCH total CCR ceiling is determined based on IPPS CCR 
data, by first calculating the ``total'' (that is, operating and 
capital) IPPS CCR for each IPPS hospital and then determining the 
average ``total'' IPPS CCR for all hospitals. The LTCH CCR ceiling is 
then established at 3 standard deviations from the corresponding 
national geometric mean total CCR. (For further detail on our 
methodology for annually determining the LTCH CCR ceiling, refer to the 
FY 2007 IPPS final rule (71 FR 48117 through 48119).) We also 
established that the LTCH ``total'' CCR ceiling used under the LTCH PPS 
will continue to be published annually in the IPPS proposed and final 
rules, and the public should continue to consult the annual IPPS 
proposed and final rules for changes to the LTCH total CCR ceiling that 
would be effective for discharges occurring on or after October 1 each 
year. Accordingly, in the FY 2007 IPPS final rule (71 FR 48119), we 
established a FY 2007 LTCH total CCR ceiling of 1.321, effective for 
discharges occurring on or after October 1, 2006.
    In addition, under the broad authority of section 123 of the BBRA 
and section 307(b)(1) of BIPA, for discharges on or after October 1, 
2006, we revised our methodology to determine the Statewide average 
CCRs under Sec.  412.529(c)(3)(iv)(C) for use under the LTCH PPS in a 
manner similar to the way we compute the ``total'' LTCH CCR ceiling 
using IPPS CCR data (71 FR 48120). Specifically, under this revised 
methodology, we first calculate the total (that is, operating and 
capital) CCR for each IPPS hospital. We would then calculate a weighted 
average ``total'' CCR for all IPPS hospitals in the rural areas of the 
State and weighted average ``total'' CCR for all IPPS hospitals in the 
urban areas of the State. (For further detail on our methodology for 
annually determining the LTCH urban and rural Statewide average CCRs, 
refer to the FY 2007 IPPS final rule (71 FR 48119 through 48121).) We 
also established that the applicable Statewide average ``total'' 
(operating and capital) CCRs used under the LTCH PPS will continue to 
be published annually in the IPPS proposed and final rules, and the 
public should continue to consult the annual IPPS proposed and final 
rules for changes to the applicable Statewide average total CCRs that 
would be effective for discharges occurring on or after October 1 each 
year. Accordingly, in the FY 2007 IPPS final rule (71 FR 48122), the FY 
2007 LTCH PPS Statewide average total CCRs for urban and rural 
hospitals, effective for discharges occurring on or after October 1, 
2006, were presented in Table 8C of the Addendum of that final rule (71 
FR 48303).
    Additionally, in the FY 2007 IPPS final rule (71 FR 48119), under 
the broad authority of section 123 of the BBRA and section 307(b)(1) of 
BIPA, we established under the LTCH PPS SSO policy at Sec.  
412.529(c)(3)(iv)(C) that the FI may use a Statewide average CCR, which 
is established annually by CMS, if it is unable to determine an 
accurate CCR for a LTCH in one of the following three circumstances: 
(1) New LTCHs that have not yet submitted their first Medicare cost 
report (for this purpose, a new LTCH would be defined as an entity that 
has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18); (2) LTCHs whose CCR is in 
excess of the LTCH CCR ceiling; and (3) other LTCHs for whom data with 
which to calculate a CCR are not available (for example, missing or 
faulty data). Other sources of data that the FI may consider in 
determining a LTCH's CCR included data from a different cost reporting 
period for the LTCH, data from the cost reporting period preceding the 
period in which the hospital began to be paid as a LTCH (that is, the 
period of at least 6 months that it was paid as a short-term acute care 
hospital), or data from other comparable LTCHs, such as LTCHs in the 
same chain or in the same region.
    Furthermore, in the FY 2007 IPPS final rule (71 FR 48121), we 
established under Sec.  412.529(c)(3)(iv)(B) that, for discharges 
occurring on or after October 1, 2006, the CCR applied at the time a 
claim is processed will be based on either the most recently settled 
cost report or the most recent tentatively settled cost report, 
whichever is from the latest cost reporting period. Under the broad 
authority of section 123 of the BBRA and section 307(b)(1) of BIPA, in 
that same final rule, we also established at Sec.  412.529(c)(3)(iv)(A) 
that, for discharges occurring on or after October 1, 2006, we may 
specify an alternative to the CCR computed under Sec.  
412.529(c)(3)(iv)(B) (that is, computed from the most recently settled 
cost report or the most recent tentatively settled cost report, 
whichever is later), or a hospital may also request that the FI use a 
different (higher or lower) CCR based on substantial evidence presented 
by the hospital. A complete discussion of these revisions to our 
methodology for determining a LTCH's CCR is

[[Page 26919]]

discussed in the FY 2007 IPPS final rule (71 FR 48119 through 48121).
4. Reconciliation of SSO Cases
    In the FY 2007 IPPS final rule (71 FR 48121 through 48122), under 
the broad authority of section 123 of the BBRA and section 307(b)(1) of 
BIPA, we revised Sec.  412.529(c)(3)(iv) (D) through (E), for 
discharges occurring on or after October 1, 2006, to codify in subpart 
O of 42 CFR part 412 the provisions concerning the reconciliation of 
LTCH PPS outlier payments, including editorial clarifications discussed 
in greater detail below in this section, that would more precisely 
describe the application of those policies.
    Specifically, at Sec.  412.529(c)(3)(iv)(D), similar to our current 
policy, we specified that for discharges occurring on or after October 
1, 2006, any reconciliation of outlier payments will be based on the 
CCR calculated based on a ratio of costs to charges computed from the 
relevant cost report and charge data determined at the time the cost 
report coinciding with the discharge is settled. In addition, at Sec.  
412.529(c)(3)(iv)(E), we specified that for discharges occurring on or 
after October 1, 2006, at the time of any reconciliation, outlier 
payments may be adjusted to account for the time value of any 
underpayments or overpayments. Such an adjustment will be based upon a 
widely available index to be established in advance by the Secretary 
and will be applied from the midpoint of the cost reporting period to 
the date of reconciliation. We made these additional revisions to Sec.  
412.529(c)(3) because we believe that these changes would be more 
consistent with the LTCH PPS single payment rate, and because we 
believe it would be more appropriate and administratively simpler to 
include all of the regulatory provisions concerning the determination 
of LTCH PPS outlier payments applicable under the LTCH PPS regulations 
at subpart O of 42 CFR part 412. (For a complete discussion on the 
revisions made to the SSO reconciliation policy, refer to the FY 2007 
IPPS final rule (71 FR 48121 through 48122).)
    Comment: One commenter requested that we clarify how we interpret 
the 10 percentage point criterion of the SSO and HCO reconciliation 
policy.
    Response: We did not propose any changes to the current 
reconciliation policy. Therefore, we do not believe this final rule is 
the appropriate vehicle to address this comment. As we have stated, we 
intend to issue subregulatory guidance on LTCH reconciliation that 
would be similar to the IPPS reconciliation process and would address 
the commenter's question.

B. Expansion of Special Payment Provisions for LTCH Hospitals Within 
Hospitals (HwHs) and LTCH Satellites: Expansion of the 25 Percent Rule 
to Certain Situations Not Currently Covered Under Existing Sec.  
412.534

    In the FY 2005 IPPS final rule, we established the special payment 
provisions at Sec.  412.534 for LTCHs that are HwHs and for satellites 
of LTCHs that are co-located with host hospitals. In developing that 
policy, we were particularly concerned with patient shifting between 
the host acute care hospitals and the co-located LTCH HwH or satellite 
for financial rather than for medical reasons, a scenario that we 
believed was encouraged by physical proximity, and that resulted in 
inappropriate increased cost to the Medicare program (69 FR 49191). We 
specified that the payment adjustment for co-located LTCHs at Sec.  
412.534 was also applicable to host hospitals other than acute care 
hospitals that served as hosts to LTCH HwHs or satellites of LTCHs 
since we had similar concerns to those stated above regarding patient 
shifting between such hosts and their co-located LTCHs. However, the 
vast majority of host hospitals continue to be acute care hospitals (69 
FR 49198).
    In the FY 2005 IPPS final rule, we quoted the FY 1995 IPPS final 
rule where we first discussed our concern that LTCH HwHs were, in 
effect, operating as step-down units of acute care hospitals. We 
explained that this was inconsistent with the statutory framework and 
that such a configuration could lead to Medicare making one payment to 
the acute care hospital and another under LTCH PPS for what was 
essentially one episode of care (69 FR 49191 through 49192, and 59 FR 
45389).
    When we first established the separateness and control criteria for 
LTCH HwHs at Sec.  412.22(e) in the FY 1995 IPPS final rule, our main 
objective was to address the shifting of costly, long-stay patients 
from the host to the on-site LTCH, resulting in two hospital stays 
which would result in a financial windfall for both providers. We 
sought to protect the integrity of the IPPS by ensuring that those 
costly, long-stay patients who could reasonably continue treatment in 
an acute care hospital would not be unnecessarily discharged to an 
onsite LTCH, a behavior that would undermine the Medicare IPPS DRG 
payment system for acute care hospitals. We explained that the Federal 
standardized payment amount for the IPPS was based on the average cost 
of an acute care patient across all acute care hospitals for the base 
year. This is premised on the assumption that, on average, both high-
cost and low-cost patients are treated at hospitals. Although Medicare 
may pay a hospital less than was expended by the hospital for a 
particular costly case, the hospital could also receive more than it 
expended for other, less costly cases. However, an acute care hospital 
that consistently discharges higher cost patients to a post-acute care 
setting for the purpose of lowering its costs, undercuts the foundation 
of the IPPS DRG payment system which is based on averages, as noted 
above. Because the course of acute treatment had not been completed, 
the hospital inappropriately would have incurred lower costs under the 
IPPS. It did not incur additional costs for what would have been the 
remainder of the patient's stay at the IPPS acute care hospital. We 
were concerned that once that patient was discharged from the IPPS 
acute care hospital, the patient, still under active treatment for the 
same condition, would be admitted to a LTCH, thereby generating a 
second admission and Medicare payment that often would not have taken 
place but for the availability of the LTCH (59 FR 45389 through 45393).
    With the growth of satellites of excluded hospitals, another 
category of co-located facilities, we established ``separateness and 
control'' policies applicable to satellites, which we defined at Sec.  
412.22(h) as ``a part of a hospital that provides inpatient services in 
a building also used by another hospital or in one or more entire 
buildings located on the same campus as buildings used by another 
hospital.'' In the FY 2003 IPPS final rule at Sec.  412.22(h), we 
finalized additional regulations governing the satellites of hospitals 
(64 FR 41532 through 41535 and 67 FR 50105 through 50106).
    As detailed in the FY 2005 proposed and final rules for the IPPS 
(69 FR 28323 through 28327, 69 FR 49191 through 49214), with the 
explosive growth in the number of LTCH HwHs and concomitant cost to the 
Medicare program, we reevaluated the effectiveness of existing policies 
regarding HwHs. (OSCAR data showed that there were 105 LTCHs in 1993 of 
which 10 were HwHs. By October 2005, there were 373 LTCHs of the 
majority which were HwHs.) We considered whether our regulations 
sufficiently protected the Medicare program from the problems that we 
envisioned in the FY 1995 IPPS final rule. We also questioned the 
effectiveness of the ``performance of basic hospital functions'' aspect 
of the ``separateness

[[Page 26920]]

and control'' requirements alone because we were aware that some co-
located providers had been establishing complex arrangements among 
corporate affiliates, and had obtained services from those affiliates, 
masking true corporate identities, and therein, diluting or impairing 
the effectiveness of the separateness criteria in determining whether 
both hospitals were interrelated. While technically remaining within 
the parameters of the rule, these arrangements intermingled corporate 
interests so that the corporate distinctness was lost, thus side-
stepping the intent of our regulations. (Although we have had similar 
concerns regarding patient movement between host hospitals and their 
satellites, there had never been any ``performance of basic hospital 
functions'' criteria established in Sec.  412.22(h) because satellites 
are part of another hospital, and therefore, share a Medicare provider 
number with ``the hospital of which they are a part'' thus making it 
administratively burdensome to distinguish between the inpatient 
operating costs of the main hospital and its satellite(s).)
    In the FY 2005 IPPS final rule, following serious consideration of 
the public comments that we received on our proposed policy revisions 
for LTCH HwHs and satellites (69 FR 28323 through 28327) and further 
evaluation of the issues, regulatory changes were finalized for HwH 
separateness and control policies at Sec.  412.22(e) and a new payment 
adjustment was established for LTCH HwHs and satellites of LTCHs, at 
Sec.  412.534. (We wish to note that the term ``satellite facility'' in 
this section refers to satellites of excluded hospitals, in particular, 
LTCHs, and does not include satellites of excluded units at Sec.  
412.25.)
    Specifically, in the FY 2005 IPPS final rule (69 FR 49091 through 
49214), effective for cost reporting periods beginning on or after 
October 1, 2004, for LTCHs we eliminated the performance of basic 
hospital functions test under Sec.  412.22(e)(5)(i), the 15 percent 
test under existing Sec.  412.22(e)(5)(ii), and the 75 percent of 
admissions from other than the host criteria at Sec.  
412.22(e)(5)(iii). A LTCH that met administrative separateness and 
control requirements at Sec.  412.22(e)(1)(i) through (e)(1)(iv), under 
our finalized policy, satisfied the LTCH HwH requirements. (As noted 
above in this section, the performance of basic hospital functions test 
does not exist for satellites; therefore, we did not similarly revise 
Sec.  412.22(h).) However, we established a new payment adjustment at 
Sec.  412.534 based upon annual threshold criteria for LTCH HwHs or 
LTCH satellites of 25 percent (or an applicable percentage) for LTCH 
discharges who were admitted from their host hospitals.
    Section 412.534, Special payment provisions for long-term care 
hospitals within hospitals and satellites of long-term care hospitals, 
provides that if a LTCH HwH or LTCH satellite's discharges that were 
admitted from its host hospital exceed 25 percent (or the applicable 
percentage) of its total Medicare discharges for the LTCH HwH or LTCH 
satellite's cost reporting period, an adjusted payment would be made at 
the lesser of the otherwise payable amount under the LTCH PPS or the 
amount payable under the LTCH PPS that would be equivalent to what 
Medicare would otherwise pay under the IPPS. In determining whether a 
hospital met the 25 percent (or applicable percentage) criterion, 
patients transferred from the host hospital that had already qualified 
for outlier payments at the host would not count as a discharge that 
had been admitted from the host. (We commonly refer to this throughout 
the preamble and regulations text as the discharge not being counted 
towards the applicable threshold.)
    It is important to note that if the hospital exceeds its threshold, 
LTCH discharges admitted from the host before the LTCH exceeds the 25 
percent threshold would be paid an otherwise unadjusted payment under 
the LTCH PPS.
    We also finalized additional adjustments to the 25 percent policy 
for specific circumstances. For an LTCH HwH or LTCH satellite located 
in a rural area, there is no payment adjustment applied under Sec.  
412.534 if no more than 50 percent, rather than 25 percent, of the 
Medicare patients discharged from the LTCH or satellite were admitted 
from the host. In addition, in determining the percentage of patients 
admitted from the host, any patients that had been Medicare outliers at 
the host and then discharged to the rural LTCH HwH or LTCH satellite 
would be considered as if they were admitted to the LTCH or satellite 
from a non-host hospital. In addition, in the case of a LTCH or LTCH 
satellite facility that was co-located with the only other hospital in 
the MSA or with an MSA-dominant hospital, as defined at Sec.  
412.534(e)(4), a payment threshold was established that we believed 
responded to ``the unique needs of these communities'' (69 FR 49207). 
Under Sec.  412.534(e)(2), we do not adjust payments to those LTCH HwHs 
or LTCH satellite facilities as long as the percentage of Medicare 
patients discharged from the LTCH HwH or LTCH satellite that were 
admitted from the urban single or MSA dominant host hospital, did not 
exceed the percentage of the total Medicare discharges in the MSA in 
which the hospital is located that were discharged from the host 
hospital, for the cost reporting period for which the adjustment would 
be made, but in no case is the percentage less than 25 percent or more 
than 50 percent. In addition, in determining the percentage of patients 
admitted to the LTCH from the urban single or MSA dominant host 
hospital, any patients that had been Medicare outliers at the host and 
then transferred to the LTCH HwH or LTCH satellite would be considered 
as if they were admitted to the LTCH from a non-host hospital. (When we 
refer to ``the 25 percent (or applicable percentage)'' patient 
threshold throughout this final rule, the ``applicable percentage'' 
refers to these special adjustments that we have provided for the 
special circumstances of rural, urban-single, or MSA-dominant LTCHs or 
to the percentage associated with the transition policy, discussed 
below in this section.)
    When implementing this policy, we also provided for a 4-year 
transition for existing LTCH HwHs or LTCH satellites that met the 
applicable criteria outlined in the regulations to allow these LTCHs a 
reasonable period during which hosts and co-located LTCH HwH or LTCH 
satellites and specific ``LTCHs under formation'' would be able to 
adapt to the requirements of the new policy. For cost reporting periods 
beginning on or after October 1, 2004, through September 30, 2005, 
these transitioned hospitals were to be grandfathered, with the first 
year as a ``hold harmless'' year. However, even for facilities that 
were being phased-in to the full payment adjustment, in the first cost 
reporting period, the hold harmless year, the percentage of discharges 
admitted from the host hospital to the LTCH could not exceed the 
percentage of discharges admitted from the host hospital to the LTCH 
HwH or LTCH satellite in its FY 2004 cost reporting period. (For the 
purposes of Sec.  412.534, the hospital's cost reporting period during 
FY 2004, the last cost reporting period prior to the implementation of 
Sec.  412.534, is the ``base period'' for purposes of establishing the 
gradual phase-in of the full payment threshold adjustment (69 FR 
49196).)
    After the first grandfathered cost reporting period, these LTCH 
HwHs and LTCH satellite facilities were required to meet a percentage 
transition over the 3-year period beginning in FY 2006. For cost 
reporting periods beginning on or after October 1, 2005, but before 
October

[[Page 26921]]

1, 2006, the percentage of Medicare discharges that may be admitted 
from the host with no adjustment may not exceed the lesser of the 
percentage of their discharges admitted from their host during its FY 
2004 cost reporting period or 75 percent. For cost reporting periods 
beginning on or after October 1, 2006 but before October 1, 2007, the 
percentage of Medicare discharges that may be admitted from the host 
with no adjustment may not exceed the lesser of the percentage of its 
Medicare discharges admitted from its host during its FY 2004 cost 
reporting period or 50 percent, and finally, 25 percent (or other 
applicable percentage) beginning with cost reporting periods beginning 
on or after October 1, 2007. Additionally, the 25 percent policy for 
co-located LTCHs is currently implemented in a location-specific 
manner. That is, the computation of the percentage of LTCH HwH or LTCH 
satellite discharges admitted from a host is based solely on the 
admissions from the physically co-located host and not from other 
campuses or remote locations which may share a common Medicare provider 
number with the host.
    Although the payment adjustment at Sec.  412.534 focused on LTCH 
HwHs and satellites of LTCHs and its host hospitals, the relationship 
between a receiving provider and any referring hospital has been an 
issue of concern for the Medicare program, even in the absence of co-
location. Under section 1886(d)(5)(J) of the Act, added by section 4407 
of the BBA of 1997, the Congress provided for a post-acute transfer 
policy which addressed certain patient discharges from acute care 
hospitals that subsequently received additional treatment delivered by 
a second Medicare provider. We believe that the Congress enacted this 
legislation to discourage acute care hospitals from prematurely 
discharging patients to another treatment setting in order to increase 
Medicare payment.
    The Congress' enactment of the legislation authorizing the post-
acute transfer policy is indicative of its serious concerns about 
patient shifting between acute and post-acute providers. In the case of 
the post-acute transfer policy, described above in this section, we 
focused on overpayment, under the IPPS, to the transferring hospital 
when a patient is prematurely discharged to another provider during the 
same episode of illness.
    The payment adjustment for co-located LTCHs at Sec.  412.534 was 
based on concerns similar to those underlying the post-acute transfer 
policy at Sec.  412.4, that is, an inappropriately truncated 
hospitalization at a host facility and an admission to another 
provider, specifically a LTCH, for which an additional Medicare payment 
would be generated. However, the payment adjustment at Sec.  412.534 is 
not applied to the transferring hospital but rather, to discharges from 
the co-located LTCH to which the presumably prematurely discharged 
patient has been admitted. Moreover, although the referring hospital 
under the post-acute transfer policy must be an acute care hospital, 
for the purposes of the payment adjustment at Sec.  412.534, any 
hospital is a potential host if it is co-located with a LTCH HwH or 
LTCH satellite.
    When we proposed the 25 percent (or applicable percentage) payment 
adjustment for co-located LTCHs in the FY 2005 IPPS proposed rule, 
MedPAC expressed concern that the 25 percent patient threshold policy 
would have a significant impact and could possibly lead to an 
inequitable situation for co-located LTCHs, as compared to freestanding 
LTCHs. Among their concerns were the following: Freestanding LTCHs also 
have strong relationships with acute care hospitals, and that where on 
average LTCH HwHs receive 61 percent of their patients from their 
hosts, on average freestanding LTCHs receive 42 percent of their 
patients from their primary referring hospital; a 25 percent rule that 
only applied to LTCH HwHs and not to freestanding LTCHs could be 
inequitable; and if this policy approach applied the adjustment only to 
HwHs and satellites it could be circumvented by an increase in the 
number of freestanding LTCHs instead of LTCH HwHs (69 FR 49211).
    In the RY 2007 LTCH PPS final rule, we also stated that according 
to a commenter, the data indicated ``* * * that it is common practice 
for LTCHs * * * to admit patients from a single-source acute care 
hospitals'' and that 71.2 percent of freestanding LTCHs admit more than 
25 percent of their patients from a single source acute-care hospital 
(71 FR 27878).
    Additionally, in comments received on the FY 2005 IPPS proposed 
rule to preclude common ownership of a host and a HwH (which was not 
finalized), two commenters asserted that the financial incentive to 
accept inappropriate patients from an acute care hospital could exist 
only when the acute care hospital and the LTCH were commonly owned and 
when there was common governance, a situation that ``can exist even 
without co-location, that is, a freestanding LTCH, exempt from the 
requirements of Sec.  412.22(e) could be owned and governed by the 
hospital from which it receives the majority of its referrals' (69 FR 
49202). Despite the commenters' assertions, we do not believe that 
either common ownership or co-location are the only circumstances under 
which financial incentives exist for acute care hospitals to 
prematurely discharge Medicare patients to LTCHs for additional 
treatment during the same episode of patient care. In fact, we are 
aware of the existence of ``arrangements'' between Medicare acute and 
post-acute hospital-level providers that may not have any ties of 
ownership or governance relating to patient shifting that appear to be 
based on mutual financial gain rather than on significant medical 
benefits for the patient. This could be the case if an acute care 
hospital discharges a Medicare beneficiary who continues to require 
hospital-level care primarily to preclude that patient's case from 
reaching outlier status at the acute care hospital, to an LTCH for 
additional treatment. Under this scenario, Medicare would pay the acute 
care hospital under the IPPS for the beneficiary's care but the 
hospital would be able to avoid both losing the ``fixed loss'' amount 
and absorbing 20 percent of the remaining costs for the outlier 
patient's care, as established under the IPPS outlier policy at subpart 
F of part 412. Medicare would also be responsible for a payment, to the 
LTCH, under the LTCH PPS upon the patient's discharge from the LTCH. 
Accordingly, we believe that additional regulation in this area is both 
necessary and appropriate to protect the Medicare Trust Fund when 
generating two payments under two different payment systems for what 
was essentially one episode of beneficiary care.
    When we finalized the payment adjustment at Sec.  412.534, which 
focused solely on co-located LTCHs, that is, LTCH HwHs and satellites 
of LTCHs, and as we subsequently noted in the RY 2007 LTCH PPS final 
rule, we took considerable note of these comments and we have continued 
since that time to monitor the relationships between referring 
hospitals and LTCHs (71 FR 27878). Specifically, at that time we also 
analyzed patient claims data from the FY 2004 MedPAR files for acute 
care patients who are admitted to freestanding LTCHs. We have analyzed 
the discharge and LOS information from this data to evaluate whether 
there was a significant difference in patient shifting behavior between 
co-located LTCHs and their host acute care hospitals and those 
freestanding LTCHs that admit a majority of their patients from 
particular referring acute care hospitals. (As stated previously, for 
the

[[Page 26922]]

purposes of the payment adjustment at existing Sec.  412.534, any 
inpatient hospital-level provider is a potential host if it is co-
located with a LTCH HwH or LTCH satellite (69 FR 49198). Similarly, 
freestanding LTCHs also admit patients from sources other than acute 
care hospitals. However, our data reveals that approximately 80 percent 
of all LTCH admissions are from acute care hospitals. Therefore, our 
data analysis discussed below in this section, focuses on the 
relationship between a referring acute care hospitals and LTCHs.)
    We also analyzed more recent data on relationships between LTCHs 
and acute care hospitals from which they received a significant 
percentage of referrals. The RY 2005 MedPAR files indicate that only 73 
of the then 200 freestanding LTCHs admitted 25 percent or less of their 
Medicare discharges from an individual acute care hospital; for 82 of 
those freestanding LTCHs, the percentage was between 25 and 50 percent; 
for 33 it was between 50 and 75 percent, and for 6 percent of those 
freestanding LTCHs it was between 75 and 100 percent of their Medicare 
discharges that were admitted from one acute care hospital. Thus, the 
data indicates that for over 60 percent of all freestanding LTCHs, over 
25 percent of their discharges were for patients admitted from an 
individual acute care hospital.
    Generally, the data reveals minimal differences for cases grouped 
to the same DRG between the ALOS at the acute care hospital prior to an 
admission to a co-located LTCH and the ALOS at a referring acute 
hospital prior to admission to a freestanding LTCH. For example, when 
we finalized the 25 percent threshold payment adjustment for co-located 
LTCHs at Sec.  412.534, we evaluated data from CY 2004 MedPAR files 
regarding LTC-DRG 475, Respiratory System Diagnosis with Ventilator 
Support, for both LTCH HwHs with more than 25 percent of their 
discharges admitted from their host hospital and freestanding LTCHs 
with more than 25 percent of their discharges admitted from an 
individual referring hospital. The ALOS for patients stays that have 
not reached outlier status at the host prior to being discharged to the 
co-located LTCH was 12.7 days and for freestanding LTCHs, the average 
LOS at their individual referring hospital was 12.9 days. Similarly, 
for LTC-DRG 416, Septicemia, the ALOS at the host acute care hospital 
was 9.8 days prior to admission to the co-located LTCH and the prior 
ALOS at the individual referring acute care hospital was 9.6 days prior 
to admission to the freestanding LTCH. Even though we finalized the 
percentage threshold payment adjustment only for co-located LTCH HwHs 
and satellites at that time, we believed that this data indicates 
considerable similarity between the patient-shifting behavior at acute 
care hospitals with co-located LTCHs and acute care hospitals with 
LTCHs with which they are not co-located. We would have expected the 
LOS at the acute care hospital that discharged patients to non-co-
located LTCHs to be longer.
    Furthermore, as noted above in this section, we have concentrated 
on the relationships between acute care hospitals and non-co-located 
LTCHs in this discussion, because approximately 80 percent of Medicare 
patients in LTCHs are admitted from acute care hospitals. However, we 
believe that the same concerns, articulated above, would also exist 
when the patient source is not an acute care hospital. There could 
still be a financial incentive on the part of the referring hospital 
(for example, an IRF, to prematurely discharge a beneficiary to a LTCH 
for additional post-acute treatment in order to avoid absorbing high 
treatment costs under the IRF outlier policy at Sec.  412.624(e)(5)) 
that would result in two Medicare payments, one to the initial provider 
and the other under the LTCH PPS for, what is actually, a single 
episode of beneficiary care. (We recognize that a patient could 
experience a medical crisis while an inpatient at an IRF, but 
typically, the most appropriate setting for such urgent care would be a 
general acute care hospital, rather than a LTCH.)
    We believe that this data gives further credence to concerns 
articulated by MedPAC and the assertions made by the Lewin Group in 
their comments on our FY 2005 IPPS proposed rule regarding the ``strong 
relationships'' for referral purposes that exist between many acute 
care hospitals and freestanding LTCHs. Although, our decade-old 
concerns, about LTCHs functioning as long-stay or step-down ``units'' 
of acute care hospitals, focused on co-located LTCHs (HwHs and LTCH 
satellites), we believe that this data indicates that many freestanding 
LTCHs may also be serving the same purpose as those that are co-
located, that is, as functional step-down units of their primary 
referring acute care hospital.
    We are also concerned about other attempts to evade our regulations 
at Sec.  412.534. In implementing the HwH regulations at Sec.  
412.22(e) and the satellite regulations at Sec.  412.22(h), we have 
consistently utilized the definition of ``campus'' that was established 
in the provider-based regulations at Sec.  413.65(a)(2) which specifies 
that a campus is ``the physical area immediately adjacent to the 
provider's main buildings, other areas and structures that are not 
strictly contiguous to the main buildings but are located within 250 
yards of the main buildings, and any other areas determined on an 
individual basis, by the CMS regional office, to be part of the 
provider's campus.'' We have become aware of certain LTCH companies 
that have both established new LTCHs and are considering relocating 
existing HwHs or LTCH satellites so that they are at least 300 yards 
from the acute care hospital, thus side-stepping the intent of existing 
Sec.  412.534. We believe that extending the existing payment policy 
will also address the type of ``gaming,'' described above in this 
section.
    We first noted in the RY 2006 LTCH PPS final rule (71 FR 27878) our 
concern that in many cases that the line of ``functional separateness'' 
between freestanding LTCHs and their major referral sources appears to 
have been erased. We believe that our analysis of patient movement 
between these facilities supports these concerns.
    Therefore, under the broad authority conferred on the Secretary by 
section 123 of the BBRA, as amended by section 307(b) of the BIPA to 
implement a prospective payment system for LTCHs, including authority 
to provide for appropriate adjustments to the payment system, we 
proposed the extension of the payment adjustment at Sec.  412.534, 
presently applicable to co-located subclause (I) LTCHs, to all 
subclause (I) LTCHs (section 1886(d)(1)(B)(iv)(I) of the Act), as 
explained below in this section. (For the purposes of the discussion of 
this policy, a ``subclause (I) LTCH'' is also intended to include 
satellites of these LTCHs. Our proposal regarding subclause (II) LTCHs, 
that is those LTCHs that meet the definition at section 
1886(d)(1)(B)(iv)(II) of the Act, is discussed below in this section.) 
Specifically, at Sec.  412.536, we proposed regulations that govern 
payments under the LTCH PPS for LTCH and LTCH satellite Medicare 
discharges admitted from referring hospitals not co-located with the 
LTCH or the satellite of a LTCH.
    The proposed policy provisions of the 25 percent (or applicable 
percentage) payment adjustment apply to any subclause (I) LTCH or LTCH 
satellite regardless of the physical proximity to the hospital from 
which it is accepting admissions. In order to apply this policy at all 
subclause (I) LTCHs and LTCH satellites, we proposed to additionally 
revise existing Sec.  412.534 to include a new provision at Sec.  
412.534(h) that

[[Page 26923]]

would extend the 25 percent (or applicable percentage) payment 
threshold to those grandfathered co-located subclause (I) LTCH HwHs and 
LTCH satellites at Sec.  412.22(f) and Sec.  412.22(h)(3)(i), 
respectively, for Medicare discharges that had been admitted from the 
grandfathered LTCH or LTCH satellite facility's host for cost reporting 
periods beginning on or after July 1, 2007. (We address the issue of 
satellites of subclause (II) LTCHs below in this section.) We proposed 
adding Sec.  412.536 that applies a comparable payment adjustment 
governing Medicare discharges from subclause (I) LTCHs and LTCH 
satellites that were admitted from referring hospitals not co-located 
with the LTCH or the satellite of a LTCH.
    The proposed payment adjustment at Sec.  412.536 applies to those 
Medicare discharges from co-located subclause (I) LTCHs (HwHs and LTCH 
satellite facilities) that have been admitted from hospitals other than 
those with which they are co-located. We believe that this policy 
addresses our concerns with LTCHs and LTCH satellites that in many 
cases appear to be functioning like step-down units of acute care 
hospitals.
    Furthermore, we believe it is appropriate that the same analytical 
standards and payment policies be applied by Medicare to all subclause 
(I) LTCHs. Therefore, we proposed amending existing Sec.  412.534 to 
include subclause (I) grandfathered LTCH HwHs and LTCH satellite 
facilities, as well as using the same thresholds applicable to co-
located LTCH HwHs and LTCH satellite facilities for subclause (I) LTCHs 
and LTCH satellite facilities that admit Medicare patients from 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH, under Sec.  412.536.
    Specifically under the proposed policy, for cost reporting periods 
beginning on or after July 1, 2007, as we specified in revised Sec.  
412.534(h), this proposed payment adjustment would have included those 
subclause (I) LTCH HwHs and satellites that had been ``grandfathered'' 
under Sec.  412.22(f) and Sec.  412.22(h)(3)(i), respectively, and that 
are presently exempted from the existing payment adjustment for co-
located LTCHs. As noted previously, both grandfathered HwHs at Sec.  
412.22(f) and satellite facilities at Sec.  412.22(h)(3)(i) would be 
permitted to retain their exclusions from the IPPS despite not meeting 
``separateness and control'' policies with regard to their 
relationships with their host hospitals, as long as they continued to 
comply with applicable Medicare requirements. This inclusion of 
grandfathered LTCH HwHs and LTCH satellites in the proposed 25 percent 
(or applicable percentage) threshold policy would not effect their 
ability to continue to be ``grandfathered'' and excluded from the IPPS. 
Moreover, as noted above, the 25 percent (or the applicable percentage) 
threshold policy governing discharges from subclause (I) LTCHs that had 
been admitted from any individual referring hospital not co-located 
with the LTCH or the satellite of a LTCH, at Sec.  412.536, would also 
apply in determining payments under the LTCH PPS for Medicare 
discharges from LTCH HwHs and LTCH satellites, including grandfathered 
HwHs and LTCH satellites, that had been admitted from referring 
hospitals not co-located with the LTCH or the satellite of a LTCH (that 
is, referring hospitals other than their hosts).
    Under the policies applicable to grandfathered subclause (I) LTCH 
HwHs and LTCH satellites, we proposed to pay an adjusted amount for 
those discharged Medicare patients that were admitted from their co-
located host, under Sec.  412.534(h) or from any other referring 
hospital under Sec.  412.536, in excess of the applicable percentage 
threshold. The grandfathered LTCHs and LTCH satellite facility's 
Medicare discharges that reached outlier status at the host, at Sec.  
412.534(h), or at the referring hospital not co-located with the LTCH 
or the satellite of a LTCH, at Sec.  412.536, would not count towards 
the applicable threshold.
    We believed that since we proposed expanding the 25 percent policy 
to all subclause (I) LTCHs and LTCH satellite facilities it was 
appropriate to include LTCH HwHs and LTCH satellites grandfathered 
respectively under Sec.  412.22(f) and Sec.  412.22(h)(3)(i). We 
proposed that the provisions at Sec.  412.534(h) would apply for 
Medicare discharges from grandfathered LTCH and LTCH satellite 
facilities admitted from co-located hospitals and the provisions at 
Sec.  412.536 would apply for discharges admitted from the referring 
hospital not co-located with the LTCH or the satellite of a LTCH. As we 
noted in our RY 2007 LTCH PPS final rule regarding grandfathered HwHs, 
``[W]e do not believe that it is reasonable to assume that by creating 
a limited exception for these hospitals, the Congress was immunizing 
these facilities from any further regulation by the Secretary as to 
their growth and financial impact on the Medicare program. We do not 
believe the Congress was establishing a separate class of providers'' 
(71 FR 48109).
    As noted in the proposed rule, when we implemented the existing 25 
percent (or applicable percentage) for cost reporting periods beginning 
on or after October 1, 2004, we opted to implement on a ``location-
specific'' basis rather than based on Medicare provider numbers. That 
is, we applied the percentage threshold payment adjustment only to 
discharges from a specific location of a LTCH HwH or LTCH satellite 
that was admitted from the host hospital with which they share a 
building or campus. However, since implementing this policy, we have 
been contacted by numerous representatives of LTCH chains whose 
questions appear to indicate that the site-specific implementation of 
the threshold percentage had resulted in patient-shifting between 
hospital locations that shared a Medicare provider number and even 
between separately owned LTCHs (for their mutual advantage) that side-
stepped the intent of our policy. Specifically, we offer the following 
example of a situation that was occurring: a host hospital at Location 
A was discharging patients to a LTCH HwH or satellite at Location B 
while the host hospital at Location B discharged patients to the LTCH 
HwH or satellite at Location A.
    We also proposed that for those co-located LTCHs already subject to 
the 25 percent (or applicable percentage) payment adjustment at 
existing Sec.  412.534, the policy expansion at Sec.  412.536 would 
apply to payments under the LTCH PPS for patients discharged from co-
located LTCHs (HwHs and satellites) that were admitted from referral 
sources other than their host hospital(s).
    Therefore, under the proposed policy, for cost reporting periods 
beginning on or after July 1, 2007, a subclause (I) LTCH or LTCH 
satellite that discharges more than 25 percent (or applicable 
percentage) of Medicare patients admitted from any individual referring 
hospital not co-located with the LTCH or the satellite of a LTCH. (that 
had not already reached outlier status, as discussed above) would be 
subject to the payment adjustment at Sec.  412.536 for Medicare 
discharges from that hospital in excess of the applicable threshold. 
Furthermore, we believe that with the application of our proposed 
policy at Sec.  412.536 to Medicare discharges from subclause (I) LTCH 
HwHs and LTCH satellites that were admitted from any individual 
referring hospital not co-located with the LTCH or the satellite of a 
LTCH., we are closing the ``location-specific loophole'' established by 
the implementation of Sec.  412.534. The change would affect all LTCHs 
or LTCH satellite Medicare discharges that were

[[Page 26924]]

admitted from hospitals that are located on a different campus.
    We proposed that the payment adjustment at Sec.  412.534(h) for 
grandfathered LTCH HwHs and LTCH satellite facilities, discussed above 
in this section, would track the applicable provisions of the existing 
payment adjustment at Sec.  412.534. Therefore, we proposed, at Sec.  
412.534(h), for cost reporting periods beginning on or after July 1, 
2007, the provisions of Sec.  412.534 will also apply to grandfathered 
subclause (I) LTCH HwHs and LTCH satellite facilities. Accordingly, 
under revised Sec.  412.534, if the percentage of the grandfathered 
LTCH or LTCH satellite's discharged Medicare inpatient population that 
were admitted from its co-located host exceeds the applicable 
percentage of the LTCH's Medicare discharges for that cost reporting 
period, an adjusted payment will be made for those discharges that were 
admitted from that hospital beyond the applicable percent threshold, at 
the lesser of the otherwise payable amount under 42 CFR part 412, 
subpart O or the amount payable under subpart O that would be 
equivalent to what Medicare would otherwise pay under the rules at 
subpart A, Sec.  412.1(a). (The specifics of this payment formula are 
explained in considerable detail in the RY 2007 LTCH PPS final rule (71 
FR 27879).) Furthermore, as with our initial payment adjustment at 
Sec.  412.534, we proposed additional adjustments for LTCHs and LTCH 
satellites that would be affected by the new regulations and that are 
located in rural areas, or that admit Medicare patients from urban 
single or MSA-dominant referring hospitals (discussed below).
    We did not propose extending the payment adjustment in Sec.  
412.534(h) and Sec.  412.536 to those LTCHs and LTCH satellite 
facilities that we refer to as subclause (II) LTCHs and LTCH 
satellites, established by section 1886(d)(1)(B)(iv)(II) of the Act. 
The policy for subclause (I) LTCHs and LTCH satellites would be based 
on a calculation of the percentage of Medicare discharges that a LTCH 
admits from an individual hospital during a cost reporting period as 
compared to the LTCH's total Medicare discharges during that cost 
reporting period. Because of a significant policy distinction that we 
made at the start of the LTCH PPS for FY 2003, at this time we do not 
believe that this policy should be applied to subclause (II) LTCHs and 
LTCH satellite facilities. With the implementation of the LTCH PPS, we 
revised the Sec.  412.23(e)(2)(i) and (e)(3)(i) to calculate the ALOS 
based solely on Medicare patients who required long-stay 
hospitalizations at subclause (I) LTCHs defined by section 
1886(d)(1)(B)(iv)(I) of the Act; however, we did not change the formula 
for calculating the ALOS for a LTCH governed by section 
1886(d)(1)(B)(iv)(II) of the Act, implemented at Sec.  
412.23(e)(2)(ii), for a ``subclause (II)'' LTCH. We believed that in 
establishing a ``subclause (II)'' LTCH, the Congress provided an 
exception to the general definition of LTCHs under subclause (I). We 
had no reason to believe that the change in methodology for determining 
the average inpatient LOS would better identify the hospitals that the 
Congress intended to exclude under subclause (II) (67 FR 55974). 
Similarly, when we established the existing 25 percent or applicable 
percentage payment adjustment at Sec.  412.534, we determined that its 
application to subclause (II) LTCHs was inappropriate because the 
designation of a subclause (II) LTCH was not solely dependent upon 
Medicare discharges (69 FR 49205). Therefore, we are not applying the 
expansion of the 25 percent policy at Sec.  412.536 and amended Sec.  
412.534 to LTCHs and LTCH satellite facilities defined under section 
1886(d)(1)(B)(iv)(II) of the Act. The existing and amended payment 
threshold adjustments at Sec.  412.534 and at Sec.  412.536 for 
subclause (I) LTCHs and LTCH satellites are based solely on percentages 
of LTCH Medicare discharges. As stated above in this section, we 
continue to believe that since we include both Medicare and non-
Medicare discharges in our calculations for defining a subclause (II) 
LTCH at Sec.  412.23(e)(2)(ii) that applying a payment adjustment that 
is based solely on Medicare discharges may not be appropriate. 
Furthermore, consistent with our policy not to include satellites of 
subclause (II) LTCHs which were specifically grandfathered at Sec.  
412.22(h)(3)(ii) in Sec.  412.536, we have excluded subclause (II) LTCH 
satellites in the application of the 25 percent payment adjustment for 
co-located grandfathered LTCHs at Sec.  412.534(h).
    We received 270 comments on the RY 2008 LTCH PPS proposed rule. 
Several of these comments pertained to the extension of the expansion 
of the 25 percent rule to certain situations not currently covered 
under existing Sec.  412.534. The following is a summary of these 
comments and our responses.
    Comment: One commenter expressed concern about the President's 
budget that has submitted to the Congress the savings to be affected by 
this proposed rule are already ``scored'' and claimed as savings. In 
light of this, the commenter questioned the legitimacy of the comment 
process.
    Response: We disagree with the commenter that the inclusion of 
anticipated savings from the LTCH PPS in the President's Budget 
invalidates the legitimacy of notice and comment rulemaking. 
Projections for expenditures and savings are a necessary and expected 
step in the budgetary process for the Federal Government. The budget 
only represents the President's expectations or projections of what may 
happen in the future. It may make assumptions as to policies that have 
been proposed (or are being evaluated for this purpose) as a 
representation of will happen. But at most, the Budget should not be 
viewed as a final blueprint because the Administration cannot 
anticipate policy modifications in response to public comments. We 
fully consider all comments received during the comment period and 
modify proposed policies in response to public comment. Furthermore, we 
would urge the commenter to review the last several years of LTCH PPS 
and IPPS proposed and final rules and focus on the differences between 
the policies that we proposed and those that we finalized (for example, 
the interrupted stay policy (67 FR 13416, 13455 through 13462, and 67 
FR 55954, 56003 through 56006); qualifications for LTCH HwH status (69 
FR 23306, 28323 through 28327, and 69 FR 48916, 49191 through 49214); 
and revisions in the grandfathering of HwHs and satellites (71 FR 
23996, 24124 through 24126 and 71 FR 47870, 48106 through 48117)) in 
order to more clearly appreciate the impact that comments have on the 
development of our final policies.
    Comment: Several commenters questioned our authority in proposing a 
payment adjustment for LTCHs that is based on an IPPS payment. These 
commenters assert that the Congress excluded LTCHs from the IPPS in 
1983 and enacted legislation that mandated a separate PPS for LTCHs 
that specifically required that payments to LTCHs should reflect the 
resource use and costs of treating LTCH patients. The commenters 
believe we are violating the statutory requirement that payments to 
LTCHs be on a per discharge basis ``that reflects the reasonable and 
necessary cost of providing services in a hospital having an average 
LOS of greater than 25 days.'' The commenters assert that a payment 
``equivalent to'' or ``comparable to'' payments under the IPPS are 
actually payments under the IPPS, violating Congressional intent. 
Several commenters acknowledge our belief that the IPPS-equivalent is 
not a

[[Page 26925]]

payment under the IPPS but the ``thrust of the rationale'' for imposing 
the rule is that these cases still belong in the acute care hospital 
and payment should mirror payment under the IPPS. One commenter stated 
that the Congress ``established LTCHs as a distinct and separate level 
of care.''
    Several commenters believe we are violating section 1801 of the Act 
(``Nothing in this title shall be construed to authorize any Federal 
Officer or employee to exercise supervision or control over the 
practice of medicine or the manner in which medical services are 
provided'') and section 1802(a) of the Act (``Any individual entitled 
to insurance benefits under [Medicare] * * * may obtain health services 
from any institution, agency, or person qualified to participate * * * 
[in the Medicare program] if such institution, agency, or person 
undertakes to provide him such services''). These commenters stated 
that we have no authority to pay for services provided at a LTCH under 
the IPPS. Statutory authority for the establishment of the LTCH PPS 
indicates the Congress believed that LTCH care is more costly than 
acute because it requires the Secretary ``to account for different 
resource use of LTCH patients.'' The commenters believe that the 
policies in the RY 2008 LTCH PPS proposed rule would strip away the 
special status given by the Congress to LTCHs, thus undermining the 
purpose of the LTCH PPS because a significant portion of payments would 
be reimbursed under the IPPS.
    Response: Following further data and policy analysis, we believe 
that the policies that we are finalizing in this rule fairly address 
circumstances that we have become aware of as the LTCH PPS matures. We 
do not believe that we violated Congressional intent in either the BBRA 
of 1999 or the BIPA of 2000 in establishing a payment adjustment under 
the LTCH PPS that addresses our concerns about paying for a substantial 
number of short stay patients, particularly those with extremely short 
stays, under a payment system designed to treat long stay patients.
    As indicated previously, section 123 of the BBRA, as amended by 
section 307(b)(1) of the BIPA, confers broad discretionary authority on 
the Secretary to implement a PPS for LTCHs, including providing for 
appropriate adjustments to the payment system. This broad authority 
gives the Secretary great flexibility to fashion a LTCH PPS based on 
both original policies, as well as concepts borrowed from other payment 
systems that are adapted, where appropriate, to the LTCH context. In 
the instant case, our finalized policy utilizes, in large part, 
principles from the IPPS payment methodology and builds upon those 
concepts to create a LTCH PPS payment adjustment that results in an 
appropriate payment under the LTCH PPS for those inpatient stays that 
we believe could be more appropriately treated in another setting.
    We disagree with commenters that our proposed expansion of the 25 
percent policy that provides for a payment based on an ``IPPS 
comparable payment amount'' is a payment under the IPPS. We want to 
emphasize that such a payment is not an IPPS payment, but rather, given 
the fact that these patients are comparable to patients treated in 
acute care hospitals and that the statute precludes the existence of 
LTCH units, it is an appropriate payment adjustment under the LTCH PPS 
that is equivalent to a payment that would be derived from the IPPS 
payment methodology. Moreover, the authority extended to the Secretary 
by the BIPA included the discretion to ``provide for appropriate 
adjustments to the long-term hospital payment system.'' Our final 
policy is one such adjustment made within the authority conferred under 
the statute. From the inception of the LTCH PPS for FY 2003, we have 
interpreted the above cited statutory provision to authorize the 
establishment of payment adjustment policies including short stay 
outliers (Sec.  412.529), interrupted stays (Sec.  412.531), and 
discharges from LTCHs. We also believe that the authority extended to 
the Secretary by the BIPA includes the discretion to develop a payment 
adjustment based upon establishing a percentage threshold for LTCH 
discharges that we believe are comparable to discharges from acute care 
hospitals under circumstances where we believe that a full episode of 
care has not been delivered at the referring hospital and that the LTCH 
is functioning like a step-down unit of the referring hospital.
    We believe that further refining the 25 percent policy actually 
captures Congressional intent since it addresses the situation of a 
LTCH which by all appearances is serving as a unit of another hospital.
    Comment: Some commenters maintain that we have no authority to 
restrict admissions through payment reductions to LTCHs that have no 
relationship to the referring acute care hospitals. One commenter 
stated that in proposing the extension of the 25 percent policy to non-
co-located LTCHs, we have violated the Court's two-prong test for 
validity of a regulation established under Chevron U.S.A., Inc. v. 
Natural Resources Defense Counsel, Inc., 467 U.S. 837, 842-843 (1984). 
Under the ruling, the Court asks whether the Congress addressed, in 
clear language, the issue in question and, if the answer is 
affirmative, the effect is given to the ``unambiguously expressed 
intent of Congress.'' If the ``statute is silent or ambiguous with 
respect to the specific issue,'' ``the Agency's interpretation is 
allowed to stand as long as it is based on a permissible construction 
of the statute.'' Id. at 843. Deference to the Agency's interpretation 
is ``only appropriate when the agency has exercised its own judgment'' 
and is not based upon an erroneous view of the law. Id.
    Response: We disagree that we have imposed criteria that would 
restrict admissions through payment reductions to LTCHs that have no 
relationship to the referring acute care hospitals. The payment 
adjustment we are implementing is not the equivalent to setting 
``admissions criteria'' for treatment at a LTCH. An LTCH may admit as 
many hospital-level patients as it can safely treat and from whatever 
source(s) it chooses. However, we believe that LTCHs that discharge 
greater than the applicable percentage of patients admitted from a 
particular source that had not reached high cost outlier status, may be 
understood to be functioning similarly to a co-located LTCH (HwH or 
satellite), and therefore, more like a step-down unit of the acute care 
hospital. Under such a circumstance, we believe that the Medicare 
program would be generating a second payment under the LTCH PPS for a 
single episode of care for patient who, had not completed his or her 
episode of care and, is discharged to a LTCH for the remaining portion 
of the original episode of care. Thus, we believe that it is 
appropriate to adjust the payment to be made to the LTCH under the LTCH 
PPS.
    Section 123 of the BBRA, as amended by section 307 (b) of the BIPA, 
confers upon the Secretary tremendous discretion in creating the LTCH 
PPS. We believe that the expansion of the 25 percent policy is in 
accordance with the authority granted to the Secretary under 123 of the 
BBRA as amended by section 307 of the BIPA to make adjustments under 
the LTCH PPS and is consistent with the statute which precludes the 
establishment of LTCH units at section 1886(d)(1)(B) of the Act and is 
also consistent with the Secretary's authority under sections 1102 and 
1871 of the Act. Therefore, we disagree with commenters that the 
Secretary is acting in contradiction of the statute and inconsistently 
with the Chevron doctrine.

[[Page 26926]]

    As a result of our monitoring efforts, we have become increasingly 
aware that the intent of our existing payment adjustment policy at 
Sec.  412.534 aimed at combating LTCHs functioning as long-stay 
``units'' of the referring hospitals is being circumvented by creative 
patient-shifting and admission practices, in addition to, a spiked 
increase in the number of freestanding LTCHs. We have been monitoring 
the patient shifting patterns of LTCHs and referring hospitals that are 
not co-located with one another and have detected behavior that is not 
significantly different from that of co-located LTCHs and their host 
hospitals. Therefore, we do not believe that co-location is a 
prerequisite to inappropriate patient-shifting between an acute care 
hospital and a LTCH.
    We believe that the danger of LTCHs functioning as ``units'' 
appears to be occurring not only in LTCH HwHs and LTCH satellites, but 
also with freestanding LTCHs, and that in many cases, these non-co-
located LTCHs and their referral sources may be functioning in ways 
that appear to have erased the line of ``functional separateness'' 
between these LTCHs and their referring acute care hospitals. If 
patient-shifting between the referring hospital and a LTCH exceeds a 
specific threshold prior to the patient reaching outlier status at the 
referring hospital (that is, prior to receiving a full episode of care) 
the LTCH appears to be functioning as a de facto step down unit of the 
acute care hospital, a configuration not permitted by section 
1886(d)(1)(B) of the Act, which authorizes rehabilitation and 
psychiatric units but not LTCH units of acute care hospitals. We 
believe that if the patient is in effect, being treated in a ``unit'' 
of the acute care hospital, it is reasonable to revise the payment 
methodology and take this into account.
    Comment: We received several comments supporting our inclusion of 
grandfathered LTCH HwHs in the 25 percent threshold payment adjustment. 
These commenters stated that such inclusion would ``level the playing 
field'' among LTCHs. A number of commenters disagreed with applying the 
25 percent threshold payment adjustment for co-located LTCH HwHs and 
satellites. Other commenters urged us to ``continue the grandfathering 
exemption.'' Several commenters stated that including grandfathered 
LTCH HwHs with other LTCHs ``evades the Congressional mandate for 
grandfathering'' and also contradicts regulatory statements that we 
have made since the start of the LTCH PPS. One commenter stated that 
grandfathered LTCHs HwHs have ``operated in reasonable reliance on CMS 
statements that it [would] not apply the HwH requirements to 
[grandfathered LTCHs]'' and requested that we continue to exempt 
grandfathered LTCHs from the proposed 25 percent rule. The commenter 
noted that since grandfathered LTCH HwHs were exempt from the original 
25 percent policy that had been codified at Sec.  412.22(e)(5)(iii) and 
since Sec.  412.534 is based on that requirement, we should continue to 
exempt grandfathered LTCH HwHs from this policy. One commenter noted 
that grandfathered LTCH HwHs were protected against being paid under 
the IPPS even though they did not comply with the ``separateness and 
control'' regulations but if they are required to comply with the 25 
percent threshold payment adjustment, the ``result will be the same'' 
because the grandfathered LTCH HwH would be paid under the IPPS. 
Another commenter cited that LTCH HwHs are precluded from growing under 
our regulations, and therefore, they should be exempted from the 25 
percent policy. One commenter agreed that HwH, freestanding, and 
grandfathered LTCHs should be subject to the extension of the 25 
percent threshold rule, but believes that the threshold should be 35 
percent for this group of LTCHs instead of 25 percent because it would 
still allow CMS to achieve its stated goal and would also be more 
realistic for LTCH providers that operate in small urban markets which 
are very similar to rural areas.
    Response: We appreciate those commenters who endorsed our inclusion 
of grandfathered LTCH HwHs in the 25 percent threshold payment 
adjustment. (We would also note that satellites of LTCHs at Sec.  
412.22(h)(4) will also be affected by the policy change.) The payment 
adjustment that we are finalizing, will affect all subpart (I) LTCHs, 
including those LTCHs and LTCH HwHs and satellites that were already 
regulated under Sec.  412.534 for discharges that had been admitted 
from their co-located hosts. It addresses our concern regarding 
Medicare patients who are discharged from referring hospitals prior to 
the delivery of a full episode of care, to LTCHs. In keeping with our 
fiduciary responsibility to protect the Medicare program against 
duplicative and inappropriate payments, we are finalizing the proposed 
policy at Sec.  412.534(h) under which all subclause (I) LTCHs, 
including grandfathered LTCH HwHs and satellites, will be subject to 
the 25 percent (or applicable percentage) threshold payment adjustment 
with regard to Medicare discharges that they admit from their co-
located host. (We are also providing for conforming changes to Sec.  
412.534(a), (c)(1), (c)(2), (d)(1), and (e)(1) to include grandfathered 
HwHs and satellites, in existing provisions.) Furthermore, under new 
Sec.  412.536, Medicare discharges from grandfathered LTCH HwHs and 
satellites that were admitted from referring hospitals not co-located 
with the LTCH or the satellite of a LTCH that exceed the applicable 
threshold, will be subject to the payment adjustment described in 
detail above in this section. (Elsewhere in these responses, we discuss 
the 3-year transition period to the full threshold adjustment that we 
are also providing for all LTCHs and LTCH satellites including 
grandfathered LTCHs and satellites affected under Sec.  412.536.)
    We disagree with commenters who stated that we are ``evading 
Congress' mandate, and contradicting regulatory statements that we have 
formerly made.'' Section 4417(a) of the BBA of 1997 amended 
1886(d)(1)(B) of the Act to provide that ``[a] hospital that was 
classified by the Secretary on or before September 30, 1995 as a 
hospital described in clause (iv) [a LTCH] shall continue to be so 
classified notwithstanding that it is located in the same building as 
or on the same campus as another hospital.'' We believe this provision 
was intended to prevent grandfathered LTCHs that were unable to satisfy 
our HwH regulations from losing their LTCH status. By finalizing the 25 
percent (or applicable percentage) payment threshold policy to include 
grandfathered LTCHs HwHs, in no way are we countermanding their 
exemption from the separateness and control regulations at Sec.  
412.22(e). LTCHs that exceed the applicable threshold do not lose their 
LTCH status. Rather, the new policy only affects the payment level for 
all LTCHs that exceed the threshold. We further believe that including 
grandfathered LTCH HwHs (and satellites) within the scope of the 
percentage payment threshold that we have established to ensure that 
Medicare is not generating two full payments one under the IPPS and 
another under the LTCH PPS for one episode of care, is well within the 
authority of section 123 of the BBRA, as amended by section 307(b)(1) 
of the BIPA, which confers broad discretionary authority on the 
Secretary to develop and implement a PPS for LTCHs and further provides 
that the Secretary ``may provide for appropriate adjustments to the 
long-term hospital payment system.''
    We do not believe that it is reasonable to assume that by creating 
a limited

[[Page 26927]]

exception for these hospitals that the Congress intended to immunize 
these facilities from any further regulation by the Secretary as to 
their growth and financial impact on the Medicare program. ``We do not 
believe Congress was establishing a separate class of providers'' (71 
FR 48109). Grandfathered LTCHs and LTCH satellite facilities are paid 
under the LTCH PPS and the revised payment adjustment under Sec.  
412.534 and new Sec.  412.536 is merely another feature of the LTCH 
PPS.
    One commenter believes we contradicted our own statements by 
including a partial quote from the FY 2007 IPPS final rule about 
grandfathered LTCH HwHs' ``reasonable reliance'' on the fact that we 
would not apply the HwH requirements. In that final rule, we explained 
that ``[t]he purposes of our grandfathering certain existing HwHs and 
satellites was to reflect reliance interests and settled expectations 
that existed on the part of these facilities at the time the 
separateness and control requirements were created'' (71 FR 48107). We 
believe this statement is consistent with our belief that including 
grandfathered HwHs in the extension of the 25 percent (or applicable 
percentage) payment threshold policy does not violate the Congress' 
intent. The expansion of the 25 percent policy will not affect the 
``reliance interests and settled expectations'' of grandfathered HwHs 
(and also on LTCH satellites) since they will continue to be exempt 
from meeting the separateness and control requirements that are 
required by non-grandfathered co-located LTCHs. Moreover, the concerns 
that we hold regarding premature patient shifting from host hospitals 
or referring hospitals to LTCHs and the consequences of such patterns 
for Medicare payment purpose, may even be more relevant with regards to 
grandfathered LTCH HwHs because since they are exempted from the 
separateness and control policies they may even more closely resemble 
step-down units of their host hospitals.
    Several commenters noted that the 25 percent threshold payment 
adjustment originated as one of the three options (the 75/25 test) with 
which HwHs could comply to meet the separateness and control 
requirements at (then) Sec.  412.22(e)(v)(C). They stated that since 
grandfathered LTCH HwHs were exempted from this requirement when it was 
a ``certification issue,'' or ``control requirement,'' these facilities 
should similarly be exempted from the policy when it is a payment 
adjustment. We note that even though the percentages in these policies 
are the same, there is a critical difference between them. Because the 
effect of section 1886(d)(1)(B) is that grandfathered LTCH HwHs may 
continue to be classified as LTCHs even if they fail to meet with the 
``separateness and control'' requirements that we had established at 
Sec.  412.22(e), among which was the 75/25 test as one of the three 
options for indicating independent ``performance of basic hospital 
functions'' between the host and the LTCH HwHs, grandfathered HwHs 
continued to be excluded from the IPPS despite their unquestioned 
organizational and functional linkage to their host hospitals. A non-
grandfathered LTCH HwH that was not in compliance with the separateness 
and control requirements would have lost its IPPS exclusion. Therefore, 
since loss of IPPS-excluded status is not a feature of the payment 
adjustments that we are finalizing at revised Sec.  412.534 and Sec.  
412.536, we would disagree with the commenter that the ``result will be 
the same because the grandfathered LTCH HwH would be paid under the 
IPPS.'' Under Sec.  412.534(h), which makes grandfathered LTCH HwHs 
(and LTCH satellites) subject to revised Sec.  412.534(h) and to Sec.  
412.536, for cost reporting periods beginning on or after July 1, 2007, 
there is no risk of losing IPPS-excluded status. Grandfathered LTCHs 
would continue to be paid under the LTCH PPS, albeit, an adjusted 
payment amount, even if they exceed the applicable percentage threshold 
under our finalized policy.
    As with all other subclause (I) LTCHs, Medicare payments to 
grandfathered LTCH HwHs (and satellites) for discharges in excess of 
the applicable threshold that were admitted from an individual 
referring hospital will be based on a payment under the LTCH PPS at the 
lesser of the otherwise unadjusted amount under the LTCH PPS or a 
payment equivalent to what would otherwise have been paid under the 
IPPS. As with all LTCHs and LTCH satellites that are subject to this 
payment policy, discharges that exceed the applicable threshold that 
had reached outlier status at the referring (or host) hospital, will 
not be subject to the payment adjustment and will therefore be eligible 
for otherwise unadjusted payment under subpart O.
    Since we are applying the 25 percent policy even to freestanding 
LTCHs, it would be inconceivable to treat grandfathered HwHs as being 
in a unique class that exempts them from the policy while applying the 
policy to LTCHs that are totally separate from the referring hospital. 
We believe that the Congress intended to allow grandfathered HwHs to 
maintain their LTCH status but in no way intended for this group of 
LTCHs to receive an exclusion from payment policies applicable to 
freestanding LTCHs.
    We further disagree with the commenters that since grandfathered 
LTCH HwHs (and satellites) are precluded from ``growth'' under our 
existing regulations, that they should not be subject to the 25 percent 
(or applicable percentage) payment adjustment. We have allowed 
grandfathered LTCH HwHs and satellites to modernize their facilities as 
necessary and appropriate even if modernization required an increase in 
square footage. Specifically, in the FY 2007 IPPS final rule, we 
revisited previous policies that limited grandfathered LTCH HwHs (and 
satellite facilities, including satellite units) from changing the 
``terms and conditions'' under which they operated at the time of their 
grandfathering and we revised Sec.  412.22((f)(3) (and Sec.  
412.22(h)(4) for satellites), and finalized a policy which would allow 
them to increase or decrease their square footage or decrease their 
number of beds without risking their grandfathered status. In that same 
final rule, we revised this policy for all HwHs, satellites, and 
satellite units of all excluded hospitals, not only LTCHs, because we 
were persuaded by comments received on our FY 2007 IPPS proposed rule 
(71 FR 23996) that these facilities needed to be able to expand in 
order to modernize (for example, to accommodate new medical equipment, 
record requirements, and new Federal, State, and local safety 
requirements). However, we did not allow grandfathered facilities to 
increase their number of beds because we believed that all 
grandfathered co-located facilities already held a significant 
advantage over such facilities that were not grandfathered, because 
they were not required to comply with separateness and control rules. 
Therefore, we believed that not only would allowing them to increase 
their bed count convey an additional unfair advantage to these 
facilities, but also that such an increase would lead to additional 
costs for the Medicare program (71 FR 48106 through 48115). We 
similarly believe that continued exemption of grandfathered LTCH HwHs 
and satellites from the payment threshold adjustment to which all other 
subclause (I) LTCHs are subject is both fair and appropriate, and in 
the words of our commenter, helps to ``level the playing field'' among 
LTCHs.
    Regarding the commenter's suggestion that even as we extend the 25 
percent

[[Page 26928]]

threshold payment adjustment to all LTCHs including grandfathered HwHs, 
we should raise the threshold to 35 percent as a more reasonable goal, 
particularly for small urban and rural areas, we would call the 
commenter's attention to the 3-year transition to the full threshold 
adjustment that we are providing (described in greater detail in the 
next response) which establishes a 75 percent threshold but not to 
exceed the percentage in the base year at Sec.  412.536(f)(1) for all 
impacted LTCHs and LTCH satellites for cost reporting periods beginning 
on or after July 1, 2007, through June 30, 2008 and a 50 percent but 
not to exceed the percentage in the base year threshold for all 
impacted LTCHs and LTCH satellites for cost reporting periods beginning 
on or after July 1, 2008, through June 30, 2009. For cost reporting 
periods beginning on or after July 1, 2009, the threshold will be 25 
percent (or the applicable percentage.) We have responded to comments 
regarding single urban and rural LTCHs elsewhere in these responses. We 
believe that establishing this policy will result in hospitalized 
patients who continue to need acute care hospital treatment to not be 
shifted to another acute care hospital setting before the end of a full 
episode of care, but rather to complete appropriate treatment at the 
referring hospital.
    Comment: Several commenters contend that the relationship between a 
referring hospital and a freestanding LTCH should not be subject to the 
same regulatory standards as should a co-located LTCH and its host 
hospital. Furthermore, the commenters assert that when we finalized the 
25 percent payment threshold for co-located hospitals, we provided a 4-
year phase-in to the full 25 percent (or applicable percentage) 
threshold but in our proposed rule, we have not proposed any such 
phase-in for those LTCHs who would be affected under the proposed 
policy at proposed Sec.  412.536. The commenters request that if we 
finalized the proposed extension of the 25 percent payment adjustment 
to non-co-located LTCHs and LTCH satellites, that we provide a similar 
transition period to allow LTCHs the opportunity to adapt to the full 
impact of the policy. In addition, commenters requested that we also 
provide for implementation on a site-specific basis, as we had under 
the existing Sec.  412.534 provision rather than based on admissions to 
the provider in its entirety. One commenter stated that for purposes of 
implementation, using a provider number definition on the LTCH side 
would be simpler to track and control and would be less subject to 
manipulation.
    Response: We have expressed our concerns regarding patient-shifting 
between host hospitals and co-located LTCHs (HwHs and satellites) since 
we originally established the separateness and control requirements at 
Sec.  412.22(e) for FY 2005 (59 FR 45389 through 45393). Upon 
finalizing the 25 percent (or applicable percentage) threshold policy 
for co-located LTCHs for FY 2005, we received comments indicating that 
we should be aware of similar patient shifting patterns between non-co-
located LTCHs and their primary referring hospitals (69 FR 49211). 
Specifically, MedPAC noted that ``freestanding LTCHs also have strong 
relationships with acute care hospitals, and that where on average LTCH 
HwHs receive 61 percent of their patients from their hosts, 
freestanding LTCHs receive 42 percent from their a primary referring 
hospital * * * [that] there are some risks in our proposed 25 percent 
policy; (a) the 25 percent rule that only applies to LTCH HwHs and not 
to freestanding LTCHs and may therefore be inequitable; (b) it does not 
ensure that patients go to the most appropriate post-acute setting; (c) 
this approach may be circumvented by an increase in the number of 
freestanding LTCHs instead of LTCH HwH.'' As we stated in the FY 2005 
IPPS final rule, we believe that ``MedPAC shares our concern that the 
LTCH payment system creates an incentive for unbundling of the IPPS in 
addition to overpayment for the care provided by LTCHs and that this 
concern is great, particularly, in the case of a LTCH HwH * * * '' (69 
FR 49211). We also provided an in-depth discussion of our growing 
concerns in the RY 2007 LTCH PPS final rule (71 FR 27874 through 
27881). As we have stated, when we evaluate patient discharges from a 
host or a referring hospital (typically, an acute care hospital) and 
admission to a LTCH, we are particularly concerned that the acute care 
hospital has not provided a full episode of care for a patient who 
continues to need hospitalization, but instead, is discharging this 
patient to another acute care hospital, one that is paid under the LTCH 
PPS. Consequently, two Medicare claims are submitted; one from the 
acute care hospital and the other for payment under the LTCH PPS for 
what was essentially one episode of care.
    In this final rule, while we continue to believe that the expansion 
of the 25 percent payment threshold policy for at Sec.  412.536 and 
revised Sec.  412.534 are appropriate, in response to the commenters, 
we have revisited our original proposal and will provide for a 3-year 
phase-in of the final payment threshold adjustment at Sec.  412.536 and 
revised Sec.  412.534. Specifically, in this final rule, we have 
established a 3-year transition period under Sec.  412.536 for LTCHs 
that will be governed by the expansion of the 25 percent threshold 
policy for LTCH discharges admitted from referring hospitals not co-
located with the LTCH or the satellite of a LTCH and also for those 
grandfathered co-located LTCHs that we included under this policy at 
revised Sec.  412.534(h).
    Under the policy that we are finalizing for cost reporting periods 
beginning on or after July 1, 2007 and before July 1, 2008, the 
threshold will be no less than the lesser of 75 percent or the 
percentage that the LTCH or LTCH satellite discharged from the 
referring hospital during its RY 2005 cost reporting period. For cost 
reporting periods on or after July 1, 2008 and before July 1, 2009, the 
threshold will be no less than the lesser of 50 percent or the 
percentage that the LTCH or LTCH satellite discharged from the 
referring hospital, during its RY 2005 cost reporting period. For cost 
reporting periods beginning on or after July 1, 2009, all LTCHs and 
LTCH satellites under Sec.  412.536 and grandfathered LTCHs and LTCH 
satellites under Sec.  412.534 will be subject to the applicable 
percentage threshold. (We note that for cost reporting periods 
beginning on or after October 1, 2007, non-grandfathered co-located 
subclause (I) LTCHs, under Sec.  412.534, are fully phased-in to the 
full 25 percent (or applicable percentage threshold) for discharges 
admitted from their co-located hosts. However, payments for LTCH 
discharges admitted from referring hospitals not co-located with the 
LTCH or the satellite of a LTCH, are governed under Sec.  412.536.)
    Furthermore, under our finalized policy, grandfathered LTCH HwHs 
and satellites, under Sec.  412.534(h) and Sec.  412.536 will now be 
subject to the 3-year transition that we are finalizing under this new 
policy for all their discharges, both admitted from their co-located 
host and from referring hospitals not co-located with the LTCH or the 
satellite of a LTCH hospital.
    We believe that a 3-year transition is sufficient time for those 
affected LTCHs to adapt to this payment adjustment. Since the 
implementation of the existing payment adjustment for co-located LTCHs 
at Sec.  412.534 for FY 2005, we have clearly articulated our 
continuing concerns about patient-shifting between non-co-located LTCHs 
and referring hospitals (69 FR 49213, 71 FR 27878 through 27879). 
Therefore, we believe

[[Page 26929]]

that we have provided ample notice to the LTCH industry of potential 
impending regulation in this area and that therefore we believe that 
the industry had time to adjust its behavior. We have also seen 
articles in trade association newsletters over the past several years 
indicating that the LTCH industry was well aware of our focus on this 
issue. However, in response to comments, we have adopted a 3-year 
transition policy that we believe will provide additional time for 
LTCHs to adjust to the new regulations.
    However, we also want to reiterate, that just as we provided under 
Sec.  412.534, the payment adjustment specified at Sec.  412.536 will 
not be applied to discharges (admitted to LTCHs or LTCH satellites from 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH) that reached HCO status at the referring hospital prior to 
admission to the LTCH or LTCH satellite.
    Regarding implementation of the new payment adjustments, we will be 
implementing the percentage threshold at Sec.  412.536 on the provider 
as a whole for multi-campus referring sources and also for multi-campus 
LTCHs or LTCH satellites in contrast to our location-specific 
implementation of the 25 percent payment adjustment for co-located 
LTCHs under Sec.  412.534. We agree with the commenter that location-
specific implementation was consistent with our policy goals in 
addressing patient movement between co-located LTCHs and LTCH 
satellites and their hosts. However, we believe that our goals 
regarding LTCH discharges admitted from referring hospitals not co-
located with the LTCH or the satellite of a LTCH are more logically 
served by basing implementation on the provider as a whole (that is, 
based on discharge data for the entire provider under its provider 
number). Discharges from a co-located LTCH or LTCH satellite that were 
admitted from remote locations of the host hospital not co-located with 
the LTCH or the satellite of a LTCH would also be held to the expanded 
25 percent policy by aggregating the discharges from those locations 
and determining if they exceeded the applicable threshold. Patients 
that are admitted from the hospital that is co-located with the LTCH or 
LTCH satellite facility will continue to be governed by the location-
specific implementation of Sec.  412.534.
    We have revised our proposed policy regarding transitioning to the 
full 25 percent threshold adjustment and under our finalized policy, 
for all subclause (I) co-located HwHs and satellites, including 
grandfathered subclause (I) LTCH HwHs and LTCH satellites under the 
extension of the 25 percent (or the applicable percentage) threshold 
policy that we are finalizing, at revised Sec.  412.534(h) and Sec.  
412.536, and we are providing for a 3-year transition period. 
Accordingly, for cost reporting periods beginning on or after July 1, 
2007, and before July 1, 2008, the percentage threshold applied would 
be no less than the lesser of 75 percent of the total number of 
Medicare discharges that were admitted from all referring hospitals not 
co-located with the LTCH or the satellite of a LTCH during that cost 
reporting period or the percentage of Medicare discharges that had been 
admitted to the LTCH or LTCH satellite from that referring hospital 
during the long-term care hospital's or satellite's RY 2005 cost 
reporting period. Although we proposed to use FY 2005 as the base year 
for this group of LTCHs in the RY 2008 LTCH PPS proposed rule (72 FR 
4815), we will use RY 2005 rather than FY 2005 as the base year since 
we have revised the transition period under Sec.  412.536 to be 
effective and applicable for cost reporting periods on a rate year 
cycle (That is, beginning on or after July 1. We originally chose 2005 
because when we published our proposed rule, FY 2005 was our most 
recent full year of MedPAR data. For cost reporting periods beginning 
on or after July 1, 2008 and before July 1, 2009, the percentage 
threshold applied would be no less than the lesser of 50 percent of the 
total number of Medicare discharges that were admitted from all 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH during that cost reporting period or the percentage of Medicare 
discharges that had been admitted to the LTCH or LTCH satellite from 
that referring hospital during the long-term care hospital's or 
satellite's RY 2005 cost reporting period. For cost reporting periods 
beginning on or after July 1, 2009, the threshold will be 25 percent 
(or the applicable percentage.) A 3-year transition period is 
applicable for all subclause (I) LTCHs and LTCH satellites governed 
under Sec.  412.536 and to grandfathered LTCHs and LTCH satellites now 
subject to the threshold under Sec.  412.534. For co-located LTCHs 
(that is, LTCH HwHs and LTCH satellites) it is important to note that 
under existing Sec.  412.534(g)(4), for cost reporting periods 
beginning on or after October 1, 2007, LTCH HwHs and LTCH satellites 
being phased-in to the full adjustment would enter year 4 and be would 
be required to meet the 25 percent (or applicable percentage) threshold 
regarding their percentage of discharges from their co-located hosts. 
However, these LTCH HwHs or LTCH satellites are governed by Sec.  
412.536 regarding discharges that they admitted from any other referral 
source (that is, other than its co-located host hospital) and would be 
subject to the 3-year transition beginning with cost reporting periods 
beginning on or after July 1, 2007.
    We also believe that it is important that we note that the 3-year 
transition to the full 25 percent threshold payment adjustment will 
coincide with our continuing work on the MedPAC recommendations to 
attempt to develop facility and patient level criteria for LTCHs. We 
hope that the LTCH industry will work closely with CMS to pursue this 
endeavor during the transition period.
    Comment: Several commenters maintained that we did not present 
convincing data-based evidence in the RY 2008 LTCH PPS proposed rule 
and that in the absence of meaningful data no meaningful comments can 
be made. Several commenters questioned why we are seeking to expand the 
25 percent threshold policy to non-co-located LTCHs when we have not 
yet evaluated data from the FY 2005 implementation of the same payment 
adjustment for co-located LTCHs and LTCH satellites. Some commenters 
included data analyses that they believe refutes the policies that we 
proposed in the RY 2008 LTCH PPS proposed rule. The commenters urged 
CMS to review the most current hard data from LTCHs and to base all 
policy formulations on the conclusions that can reasonably be drawn 
from such data. Several commenters contended that we proposed policy 
based on anecdotes rather than on hard data and that we have accused 
the LTCH industry based on this anecdotal evidence. The commenters 
requested that we provide data, rather than anecdotal evidence of the 
purported ``gaming'' that we believe is occurring between the acute 
hospitals and LTCHs. The commenters further contended that the research 
produced by RTI should be the foundation of future CMS rulemaking.
    Commenters also maintained that rather than continuing to increase, 
the absolute number of LTCHs has decreased by one during 2006, and 
therefore, we should not continue to be concerned about industry 
growth.
    Response: We disagree with the commenters' assertions regarding 
both our analyses and provision of the best available data evidence for 
the policies that we proposed and that this lack resulted in LTCH 
stakeholders being unable to submit ``meaningful comments.'' In fact, 
we received 270 comments in response to the RY 2008

[[Page 26930]]

LTCH PPS proposed rule (some of which were very lengthy). We believe 
that the concerns expressed in these comments, which we present in 
appropriate sections of this final rule by topic, are indicative that 
meaningful comments were made. In determining our final policy, we are 
fully aware of the serious attention that our commenters invested in 
their policy recommendations, as well as in the challenges that they 
have articulated presented. Moreover, regarding assertions that we have 
not provided data that indicates our policy rationale, we note that in 
December 2006 we posted the RTI report in its entirety on the CMS Web 
site at http://www.cms.hhs.gov/LongTermCareHospitalPPS/02a_RTIReports.asp#TopOfPage. This report contains detailed data analyses 
which were the bases of RTI's findings and significantly impacted our 
decisions to propose specific policies.
    With regard to the data analyses that some commenters submitted 
challenging the correlation that we proffered, between the discharges 
to LTCHs and fewer high cost outlier cases at referring acute care 
hospitals we would assert that our data analyses (described below) 
support this theory.
    An analysis of our MedPAR data from acute care hospitals regarding 
their LOS during CY 2003 to their LOS during CY 2005 in markets where 
LTCHs opened in CY 2004. Our data analysis focused on acute care 
hospitals that had been the source of at least 25 percent of the LTCH 
discharges. (Our data indicated that these communities already had some 
LTCHs at the time when these additional LTCHs opened.) We compared 
304,650 acute care cases in CY 2004 to 316,816 cases in CY 2005. In CY 
2003, there were 7,586 outliers and in CY 2005, there were 5,858. The 
percentage of outliers in the acute care hospitals decreased from 2.5 
percent to 1.8 percent and the numbers of patients that were admitted 
to LTCHs in those communities increased from 2,128 in CY 2003 to 6,597 
in CY 2005. Furthermore, the percentage of acute care hospital 
discharges to LTCHs increased from 0.7 percent in CY 2003 to 2.1 
percent in CY 2005. The percentage decline in total outliers between 
the CY 2003 and CY 2005 was -25.7 percent. The increase in LTCH 
discharges from CY 2003 to CY 2005 was 198.1 percent.
    We would also quote section 3.3 ``the RTI report which summarizes 
its detailed data analyses (which are included in the Report) by noting 
that LTCH admissions were less likely to have had an outlier payment 
during the prior acute stay (8 percent compared to 12 percent for non-
LTCH admissions). The ALOS in the acute hospital [prior to discharge to 
the LTCH] tended to be longer for the LTCH admissions, averaging 13.5 
days compared to only 11 days for the other acute admissions.'' (p. 51) 
This statement indicates that those patients that were admitted to the 
LTCH before achieving outlier status at the acute care hospital were 
``sicker'' than other patients in those DRGs, which is logical since 
they continued to need acute hospital-level treatment. (Elsewhere in 
these responses, we respond, in greater detail, to comments that we 
received that challenge our benchmark assumption that reaching outlier 
status signifies the delivery of a full episode of care. To briefly 
summarize, it is our belief that a patient at an acute care hospital 
who still is in need of acute hospital-level care upon discharge from 
that setting, may not have completed the treatment for which the 
Medicare is paying) and is using the LTCH as a unit to treat those 
patients.
    In particular, we suggest that commenters revisit Table 3-7 in the 
RTI Report which indicates that while most patients constituting LTCH 
admissions were previously hospitalized, only a small proportion of 
those in the acute hospital generated an outlier payment (less than 20 
percent) except for the DRG 452: Complications of Treatment with CC 
(21.3 percent) and DRG 204: Disorders of the Pancreas Except Malignancy 
(26.2 percent). About one-fourth of the top 50 LTCH conditions had 15 
to 20 percent of their admissions qualifying for an acute outlier 
payment before being admitted to the LTCH. These included many of the 
medically complex conditions such as: DRG 475: Ventilator Support 16.9 
percent); DRG 316: Renal Failure (19.3 percent); DRG 076: Other 
Respiratory System OR Procedures with CC (19.2 percent); DRG 188: Other 
Digestive System (19.5 percent); DRG 483: Tracheostomy (17.8 percent); 
DRG 461: OR Procedures (17.8 percent); DRG 331: Other Kidney and 
Urinary Tract Diagnoses with CC (17.1 percent); and DRG 440: Wound 
Debridements for Injuries (19.4 percent). Still, the majority of LTCH 
admissions were admitted before reaching outlier status in the acute 
hospital'' (p. 48).
    We believe that the above data supports our extension of the 25 
percent threshold payment adjustment which distinguishes between 
patients in need of further acute level care who were admitted to a 
LTCH or satellite after receiving a full episode of care at the 
referring acute (that is, they reached outlier status at that hospital) 
and those needing further acute treatment that were admitted to the 
LTCH following what appears to be a truncated stay at the acute care 
hospital.
    In response to the comments that suggested that our extension of 
the 25 percent payment threshold policy was premature since as yet, we 
had no data on the impact of the 25 percent policy on co-located LTCHs, 
because the policy is not yet fully phased-in, we reiterate that 
regulating inappropriate patient shifting to LTCH HwHs and satellites 
from their co-located hosts does not negate the need to address the 
same issue between LTCHs and referring hospitals with which they are 
not co-located. We remain concerned about LTCHs with a pattern of 
patients who need acute hospital-level care after having received 
treatment for which Medicare has paid under the IPPS that are 
immediately admitted for additional hospital-level treatment to other 
acute care hospitals (LTCHs) for another Medicare payment under the 
LTCH PPS.
    In response to commenters who found fault with our attention to 
anecdotal information regarding the behavior of some LTCHs, we note 
that determinations are based on our policy on a variety of factors, 
including information from our FIs, questions and comments from LTCH 
consultants and attorneys, LTCH advertisements in both print media and 
the internet that provided us with irrefutable information about LTCH 
behavior. We believe that it is our fiduciary responsibility to guard 
the Medicare Trust Fund from inappropriate and unnecessary 
expenditures. Therefore, we believe that any and all information 
regarding the LTCH industry is pertinent to our responsibility to be 
proactive in the regulatory process. For example, we are aware of a 
growing trend by some LTCHs to establish ``units dedicated to mental 
health,'' identified as a ``Mental Health Unit'' or ``Medical-
Behavioral Unit.'' Assuming that the LTCH organization is cognizant of 
the preclusion against the establishment of excluded units (for 
example, psychiatric or rehabilitation) in a hospital that is excluded 
from the IPPS (see Sec.  412.25((a)(1)(ii)) establishment of such 
titular ``units'' would be reimbursed by Medicare under the LTCH PPS. 
Clearly patients in any acute care hospital setting (and LTCHs are 
acute care hospitals) may need psychiatric intervention, but given our 
regulations governing excluded psychiatric units at Sec.  412.27 and 
the specific COPs for psychiatric facilities at Sec.  482.62, we are 
very interested in LTCHs that are advertising mental health care as a 
primary patient service.

[[Page 26931]]

    Regarding the comments that note an absolute decrease in the number 
of LTCHs that were established in FY 2006, we note that we are well 
aware of continuing growth in the LTCH industry, which in some part, 
takes the form of large LTCH companies purchasing existing LTCHs and 
expanding the facilities, as well as the shifting landscape of the LTCH 
industry brought about by continuing corporate mergers. (Our 
information in this regard comes to us from FIs, corporate press 
releases from LTCHs, newsletters from LTCH trade associations, 
corporate Web sites, and investment newsletters. For example, one Web 
newsletter announced, ``Private Equity Firms Target Long-Term Acute 
Care Hospitals.'' The article continued, ``Two operators of long-term 
acute care hospitals, or LTACS, agreed to be bought by private equity 
firms, but for very different reasons. Two notable deals were announced 
this month targeting companies that manage long-term acute care 
hospitals, or LTACs. In both cases, leveraged buyout firms initiated 
transactions to buy out operators of multiple LTACs. The rationale for 
each, however, is different, reflecting different business plans and 
different stages in the growth cycles of the two companies.''
    With respect to the commenter's suggestion that we have alluded to 
gaming of the Medicare program by the LTCH industry and that we have 
provided no substantiation for these beliefs, we would note that we 
have participated in meetings, conference calls, correspondence, 
evaluated currently-used patient criteria, arranged site visits with 
LTCHs (and other providers that treat ``long-term care hospital-type'' 
patients), and participated in the Technical Expert Panel (TEP) that 
was held in January 2007. While we have met and worked with highly 
skilled physicians and administrators of a number of LTCHs and we are 
aware that many LTCHs provide high quality services to their patients, 
we are contemporaneously aware of activity by the LTCHs that appear to 
be directed towards both evading the intent of Medicare policy and also 
maximizing Medicare payments.
    We are also aware that the dynamic of patient shifting from acute 
care hospitals to LTCHs are well understood throughout the health care 
industry. In the February 28, 2000 issue of Critical Care Medicine, an 
abstract of an article entitled, ``The impact of long-term acute-care 
facilities on the outcome and cost of care for patients undergoing 
prolonged mechanical ventilation'' concluded that ``Patients undergoing 
prolonged ventilation have high hospital and 6-month mortality rates, 
and 6-month outcomes are not significantly different for those 
transferred to long-term acute care facilities * * *. Acute care 
hospitals can reduce the amount of uncompensated care by earlier 
transfer of appropriate patients to a long-term acute care facility.'' 
(Seneff MG, Wagner D, Thompson D, Honeycutt, C, Silver MR, Department 
of Anesthesiology and Critical Care Medicine, The George Washington 
University Medical Center).
    Lastly, we note that we believe that the policies that we are 
finalizing in this final rule are built on solid data analysis, 
reasonable interpretation of information that has come to our attention 
from the TEPs and the LTCH industry, and our obligation to propose 
proactive policy initiatives for the long-term benefit of the Medicare 
program.
    Comment: Several commenters offered data indicating that patients 
admitted to LTCHs following an acute care hospital stay are generally 
grouped into a different DRG at the LTCH from the one to which they 
were grouped in the acute care hospital. The commenter used the example 
of ventilator dependent patients, who typically fall into a 
tracheostomy DRG (561/562) upon discharge from the acute care hospital 
but fall under the respiratory failure DRG (475) upon discharge from 
the LTCH, suggesting that therefore the two episodes of care are 
distinct and separate. The commenters also claimed that even those 
patients with the same DRG in each setting do not constitute a single 
episode of care because of the nature of the institutions and the 
differences between them. Therefore, the commenters asserted, there can 
be no actual claim that there is double payment for the same services 
for LTCH patients coming from IPPS hospitals. In focusing on the 
appropriate lengths of stay at acute care hospitals preceding a LTCH 
admission, many commenters quoted the RTI study that notes that, 
``Understanding whether acute hospitals are already paid for these 
services or whether LTCHs are providing specialized services not 
available in the acute hospitals is poorly understood'' (p. 55). The 
commenters believe that a CMS contractor has contradicted statements 
that we made. Therefore, the commenters state that the extension of the 
25 percent threshold payment adjustment to discharges of patients 
admitted from referring hospital not co-located with the LTCH or the 
satellite of a LTCH should not be finalized. Several commenters 
suggested that if we did finalize this payment adjustment, it should be 
limited only to those situations where the same DRGs were assigned to 
both the acute care stay and the LTCH stay.
    Response: Our data analysis of the 2005 MedPAR files indicates 
that, generally, when a patient is admitted to a LTCH immediately upon 
discharge from an acute care hospital, Medicare is paying for treatment 
under different DRGs for each submitted claim. However, we disagree 
with the commenters' assertions that there are clear distinctions 
between ``episodes of care'' for a patient who is originally treated at 
an acute care hospital and eventually admitted to a LTCH, whether or 
not the same DRG is assigned to each stay. Patients being cared for in 
both the acute care hospital and LTCH settings are very ill, 
complicated patients with multiple comorbidities, and typically there 
is not one clear or distinctive principle diagnosis that is the cause 
of the patient's failure to get well, but rather a constellation of 
problems that necessitate further treatment. Nor will one ``magic'' 
intervention or procedure necessarily cure the patient's problems. DRG 
assignment is based on software that attempts to group patients 
according to individual principal diagnoses and surgical procedures, 
but the clinical reality is that, especially in the case of complex 
patients with multiple medical problems, DRG assignment can be a 
limited way of defining or characterizing the nature of a particular 
episode of care for a given patient.
    The example of respiratory failure that the commenter provides is 
especially illustrative of this point. A patient who suffers from 
respiratory failure in the acute care hospital, if it does not resolve, 
will eventually require a tracheostomy, which will then group the 
patient to the tracheostomy DRG. The tracheostomy itself is a procedure 
that is usually done on a semi-elective basis when it becomes apparent 
that the patient will require prolonged mechanical ventilation. If that 
patient subsequently is admitted to an LTCH, that discharge will 
necessarily group to the respiratory failure DRG, because the 
tracheostomy has already been performed during the acute care 
hospitalization. However, the clinical characteristics of the patient 
and the type of care that is required, have not materially changed, and 
the LTCH stay can hardly be viewed as a separate or unique clinical 
episode from the immediately preceding acute care hospital stay. From a 
clinical perspective, in the absence of a sharp line of distinction, or 
a consistent characterization, of exactly which

[[Page 26932]]

patient is appropriate for admission to the LTCH, as well as when that 
patient should be transferred from the acute care hospital setting to 
the LTCH setting, we have difficulty understanding when, for example, 
the patient with respiratory failure stops being appropriately cared 
for in the acute care hospital and paid for under the IPPS and begins 
to require care in the LTCH. Recognizing that both settings provide 
acute hospital level care, and also noting that in areas where LTCHs 
are not available this level of care is provided exclusively in the 
acute care hospital until the time of discharge to a nonacute setting, 
it is therefore appropriate to expand the 25 percent policy to all 
instances in which a referring hospital is discharging so many patients 
to the LTCH or satellite that it appears to have created a virtual unit 
of the referring hospital at the LTCH or LTCH satellite.
    To those commenters who quoted a sentence (out of context) from the 
RTI report, we note that a thorough reading of that page indicates that 
RTI's purpose does not contradict, but rather reinforces the above 
stated concerns. RTI's full intent may be best understood from the 
following paragraphs, which includes the quoted sentence:

    ``Examining the acute length of stay differences was also useful 
for understanding the relative role of general acute and LTCHs in 
treating these severely ill populations. The multivariate work 
showed that LTCH users have a shorter acute inpatient length of 
stay. Understanding whether acute hospitals are already paid for 
these services or whether LTCHs are providing specialized services 
not available in the acute hospital is poorly understood.
    Better measures of acuity are needed to gauge the differences in 
medical or functional impairments between patients using LTCHs and 
those using other settings. Additional work in Phase 3 of this 
project will examine the discharge transitions for acute hospital 
discharges in areas that lack LTCHs. Using propensity score methods 
to match patients on diagnosis, severity, and additional factors, as 
well as control for differences in the availability of services will 
be important for understanding the potential overlap between acute 
and LTCH admissions.'' (p. 55)

    Therefore, we continue to believe that clinical insight offers a 
significant challenge to the commenters' assertions regarding the 
alleged existence of some ``bright line'' which clearly indicates when 
it is no longer appropriate for a patient to continue treatment in an 
acute care hospital. Particularly in the case of patients whose 
conditions fall into the broad category of ``medically complex,'' 
clinicians from different provider settings from throughout the country 
have evaluated existing instruments (that is, Interqual, or MassPRO) 
and although there appears to be no difficulty in defining a 
``hospital-level long-term care type patient'' there has been 
considerable difficulty in determining the assignment of such patients 
to particular provider settings (acute versus LTCH) for purposes of 
Medicare payment policy.
    Accordingly, we are finalizing the extension of the 25 percent (or 
applicable percentage) threshold policy so that the payment adjustment 
applies to all subclause (I) LTCHs. We believe it is our responsibility 
to protect the Medicare Trust Fund from making excessive payments for a 
single episode of care.
    Comment: Many commenters suggested alternatives to specific aspects 
of the proposed expansion of the proposed 25 percent threshold payment 
adjustment in the event that we decided to finalize it. A number of 
commenters suggested that we grandfather existing ``freestanding'' 
LTCHs from compliance with the policy because of the significant shift 
in operation that our policy would mean to their on-going operations. 
Similarly, these commenters also suggested grandfathering those LTCHs 
that were already under development (that is, hospitals that were in 
their 5 of 6 month qualification period for LTCH designation as set 
forth in Sec.  412.23(e)(3)). Several commenters further suggested that 
we set a 50 percent threshold for all existing LTCHs and those under 
development and apply a 25 percent threshold for new LTCHs beginning on 
July 1, 2007. Other commenters asked us to set the percentage threshold 
permanently at 50 percent for non-co-located LTCHs in light of our 
``lesser policy concerns'' than we have with LTCH HwHs and satellites. 
Several commenters urged us to set the threshold for LTCHs in 
``underserved areas'' at 75 percent because of the disparate impact 
that could be anticipated from implementing this policy. Commenters 
suggested that we establish a 50 percent threshold for urban LTCHs and 
a 75 threshold for rural or market dominant LTCHs. We also were 
requested to apply ``temporary, limited'' expansion of the threshold 
while patient and facility level characteristics are being developed 
and implemented for LTCHs over a 3-year period with the following 
percentage thresholds: year 1-75 percent; year 2-62.5 percent; year 3-
50 percent. According to the commenter, this policy would sunset after 
year 3 and be replaced by facility and patient criteria.
    Response: We appreciate each of the recommendations made by the 
commenters as to alternatives to extending the 25 percent threshold 
payment adjustment policy to all subclause (I) LTCHs effective July 1, 
2007. We have considered the commenters concerns as we noted earlier, 
we are finalizing the payment adjustment policy but (as describe 
elsewhere in these responses), we have provided for a 3-year transition 
period for all LTCHs and LTCH satellites that will be affected by these 
changes. Commenters suggested that we exempt currently existing and 
``under development'' LTCHs from the policy because it would require a 
substantial change in the way that these facilities currently operate. 
In response to the commenter's question regarding ``under development'' 
LTCHs, we are applying the transition to these hospitals as applicable, 
once they become LTCHs (for example, if a hospital has its first cost 
reporting period as a LTCH beginning on July 1, 2008, it will be 
subject to the 50 percent threshold.) We are aware that these new 
regulations will impact on admission policies at LTCHs (as well as 
discharge practices at acute care hospitals for patients that continue 
to need hospital-level care) but such changes are our stated purpose in 
establishing the original 25 percent threshold payment adjustment 
policy for co-located LTCHs at Sec.  412.534 and it continues to be our 
goal for all LTCHs and satellites as we finalize Sec.  412.536. We 
believe that it is essential that LTCHs reevaluate their existing 
practices for admittances from referring hospitals. As specified 
elsewhere in these responses, our data indicates that referring 
hospitals, primarily acute care hospitals, are discharging patients to 
LTCHs for continued acute level care when many of these patients could 
continue to be treated in the acute care hospital. This is particularly 
true in cases where patient care falls into the broad category of 
``medically complex.'' We believe that Medicare should not be 
generating two full payments, one under the IPPS and one under the LTCH 
PPS for what is essentially one episode of care. Although we have had 
historic concerns with patient-shifting between co-located hospitals, 
we also believe that it is appropriate to apply the 25 percent (or 
applicable percentage) threshold payment adjustment to those LTCHs and 
LTCH satellites that had previously been unaffected by Sec.  412.534, 
but have similar behavior patterns as co-located HwHs and satellites. 
(We have responded to concerns about rural, single urban, and

[[Page 26933]]

MSA dominant LTCHs elsewhere in these responses.) We would once again 
remind commenters that the payment adjustment is only applicable for 
Medicare discharges in excess of the applicable threshold from an 
individual referring hospital for cases that have not reached outlier 
status at the referring hospital. We believe that an appropriate and 
judicious admission policy, on the part each LTCH, could still enable 
it to admit a specific subset of patients from a referring hospital, 
prior to the patients' reaching outlier status, and prior to exceeding 
the applicable threshold. Therefore, even though we continue our work 
with RTI in Phase 3 of their project to see if we can identify 
appropriate patient and facility-level criteria for LTCHs, we do not 
see the development of those criteria and the development of those 
regulations as contradictory aspects of our fiduciary responsibility 
for the Medicare program. We further believe that it may be appropriate 
to establish policies under the LTCH PPS that guard the Medicare Trust 
Fund from duplicative payments for one episode of patient care even if 
we are able to develop criteria that identify LTCHs and LTCH-
appropriate patients.
    Comment: Several commenters expressed concern that the proposed 
expansion of the 25 percent policy would have a negative impact on 
Medicare beneficiary access to care, physician choice and authority, 
and on families of patients who would benefit from LTCH care. 
Specifically, the commenters noted that LTCHs would be ``forced to use 
a flat 25 percent for each referring hospital, thereby limiting access 
for Medicare beneficiaries to the level of care deemed most appropriate 
by their physician.'' Another commenter stated that the implementation 
of the 25 percent rule would force acute care hospitals to keep 
patients beyond the period for which is medically-appropriate because 
LTCHs would not be able to accept patients once they met the 25 percent 
threshold and that overcrowding of acute hospital beds would be the 
result of the 25 percent policy. Another commenter stated that this 
policy may result in some patients being transferred to skilled nursing 
facilities (SNFs) instead of LTCHs, even in cases in which LTCH care 
would be more appropriate.
    Response: We do not believe that the 25 percent policy is 
unnecessarily ``burdensome'' or ``onerous'' to LTCHs for several 
reasons. The 25 percent policy does not preclude the transfer of any 
patients from short term acute care hospitals to LTCHs when such 
transfer is deemed medically necessary and appropriate by the treating 
physician; rather, it adjusts the payment methodology that is applied 
to the LTCH for discharges that exceed the applicable threshold. Also, 
as we noted in the RY 2007 LTCH PPS proposed rule, the payment policy 
linked to the 25 percent rule helps to remove the perverse incentive 
that may exist between acute care hospital and LTCH facilities to evade 
Sec.  412.534 and to prevent both the acute and LTCH from receiving two 
full Medicare payments for what is essentially one episode of care. 
Furthermore, this policy also helps to ensure that appropriate 
transfers from acute to LTCH facilities are occurring based on medical 
considerations, rather than on the basis of maximizing Medicare 
payments. We believe that the preexisting relationship between LTCHs 
and their referring hospitals can be utilized to maximize quality 
patient care while also making it feasible for LTCHs to comply with the 
25 percent policy.
    With respect to the commenter's concern that the 25 percent policy 
would result in transfers to SNFs when LTCH care would be more 
appropriate, we note that since we are only dealing with patients who 
require hospital level of care, it would not be appropriate for 
physicians to transfer these patients to a SNF. However, we do note 
that it may be appropriate for a subset of LTCH patients, after their 
condition has stabilized to be transferred to a lower level of care, 
such as a SNF.
    Comment: One commenter noted that Michigan is a ``certificate of 
need'' State and that the number of LTCH beds is determined and 
approved by the State. The commenter further noted that Michigan FIs 
require that Michigan LTCHs use InterQual admissions standards and 
recommends that we exempt States who have programs similar to the 
``certificate of need'' because they already adhere to InterQual 
admissions standards, and therefore, are only treating appropriate 
``LTCH'' patients.
    Response: With respect to some LTCHs using InterQual criteria as 
the standard for admitting a patient, we note that as we stated in the 
RY 2007 LTCH PPS final rule, InterQual standards focus on the 
distinction between acute care and sub-acute care, that is, SNF-level 
of care, and determinations of ``medical necessity'' or ``inappropriate 
admission'' are based only on whether the patient should be 
hospitalized, rather than on whether the hospitalization should occur 
at an LTCH or at a general acute care hospital'' (71 FR 27869). 
Furthermore, we recognize and assume that all LTCHs should be using 
some form of clinical assessment or screening tool to identify 
appropriate admission candidates; the InterQual is just one model of 
such a tool that LTCHs may choose to use if they determine that those 
standards sufficiently identify appropriate patients for their 
facility. However, we note that the choice of which screening tool an 
LTCH chooses to use should have no bearing on the percentage of 
patients being admitted from a particular referring hospital because 
even under the expansion of the 25 percent policy, it is assumed that 
all LTCH admissions are hospital-level patients. As explained 
previously in this section, the expansion of the 25 percent policy is 
intended to address the situation of an LTCH or satellite that is 
treating hospital-level patients since it has exceeded the applicable 
threshold for discharging patients that were admitted from any 
individual referring hospital and is serving as a unit of the referring 
hospital. Therefore, we are not exempting LTCHs in ``certificate of 
need'' States from the 25 percent policy, but again note that they, 
along with all other affected LTCH and LTCH satellites will be given a 
3-year transition period with respect to implementation of this policy.
    Comment: One commenter supported the proposed 25 percent rule and 
believes that the SSO provision should not apply to subclause II and 
satellite LTCHs.
    Response: We are finalizing our proposal to exempt subclause II and 
satellite LTCHs from both the 25 percent rule expansion and the SSO 
policy that we are finalizing in this rule.
    Comment: One commenter stated that implementation of the 25 percent 
rule would result in the following: (1) The loss of local LTCH services 
in all areas except large metropolitan areas; (2) Patients having to 
endure long ambulance rides to access LTCH care and possibly being 
driven past LTCHs with available beds; (3) Families having to drive 
longer distances to visit their loved ones who may be in LTCHs for 
extended periods of time; and (4) Some companies, who have already 
invested in building new LTCHs, possibly being faced with bankruptcy 
because of the reduced payment associated with the 25 percent rule.
    Response: We disagree with the commenter and we do not expect that 
the 25 percent policy will result in a loss of local LTCH services (in 
all but large metropolitan areas). Instead, we expect that clinical 
appropriateness will continue to be used as the standard for LTCH 
admissions. Since we do not believe that access to LTCH services will 
be negatively affected by this rule,

[[Page 26934]]

we do not believe that beneficiaries will need to endure long ambulance 
rides to reach an LTCH, nor will families of Medicare beneficiaries 
have to drive long distances to visit their loved ones. We also remind 
the commenter that LTCHs will continue to be paid full LTC-DRG payments 
as long as the 25 percent threshold is not exceeded by any one referral 
source. In addition, any patients that reach HCO status prior to being 
transferred to the LTCH would not count towards the 25 percent policy. 
With regard to the commenter's concern about companies being faced with 
a financial loss in light of the 25 percent policy expansion, we note 
that we continue to believe that the LTCH industry can adapt their 
admission practices to assure that payments will not be reduced, except 
in rare circumstances. The LTCHs would do this by targeting those 
patients at referring hospitals that had reached outlier status.
    Comment: Some commenters expressed concern that the proposed 25 
percent rule would override physician authority and limit physician 
choice in deciding the most appropriate level of care for his or her 
patients.
    Response: We disagree that this policy overrides physician 
authority and choice. Rather we believe that this policy appropriately 
adjusts payments to LTCHs so that the payments reflect the amount of 
care that is actually provided in the LTCH setting. Furthermore, this 
policy does not require a change in physician clinical decision-making; 
rather, it simply seeks to remove any financial incentive that could 
encourage an LTCH to admit a patient from an acute care hospital prior 
to that patient receiving a full episode of care at the acute care 
hospital. Additionally, we would expect that physicians would continue 
to use their clinical expertise in assessing the level and type of care 
that is most appropriate for their patients and that the physicians' 
clinical standards would not be affected by hospital payment policies.
    We do not expect that the payment policies implemented in this 
final rule will deter physicians from making referrals to LTCHs when it 
is clinically appropriate to do so. We also believe that appropriate 
clinical care, not payment, should drive physicians' decisions with 
respect to patients' length of stay and level of care. Additionally, we 
note that physicians' clinical decisions do not negate the fact that 
payments should be aligned with the care and resource utilization given 
in each provider setting.
    Comment: Several commenters stated that the payment reductions 
associated with the proposed 25 percent rule expansion and the proposed 
``very SSO'' policy violate the principles of a PPS in which some cases 
are expected to cost less than others.
    Response: We disagree that these policies violate the principles of 
averaging found in a PPS. We note that a fundamental premise of the PPS 
system is that where the costs of some cases may exceed their payment, 
the opposite is also likely to happen (that is that the costs of some 
cases will be lower than their payment). As we stated in last year's 
LTCH PPS final rule, ``* * * while some types of cases are always 
expensive for a hospital to treat, others are, in general, less costly, 
so it is assumed that hospitals under a DRG-based system, therefore, 
can typically exercise some influence over their case-mix and their 
services to achieve fiscal stability'' (71 FR 27863). The principles of 
a PPS begin to break down when there are extreme outliers that are not 
consistent with the averages calculated, especially when the extreme 
outliers constitute a disproportionate amount of cases. Additionally, 
we are attempting to maintain appropriate payment weights for the DRGs 
by adjusting the LTC-DRG weights for SSO cases. (For a full description 
of this process, see 71 FR 47978 through 47985). We note that the 
effect of this adjustment allows the LTC-DRGs to be recalibrated at a 
weight that is truly representative of average cases instead of at a 
weight that is skewed towards shorter than average (and presumably, 
less costly) cases. We also believe that applying the 25 percent (or 
applicable percentage) threshold payment adjustment to discharges from 
LTCHs that were admitted from any referring hospital is not a 
contradiction of the averaging principle intrinsic to PPSs. In fact, 
one of our rationales for establishing the percentage threshold payment 
adjustment is to preserve the integrity of the averaging principle 
under the IPPS because of our concern regarding premature discharges of 
patients still requiring acute hospital-level care to another acute 
care provider (and generating another Medicare payment) prior to that 
case reaching outlier status. Moreover, if LTCHs adjust their 
procedures so that patients beyond the applicable threshold that are 
discharged from referring acute care hospitals prior to their LTCH 
admission have received a full episode of care at the discharging acute 
(that is, they reach outlier status), Medicare payment for LTCH 
discharges will be based on the otherwise unadjusted LTCH PPS payment, 
which has been developed based upon averaging principles.
    Comment: Some commenters said that the proposed 25 percent rule 
would be duplicative of the payment adjustment made under the IPPS 
post-acute transfer policy. One commenter noted that ``* * * 85 percent 
of DRGs applicable to short-term acute care hospital discharges to 
LTCHs are subject to [the post-acute transfer] policy.'' Another 
commenter asked CMS to comment on why the IPPS post-acute transfer 
policy does not appropriately adjust for payment when cases transferred 
from the acute care hospital ultimately become SSO discharges in the 
LTCH setting.
    Another commenter suggested that we provide policies under the 
acute IPPS to address inappropriate or early discharges and requested 
that we use post-acute transfer rules, re-admission rules, and DRGs for 
acute care hospitals to address the issue of inappropriate transfers 
instead of penalizing LTCHs.
    Response: As we have discussed in the previous LTCH final rules, 
the IPPS post-acute transfer lessens the incentive for an IPPS hospital 
to transfer a patient to another hospital early in the patient's stay 
to minimize its costs while still receiving the full DRG payment from 
Medicare. Although the post-acute care transfer policy only affects 
DRGs that meet the criteria specified under Sec.  412.4, we continue to 
monitor trends in post-acute transfers. In addition, we may make 
additional DRGs subject to the IPPS post-acute transfer policy if the 
data demonstrate that it is appropriate to do so. Although we expect 
the post-acute transfer policy to have an impact on the discharge 
behavior of acute care hospitals because of the reduced payments that 
they will receive for qualified discharges, the post-acute transfer 
policy does not necessarily affect the issues being addressed by the 
SSO policy change. Both, the IPPS post-acute transfer policy and the 
proposed RY 2008 SSO policy, help to ensure that Medicare payments are 
appropriate given the types of treatment provided in each setting.
    We believe that the revised payment formula for SSO patients that 
we are finalizing will appropriately pay LTCHs for delivering services 
to patients who do not otherwise require the lengths of stay that are 
characteristic of LTCHs. The SSO policy will address payments to LTCHs 
for patients discharged from the acute care hospital even after the 
geometric ALOS.
    With respect to the comment about the 25 percent policy being 
duplicative of the IPPS post-acute transfer provision, we would note 
that the post

[[Page 26935]]

acute transfer policy focuses on a truncated length of stay at an acute 
care hospital that will be paid for under the IPPS, prior to the case 
reaching the geometric mean LOS for that DRG as specified in Sec.  
412.4(c) and (f). The policy that we are finalizing focuses on 
determining the appropriate payment to the LTCH, where the patient who 
has already been treated at the acute care hospital (up to the 
geometric mean LOS) has been ``transferred'' to the LTCH care prior to 
receiving full treatment at the ``transferring'' hospital. We believe 
such a stay is a continuation of the patient's original stay at the 
first hospital, and therefore, that Medicare should pay for such care 
based on a LTCH PPS payment adjusted to what would otherwise be 
equivalent to what would have been paid under the IPPS.
    Comment: Some commenters wrote in support of extending the comment 
period from 60 days to 6 months to allow commenters additional time to 
collaborate for the good of the industry.
    Response: We do not believe that a 6-month comment period is 
warranted or necessary. Consistent with section 1871 of the Act, we 
provide for a 60-day comment period. This deadline is necessary in 
order to implement and establish policy changes and payment updates 
under the LTCH PPS for an effective date of July 1.
    We received 270 comments during the comment period and we believe 
that both the number and the nature of the comments received 
demonstrate that the comment period was sufficient for commenters to 
submit relevant and meaningful comments.
    Comment: We received many comments that challenged the IPPS-
equivalent payment adjustment that we proposed to extend to LTCHs and 
LTCH satellites for Medicare discharges in excess of the 25 percent (or 
applicable percentage) threshold that had been admitted from referring 
hospital not co-located with the LTCH or the satellite of a LTCH.
    One commenter maintained that we have determined a payment penalty 
for freestanding LTCHs for every patient over a 25 percent threshold 
requiring long term care who is admitted from any single acute care 
hospital referral source. Another commenter stated that an LTCH could 
not have more than 25 percent of its patients referred from any one 
general hospital. Many commenters claimed that our proposal to pay 
``under the IPPS'' for LTCH cases ignores data indicating that LTCHs 
sustain higher costs than IPPS hospitals in treating Medicare 
inpatients that are grouped to the same DRG. The commenters stated that 
costs are higher than they are at acute care hospitals because patients 
are much sicker than at acute care hospitals. Several commenters 
included data that indicated that they would sustain substantial 
financial losses under this policy.
    Response: We disagree with the commenters who asserted that under 
Sec.  412.536 and also the revised Sec.  412.534 we have proposed to 
pay all LTCHs ``under the IPPS'' for discharges in excess of 25 percent 
or the applicable percentage) from an individual referring hospital. As 
we have noted elsewhere in these responses, if a Medicare beneficiary 
is treated at an acute care hospital and continues to need further 
acute hospital-level care, the patient could remain at the acute care 
hospital. A discharge from the acute care hospital and admission to a 
LTCH (which is also certified as an acute care hospital) could be 
appropriately seen as an extension of the stay at the discharging acute 
care hospital and as such, should not require Medicare to pay for 
``different resource use''. We further disagree with the commenters who 
call the extension of the 25 percent threshold a ``payment penalty for 
freestanding LTCHs for every patient over a 25 percent threshold who 
comes from any single acute care hospital'' and the commenter that 
stated that ``an LTCH could not have more than 25 percent of its 
patients referred from any one general hospital.'' As we have noted 
elsewhere in these responses, the 25 percent threshold is not a patient 
quota system. By virtue of the fact that more than 25 percent of the 
LTCH's discharges had been admitted from an individual referring 
hospital, it is apparent that the LTCH has an ongoing, working 
relationship with the referring hospital. This policy should lead LTCHs 
to carefully determine which patients should be admitted from the 
referring hospital. A patient who is hospitalized in an acute care 
hospital continues to require acute hospital-level care, generally 
should not be discharged before the referring hospital has provided the 
patient with a full episode of care. As discussed elsewhere in these 
responses, we believe that a patient stay that reaches the HCO 
threshold at an acute care hospital would be considered to have 
received a complete episode of care and for such a patient who has 
received a full episode of care at an acute care hospital, should that 
patient require further acute level care at a LTCH, Medicare will make 
an unadjusted additional payment to the LTCH.
    Our concern is that many patients that are admitted to LTCHs could 
have completed this care at the referring hospital to which they were 
originally admitted. As we have detailed previously in this preamble, 
in the FY 2005 IPPS final rule (69 FR 48916) we finalized a payment 
adjustment for co-located LTCHs (that is, HwHs and satellites at Sec.  
412.534), which provides that if a LTCH's or satellite's discharges 
admitted from its host hospital exceed 25 percent (or the applicable 
percentage) of its discharges for the LTCH HwHs or satellite's cost 
reporting period, an adjusted payment will be made at the lesser of the 
otherwise full payment under the LTCH PPS and an adjusted amount under 
the LTCH PPS that would be equivalent to what Medicare would otherwise 
pay under the IPPS. In determining whether a hospital meets this 
percent test, patients transferred from the host hospital that have 
already qualified for outlier payments at the host would not count as 
part of the host 25 percent (or the applicable percentage) and the 
payment for those patients would also not be subject to the adjustment. 
Those patients would be eligible for an unadjusted payment under the 
LTCH PPS. (Discharges admitted from the host before the LTCH crosses 
the 25 percent (or the applicable percentage) threshold would also be 
paid without the adjustment under the LTCH PPS (69 FR 49213). MedPAC 
submitted a comment that addressed its concerns with the 25 percent 
threshold policy for co-located LTCHs in the FY 2005 IPPS final rule.
    Specifically, the Commission noted that ``freestanding LTCHs also 
have strong relationships with acute care hospitals, and that where on 
average LTCH HwHs receive 61 percent of their patients from their 
hosts, freestanding LTCHs receive 42 percent from their primary 
referring hospital * * * [that] there are some risks in our proposed 25 
percent policy; (a) the 25 percent rule that only applies to LTCH HwHs 
and not to freestanding LTCHs and may therefore be inequitable; (b) it 
does not ensure that patients go to the most appropriate post-acute 
setting; (c) this approach may be circumvented by an increase in the 
number of freestanding LTCHs instead of LTCH HwH.'' As we stated in the 
FY 2005 IPPS final rule, ``MedPAC shares our concern that the LTCH 
payment system creates an incentive for unbundling of the IPPS in 
addition to overpayment for the care provided by LTCHs and that this 
concern is great, particularly, in the case of a LTCH HwH * * *'' (69 
FR 49211).
    In establishing the concept of ``functional separateness,'' in the 
FY 1995 IPPS final rule, we were identifying a broader phenomenon than 
just the relationship between a host

[[Page 26936]]

acute care hospital and a LTCH HwH or satellite of a LTCH. We also 
reviewed MedPAC's comment (discussed previously in this section) on 
non-co-located LTCH referral patterns and noted that despite the fact 
that we limited the payment adjustment established in FY 2005 to LTCH 
HwHs and satellites, ``* * * [w]e took considerable note of these 
comments and the specific information that they included'' (59 FR 
45391).
    We further stated that ``* * * [s]ince the October 1, 2004 
implementation of the payment adjustment for LTCH HwHs and satellites 
of LTCHs at Sec.  412.534, through our LTCH PPS monitoring initiative 
(see section X. of this preamble), we have become aware that the growth 
in the LTCH universe is now occurring through the development of 
freestanding LTCHs'' and that [r]eviews of public documents posted at 
the corporate Web site and analysis of the expected consequences of the 
policy at other investor-oriented sites describe a focus on building 
freestanding LTCHs, which we believe may imply a response to the 
payment adjustment for co-located LTCHs established under Sec.  
412.534.'' At that time, we noted data analyses from FY 2004 and FY 
2005 MedPAR files of sole-source (for example, one hospital referring 
to one LTCH) relationships between acute care hospitals and non-co-
located LTCHs and we stated that we believed that the danger of LTCHs 
functioning as ``units'' appears to be occurring not only in LTCH HwHs 
and LTCH satellites but also with freestanding LTCHs (71 FR 27877 
through 27879).
    We stated that, in many cases, these non-co-located LTCHs and their 
sole referral source may be functioning in ways that appear to have 
erased the line of ``functional separateness'' between these LTCHs and 
their referring acute care hospitals ((71 FR 27877 through 27879, 59 FR 
45391).
    Many commenters noted that they would experience considerable 
financial losses if we implemented the extension of the 25 percent 
threshold policy. We believe that our finalized policy will result in a 
behavioral change for LTCHs, and LTCHs will take steps to assure that 
no more than 25 percent (or the applicable percentage) of the 
hospital's discharges are patients that had not already reached outlier 
status at the referring hospital, to assure that all Medicare payments 
to LTCHs will be made, without adjustment under this policy.
    In response to the commenters that asserted LTCH patients are much 
sicker than acute care patients, we note that it is our understanding 
from our own data analyses, as well as work done by RTI that costs at 
LTCHs on a per diem basis are lower than costs for the same DRG at 
acute care hospitals. For example, RTI performed an analysis of the 
2005 MedPAR files and determined the per diem payment for the 20 most 
common LTC-DRGs treated in LTCHs as outlined in Table 6.

    Table 6.--Average Payment per Day for the Top 20 DRGs on LTCH Admissions, LTCH Versus Acute, 2005 MedPAR
----------------------------------------------------------------------------------------------------------------
                                                              LTCH                            Acute
                                               -----------------------------------------------------------------
                Top 20 LTCH DRGs                            Average    Average               Average    Average
                                                 Average   length of   payment    Average   length of   payment
                                                 payment      stay     per day    payment      stay     per day
----------------------------------------------------------------------------------------------------------------
475: Respiratory System Diagnosis With            $58,828       37.6     $1,815    $21,696       10.4     $4,187
 Ventilator Support...........................
271: Skin Ulcers..............................     26,652       28.8      1,009      5,525        6.6      1,298
087: Pulmonary Edema & Respiratory Failure....     36,552       26.6      1,498      7,211        6.3      1,893
079: Respiratory Infections & Inflammations        26,545       23.7      1,235      8,654        8.0      1,690
 Age >17 w CC.................................
088: Chronic Obstructive Pulmonary Disease....     20,822       19.4      1,156      4,441        4.8      1,369
089: Simple Pneumonia & Pleurisy Age >17 w CC.     22,356       20.8      1,167      5,189        5.5      1,355
249: Aftercare, Musculoskeletal System &           21,601       25.2        914      3,816        3.9      1,701
 Connective Tissue............................
416: Septicemia Age >17.......................     25,962       23.5      1,189      9,309        7.4      2,192
466: Aftercare w/o History of Malignancy as        20,962       22.3      1,018      4,637        4.7      1,919
 Secondary Diagnosis..........................
012: Degenerative Nervous System Disorders....     23,804       27.3        976      4,651        5.3      1,298
462: Rehabilitation...........................     19,149       22.6        903      9,621        9.3      1,125
263: Skin Graft &/or Debrid for Skin Ulcer or      41,006       42.0      1,054     11,929       10.3      1,930
 Cellulitis w CC..............................
127: Heart Failure & Shock....................     21,252       20.8      1,088      5,425        5.0      1,641
316: Renal Failure............................     25,420       23.3      1,190      7,114        6.1      1,936
418: Postoperative & Post-Traumatic Infections     25,766       25.6      1,090      6,348        6.0      1,633
430: Psychoses................................     15,019       27.0        651      3,955        7.6        869
238: Osteomyelitis............................     27,639       30.4        973      7,934        7.7      1,584
277: Cellulitis Age >17 w CC..................     20,005       21.7        980      4,464        5.3      1,182
144: Other Circulatory System Diagnoses w CC..     22,990       22.3      1,112      7,282        5.7      2,290
320: Kidney & Urinary Tract Infections Age >17     21,491       22.5      1,027      4,369        4.9     1,266
 w CC.........................................
----------------------------------------------------------------------------------------------------------------
Source: \\rtimas04\hser\Project\08686\006 IPPS\001 LTCH\common\jpotelle\programs\gage030.log.

    Furthermore, LTCHs utilize such information regarding their lower 
costs for treating patients in their advertising. We refer commenters 
to the following question and answer from the Internet site of a large 
LTCH chain: The question: ``How can a long term acute care hospital be 
less expensive than a short term acute care hospital?'' The answer: 
``Patients transferred to a long term acute care hospital are medically 
stable and do not require the critical care resources found in short 
term acute care hospitals, which are typically the most costly to a 
patient.''
    Comment: Many commenters challenged the basis of the proposed 
payment adjustment that would result if we finalized our proposed 
expansion of the 25 percent (or applicable percentage) payment 
threshold to LTCH and LTCH satellite discharges that were admitted from 
referring hospitals not co-located with the LTCH or the satellite of a 
LTCH. According to these commenters, in section 123(a)(1) of the BBRA, 
the Congress specified that the payment policies under the LTCH PPS 
should ``reflect differences in patient resource use and cost.'' These 
commenters asserted that payment adjustments under the LTCH PPS should 
not be based upon referral sources but rather on the ``costs of 
treatment'' and ``costs of care'' at LTCHs.

[[Page 26937]]

    Response: There is considerable precedent regarding our concerns 
with the financial implications to the Medicare Trust Fund from 
patient-shifting between acute and post acute settings that could 
result in two Medicare payments, one to the acute care hospital and 
another under the LTCH PPS for one episode of care. As noted elsewhere 
in these responses, this concern was first addressed by the Congress in 
establishing the post-acute transfer policy at section 1886(d)(5)(J) of 
the Act, which we subsequently implemented at Sec.  412.4. Furthermore, 
in the FY 1995 IPPS final rule, we addressed the financial consequences 
to the Medicare program of the patient-shifting that was occurring 
between acute care hospitals and co-located LTCHs. At that time, we 
noted that the ``effect of this process is to extend the [LTCH] 
exclusion to what is for all practical purposes a [LTCH] unit'' (59 FR 
45389).
    We further stated that paying the co-located LTCH as a hospital 
excluded from the IPPS ``may not be appropriate'' under these 
circumstances because ``[e]xclusion of long-term care units could 
inadvertently encourage hospitals to try to abuse the prospective 
payment systems, by diverting all long-stay cases to the excluded unit, 
leaving only the shorter, less costly cases to be paid for under the 
prospective payment systems' (59 FR 45389). Therefore, in accordance 
with sections 1102 and 1871 of the Act which ``confer authority on the 
Secretary to establish rules and regulations as may be necessary to 
administer the Medicare program'' (59 FR 45390), we established 
separateness and control criteria at then Sec.  412.23(e)(3)(i) which a 
co-located LTCH would have to meet to be paid as a hospital excluded 
from the IPPS. We believed at that time that ``the extent to which a 
facility accepts patients from outside sources can be an important 
indicator of its status as a separate facility'' (59 FR 45392). 
Therefore, at that time, among other indications of separateness, we 
adopted a ``75 percent referral standard'' which required that no more 
than 25 percent of the LTCHs discharges be admitted from its host to be 
paid as a hospital excluded from the IPPS. Accordingly, the source of 
an LTCH's patients as one potential variable since FY 2005 as to 
whether or not a LTCH receives Medicare payment under the payment 
system for hospitals excluded from the IPPS, has been a basis for 
determining whether or not a LTCH was an independent hospital or 
functioning as a unit of an acute care hospital.
    In response to the commenters who maintained that the BBRA mandates 
that payment under the LTCH PPS is to reflect the ``differences in 
patient resource use and costs'' at LTCHs, we note that in general, 
with respect to the development of the LTCH PPS, section 123(a)(1) of 
the BBRA requires, among other things, that the Secretary shall develop 
a PPS and that this PPS shall include an adequate classification system 
that reflects the difference in resource use and costs. Section 
307(b)(1) of the BIPA provides a modification of requirements with 
respect to the implementation of the PPS. It provides that the 
Secretary * * * shall examine the feasibility and the impact of basing 
payments under such a system on the sue 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. 
The Secretary shall examine and may provide for appropriate adjustments 
to the long-term care hospital payment system, including adjustments to 
DRG weights, area wage adjustments, geographic reclassification, 
outliers, update, and a disproportionate share adjustment * * *. We 
believe that our payment system fully satisfies these requirements.
    If a patient needing additional hospital-level acute care is 
discharged to another acute care hospital prior to completing a full 
episode of care at the first hospital, we believe that there is a 
strong presumption that the second hospital (the LTCH) is behaving like 
a step-down unit of the first acute care hospital and Medicare will be 
generating two payments, one under the IPPS and another under the LTCH 
PPS for one episode of care.
    Therefore, we are finalizing our extension of the 25 percent (or 
applicable percentage) threshold payment adjustment (after the 3-year 
transition period described elsewhere in this section) for discharges 
admitted from referring hospital not co-located with the LTCH or the 
satellite of a LTCH at Sec.  412.536 and grandfathered LTCHs and 
satellites at Sec.  412.534(h) under the authority of sections 123(a) 
of the BBRA of 1999 as amended by section 307(b) of the BIPA of 2000 
which authorize the Secretary to make adjustments under the LTCH PPS to 
LTCH hospitals.
    In addition, section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA, confers broad discretionary authority on the 
Secretary to develop and implement a PPS for LTCHs, specifically 
mandating only ``a per discharge prospective payment system'' that 
includes an ``adequate payment classification system * * * based on 
diagnosis-related groups (DRGS) that reflects the differences in 
patient resource use and costs, and shall maintain budget neutrality.'' 
Section 307 of the BIPA further provides that the Secretary ``may 
provide for appropriate adjustments to the long-term hospital payment 
system* * *''
    As discussed previously, we are finalizing the expansion of the 25 
percent (or applicable percentage) payment adjustment (after the 3-year 
transition period described elsewhere in this section) originally 
established for co-located LTCHs and satellites with regards to 
patients admitted to the LTCH from a co-located hospital at Sec.  
412.534 to govern the relationship between any referring hospital and 
an LTCH or LTCH satellite not co-located with that referring hospital. 
We believe that even in the absence of co-location, the same level of 
scrutiny must be applied to patient-shifting between acute care 
hospitals paid for under the IPPS and LTCHs to assure that Medicare is 
not paying under the IPPS and then generating another unadjusted 
payment under the LTCH PPS for one episode of care. As discussed 
elsewhere in these responses, an LTCH is certified as an acute care 
hospital and we believe that appropriate and responsible payment policy 
under the Medicare program dictates that if a patient at an acute care 
hospital paid under the IPPS continues to need treatment at an acute 
care hospital-level, that patient should remain where he or she is 
presently being treated until a full episode of care has been delivered 
prior to being discharged to a LTCH for a different episode of care. We 
continue to believe that our formulating a payment adjustment for 
treatment at a second acute care hospital (which is in fact just paid 
as a LTCH) is both appropriate and necessary for Medicare to be a 
prudent purchaser of medical care for its beneficiaries. As described 
above, under this payment adjustment, which we are finalizing at Sec.  
412.536 and at revised Sec.  412.534, during a cost reporting period, 
if an LTCH exceeds the 25 percent threshold of Medicare discharges from 
any referring hospital (or the applicable adjustment if the referral 
source is rural, MSA-dominant, or single urban) and the patient did not 
achieve outlier status at the referring hospital prior to being 
discharged to the LTCH, Medicare will make a payment adjustment for 
those discharges under Subpart O for cases beyond the threshold, based 
upon the lesser of the otherwise unadjusted payment or an adjusted LTCH 
PPS payment that is

[[Page 26938]]

equivalent to the amount that would otherwise be paid under the IPPS.
    Comment: Many commenters claimed that the proposed extension of the 
25 percent payment threshold is a consequence of our ``incorrect 
assertion'' that admission to an LTCH is only legitimate if the patient 
reaches HCO status at an acute care hospital prior to being discharged 
for admittance to a LTCH for additional treatment. The commenters 
believe that under this policy the only way that a patient can receive 
a full episode of care at an acute is by reaching HCO status. Several 
commenters quoted data which stated that the percentage of discharges 
from acute care hospitals which received full Medicare payment is 
generally close to the percentage of discharges that were admitted to 
LTCHs that also received a full payment at the acute. The commenters 
believe that this suggests that a full episode of care is being 
provided to all of these patients.
    Another commenter stated that it is ``grossly inappropriate'' for 
CMS to use outlier status as a statistical standard for whether a 
hospital has furnished a ``full ``episode of care in a case. Several 
commenters requested that if we object to two payments for a LTCH 
patient (that is, one to the referring IPPS hospital and another for 
payment under the LTCH PPS) we should address the fact that two 
payments would be generated if the patient was admitted to any post-
acute provider such as an IRF or a SNF.
    Response: The ultimate goal of our development of payment policy 
under the LTCH PPS is to assure appropriate and cost-effective payments 
under the Medicare program for services provided by LTCHs. We have 
informed the LTCH community in several forums, including notices, that 
although we were not challenging the high level of care delivered at 
many LTCHs, it was manifestly unclear how we could identify the point 
during an acute care hospitalization when a patient would cease to be 
appropriately placed in that setting such that admission to and further 
treatment in a LTCH would constitute a reasonable and fiscally 
responsible standard of care. Our data reveals that approximately 80 
percent of LTCH patients are admitted following care at an acute care 
hospital, where Medicare would have would have paid for their care 
under the IPPS. We maintain that if a hospitalized patient continues to 
need acute-level care that such a patient could remain in the acute 
care hospital for the purpose of receiving this care and not be 
discharged to another acute care level hospital, like a LTCH until the 
full episode of treatment has been delivered.
    Accordingly, where an LTCH has exceeded the applicable threshold 
and has thus demonstrated that it is in essence serving as a unit of 
the referring hospital, it is appropriate to adjust the otherwise 
payable LTCH PPS payment. We understand that some LTCHs specialize in 
areas such as ventilator care and weaning or wound care and that some 
of these facilities are highly respected across all provider settings. 
However, these same types of patients are being treated by acute care 
hospitals nationally with similar results. Furthermore, the largest 
percentage of LTCH patients nationwide would typically fall into the 
general category of ``medically complex.'' Nationwide, ``medically 
complex'' patients are certainly being successfully treated by acute 
care hospitals. We have thus far been unable to discover or establish a 
``bright line'' for purposes of demarcating an appropriate discharge 
from the referring hospital and then admission for appropriate and 
necessary treatment at an LTCH, paid for under the LTCH PPS. However, 
since patients who fit the ``LTCH profile'' are often HCO patients at 
acute care hospitals (particularly in areas where there is not high 
LTCH penetration), to determine if a hospital has exceeded its 
threshold we believe that it is both functional and reasonable to use 
reaching outlier status at an acute care hospital to determine the 
delivery of a full episode of care. (RTI report, p. 32-48)
    In response to the commenters who noted the comparability of the 
percentage of all discharges from an acute care hospital that had 
either reached or not reached outlier status (78 percent) with the 
percentage of acute care hospital patients who were subsequently 
admitted to LTCHs following their discharge from the acute care 
hospital who had either reached or not reached outlier status (also 78 
percent), stating that this proved that both had received a ``full 
episode of care,'' we do not agree with this conclusion. Furthermore, 
the commenters data is based on a universe of total discharges from 
acute care hospitals which is approximately 13 million discharges. The 
universe of discharges from acute care hospitals to LTCHs is less than 
1 percent of those discharges (approximately 112,000). Since the LTCHs 
are admitting such a small percentage of acute care hospitals' total 
cases, it is likely that LTCHs are targeting a specific subset of these 
patients that would have reached outlier status, if not for the 
presence of the LTCH.
    With regard to the comments on patients discharged from acute care 
hospitals that are admitted to other post-acute providers such as an 
IRF or a SNF, we would note that there is a distinction in the type of 
care provided at these settings and at an LTCH. An IRF provides a 
specialized post-acute service, that is, rehabilitation, for specific 
medical conditions. A SNF does not even provide hospital-level care. 
Since an LTCH is certified as an acute care hospital and in fact can 
provide the same type of care as an acute care hospital that is paid 
under the IPPS, it is necessary to address the possibility of an LTCH 
acting as an a unit of an acute care hospital and to differentiate 
between acute care patients being treated at an (short-term) acute care 
hospital and those being treated at a LTCH.
    We see no correlation between the fact that the commenter has 
identified a common percentage number and their conclusion that this 
proves that LTCH patients had received a full episode of care. The fact 
that nearly 90 percent of LTCH patients had come to the LTCH without 
achieving outlier status at the acute hospital, which had certainly 
been providing acute level care to the patient prior to their admission 
to the LTCH, indicates that for these ``medically complex'' cases, the 
acute care hospital may be routinely looking to discharge those 
patients to the LTCH, prior to their reaching outlier status and thus 
not receiving a full episode of care at the acute care hospital.
    Comment: Several commenters questioned whether the extension of the 
25 percent payment threshold would apply to those patients who had been 
admitted to an LTCH from some other provider setting than an acute care 
hospital, such as a IRF or a SNF?
    Response: The extension of the 25 percent threshold policy to 
discharges admitted from referring hospitals not co-located with the 
LTCH or the satellite of a LTCH at Sec.  412.536 is based on the policy 
that we finalized for co-located LTCHs at Sec.  412.534 for FY 2005 in 
the IPPS final rule (69 FR 48916). As we have stated above, we believe 
that many of the concerns that we expressed in our analysis of co-
located LTCHs, regarding the financially-advantageous but clinically 
unnecessary shifting of patients from acute care hospitals to LTCHs, is 
also an issue when the LTCH is not co-located with the referring 
hospital. Therefore, although the vast majority of host/LTCH HwH or 
LTCH satellite arrangements are between acute care hospitals and LTCHs, 
we specified in the FY 2005 final IPPS rule that under Sec.  412.22(e), 
any inpatient

[[Page 26939]]

hospital-level provider could serve as a host to an excluded hospital. 
Therefore, the policy adjustment that we were finalizing based upon the 
percentage of patients from one hospital that upon discharge became 
inpatients at a co-located LTCH, at Sec.  412.534, was also applicable 
when the host hospital was not an acute care hospital (69 FR 49198).
    Furthermore, we stated that applying the option of a discharge 
payment based upon the lesser of the otherwise unadjusted payment 
amount under Subpart O or payment under the LTCH PPS based upon an 
IPPS-equivalent amount was appropriate when the host hospital was an 
IRF, because ``[w]e believe that it is appropriate to pay the LTCH HwH 
or LTCH satellite that is co-located with an IRF or IPF and exceeds the 
applicable threshold at the IPPS equivalent rate and not a LTCH PPS 
rate that would be equivalent to the amount otherwise paid under the 
IRF or IPF PPS rate, since the HwH and the satellite LTCH are, as we 
explained earlier in this section, facilities that in many ways are 
comparable to an acute care hospital'' (72 FR 4811; 71 FR 4704 through 
4719).
    We are finalizing the extension of the 25 percent threshold payment 
adjustment to discharges from referring hospitals not co-located with 
the LTCH or the satellite of a LTCH because we believe that our 
concerns that patient stays are being inappropriately truncated at host 
hospitals resulting in admissions to LTCH HwHs or satellites also occur 
between LTCHs and LTCH satellites receiving patients from referring 
hospitals not on the same campus. As noted elsewhere in this section, 
we have concentrated on the relationships between referring acute care 
hospitals and non-co-located LTCHs in this discussion, because 
approximately 80 percent of Medicare patients in LTCHs are admitted 
from acute care hospitals. However, we believe that the same concerns, 
articulated above, would also exist when the patient source is not an 
acute care hospital. As we noted in the RY 2008 LTCH PPS proposed rule, 
``[t]here could still be a financial incentive on the part of the 
referring hospital (for example, an IRF, to prematurely discharge a 
beneficiary to a LTCH for additional post-acute treatment in order to 
avoid absorbing high treatment costs under the IRF outlier policy at 
Sec.  412.624(e)(5)) that would result in two Medicare payments, one to 
the initial provider and the other for payment under the LTCH PPS for a 
single episode of beneficiary care'' (72 FR 4812). Although we 
recognize that a patient could experience a medical crisis while an 
inpatient at an IRF, we would reiterate that typically, the most 
appropriate setting for such urgent care would be a general acute care 
hospital, rather than a LTCH. The policy that we are finalizing would 
not be applicable to a patient admitted to a LTCH from a SNF since a 
SNF does not deliver hospital-level care and therefore duplication or 
substitution of services by a LTCH is not a relevant issue.
    Comment: One commenter believes that the extension of the 25 
percent threshold payment adjustment deprives Medicare beneficiaries of 
their right to receive medically-necessary services in a LTCH. 
Therefore, if we finalize the extension of the 25 percent threshold 
policy, we are violating beneficiary rights and we should provide a 
notice of non-coverage to beneficiaries regarding this issue. 
Furthermore, the commenter reminded us that beneficiaries would also be 
entitled to appeal such a notification to the QIO operating in their 
State. The commenter stated that the patient whose case would cause the 
LTCH to exceed the 25 percent threshold referred from a particular 
referring hospital (that is, the patient who would represent 26 
percent) and all those that follow, are entitled to such a notice. The 
commenter also provides a lengthy discussion of the statutes, 
regulations, and case law that underlay beneficiary appeal rights.
    Response: We would emphasize that we are finalizing a policy in 
this regulation regarding the payment threshold that Medicare is 
establishing to avoid generating two payments, one to the initial 
referring hospital and another under the LTCH PPS, for a single episode 
of care delivered to a beneficiary. We are not depriving Medicare 
beneficiaries of their rights to receive treatment at a LTCH, but 
rather, we have established a payment adjustment for such treatment 
under particular conditions.
    Since the inception of the Medicare program in 1966, policies have 
been established to determine what the Federal government believes is 
appropriate payment to hospitals for the delivery of medical services 
to beneficiaries. Hospitals that elect to participate in the Medicare 
program are required to comply with the policies established by the 
program, including the establishment of payment rates and payment 
adjustments. Therefore, we do not believe that issuing an adjustment 
that could impact on a hospital's Medicare payments is a radical or 
unique act. The establishment of a payment policy that may result in 
payment adjustments for certain admissions is well within the existing 
regulatory framework. Furthermore, the basis for the policy that we are 
finalizing at this time, is an extension of a policy that has been in 
effect since FY 2005, when we established the 25 percent (or applicable 
percentage) payment threshold policy for co-located LTCHs at Sec.  
412.534. At that time, we stated that we were ``* * * providing an 
adjustment to the payment under the LTCH PPS in accordance with the 
broad authority conferred on the Secretary by the Congress in section 
123(a) of the BBRA of 2000 amended by section 307(b) of the BIPA of 
2001 to include ``appropriate adjustments'' in the establishment of a 
PPS for LTCHs' (69 FR 49204). We continue to believe that there is a 
clear distinction between medical decision-making and payment policy, 
particularly * * * when the patient is a Medicare beneficiary and the 
medically necessary services are covered by Medicare'' (69 FR 49204).
    LTCHs, for example, are required to meet the greater than 25-day 
ALOS requirement to retain designation as a LTCH; therefore, LTCHs will 
factor in that on-going requirement when making specific patient 
admission decisions during a cost reporting period. The need to comply 
with various compliance percentage requirements for treating certain 
conditions in order to qualify for IRF designation, under Sec.  
412.23(b), also impacts which patients are admitted to IRFs during a 
cost reporting period. In these two examples, hospitals currently 
evaluate admissions during a cost reporting period because a hospital's 
noncompliance with Medicare requirements regarding LOS and percentage 
of patients meeting the requirements at Sec.  412.23(b)(2), 
respectively, could risk its designation as a hospital that is excluded 
from the IPPS. Therefore, we believe that the circumstance of a LTCH 
determining which, and under what circumstances, patients should be 
admitted is an already established feature in the LTCH admission 
process and should be based on medical criteria and not based on the 
profitability of treating a specific patient.
    Furthermore, the issuance of a Hospital-Issued Notices of 
Noncoverage (HINNs) by the Medicare program is not applicable to the 
above described circumstance. Specifically, a LTCH's decision not to 
admit a specific patient is not a decision by the Medicare program to 
not cover the service. Rather, it is a determination by the LTCH of the 
type of service or patient that the facility has a level of expertise 
in treating. (We specify the conditions under which the

[[Page 26940]]

Medicare program is required to issue a HINN on the CMS Web site at 
http://www.cms.hhs.gov/BNI/05_HINNs.asp#TopOfPage.)
    In response to the commenter's belief that a beneficiary who is not 
admitted to a LTCH because of the payment policy that we are finalizing 
should appeal the determination to the QIO operating in his or her 
State, we would state that the decision to admit a patient is made by 
the hospital. Specifically, section 1802(a) of the Act stipulates that 
``Any individual entitled to insurance benefits under this title may 
obtain health services from any institution, agency, or person 
qualified to participate under this title, if such institution, agency 
or person undertakes to provide him such services (emphasis added). We 
emphatically reiterate that we are not preventing the admission of 
patients to a LTCH; rather, we are establishing a methodology for 
determining what are fair and reasonable payments based on the type of 
patient treated by the LTCH. Moreover, it is our expectation that 
extending the 25 percent (or applicable percentage) payment threshold 
policy to discharges from referring hospitals not co-located with the 
LTCH or the satellite of a LTCH will result in LTCHs focusing their 
mission with respect to referrals from acute care hospitals, and on 
treating patients that had a complete episode of care at the referring 
hospital, before being admitted to the LTCH.
    Comment: Many commenters stated that there were major differences 
between the patients treated at LTCHs and at those referred to as 
``short-term'' acute care hospitals. They also listed the significant 
distinctions between the levels of care delivered by these two types of 
hospitals. These commenters asserted that acute care hospitals paid 
under the IPPS are ``just not capable'' of delivering the level of care 
required by typical LTCH patients. The commenters noted that MedPAC, 
RTI, and even CMS have stated that LTCHs effectively treat very sick 
patients. One commenter stated that there was ``evidence that patients 
who would become subject to the 25 percent rule are different from 
patients in short term acute care hospitals, and therefore, there is no 
empirical basis whatsoever for CMS' assumption that LTCHs 
systematically engage in substitution of service.'' According to 
commenters, LTCHs have specialized care that is not available in acute 
care hospitals since the treatment model is entirely different. The 
commenters maintained that acute care hospitals ``* * * are diagnosis 
based where LTCHs provide specialized programs of whole-patients 
recovery'' for patients who require an entire multidisciplinary team. 
The commenters emphasized that LTCHs use a ``* * * team approach 
towards healing the patient versus stabilizing an acute episode.'' They 
also asserted that LTCHs and acute care hospitals do not treat 
identical conditions and patients who are forced to remain in an acute 
care setting could receive ``sub-standard care'' with the result being 
poorer health outcomes, longer stays, and even higher costs. The 
commenter believes that patients who are medically unstable, not 
progressing, or have failed ventilator-weaning can often benefit from a 
multidisciplinary program that LTCHs specialize in. In fact, some 
commenters point to a level of care that is found nowhere else in the 
medical care continuum but by staff with expertise and experience 
unique to LTCHs.
    Response: In response to the commenters, we would first state the 
following axiom of hospital policy in the Medicare program: LTCHs, 
while being unique based on maintaining an average LOS in excess of 25 
days, are certified as acute care hospitals and provide hospital-level 
services to patients. Acute care hospitals paid under the IPPS are 
throughout the country treating patients requiring hospital-level care 
often with lengths of stay comparable to those that are typical of 
LTCHs. We believe the commenters are attempting to establish a clear 
distinction between the patients that are appropriate for treatment at 
LTCHs and patients that are appropriately treated at acute care 
hospitals. Across the United States, the over 3,700 acute care 
hospitals that discharge approximately 13 million Medicare 
beneficiaries treat the full range of medical issues including those 
that the commenters identify as LTCH cases. We do not question that 
many LTCHs have highly regarded reputations for their success in 
treating respiratory and ventilator cases (DRG 475), but, as detailed 
in the RTI report, the 2004 MedPAR files indicate that where LTCHs 
treated 13,394 cases assigned to DRG 475, acute care hospitals treated 
18,727 Medicare patients with an additional 7,072 HCOs, in DRG 475. For 
DRG 88, chronic obstructive pulmonary disease (COPD), LTCHs treated 
4,894 cases where acute care hospitals treated 37,523 cases. Data on 
other common DRGs treated in LTCHs as compared to the same DRG treated 
in acute care hospitals reflect a similar pattern, particularly among 
the DRGs that could fall into the broad category of ``medically 
complex'' patients. (Table 3-2, RTI report, p. 35) We understand that 
MedPAC and RTI noted that many LTCHs deliver a high level of care to 
very sick Medicare beneficiaries, with fine doctors, exemplary nursing 
care, and top-notch rehabilitation therapists, but we also know that 
many acute care hospitals throughout the nation are treating the same 
types of patients and similarly delivering excellent care. In addition, 
we are aware that some LTCHs specialize in a particular subset of 
patients and achieve noteworthy success in their treatment of, for 
example, ventilator-weaning or wound care; however, similar patients 
are also receiving care in acute care hospitals with similar results. 
Therefore, we disagree that acute care hospitals are incapable of 
competently treating Medicare beneficiaries that happen to fall within 
the DRGs that LTCHs identify as their specialties and that any patients 
falling into such categories would receive ``substandard'' care at an 
acute care hospital.
    Commenters also stated that the Congress established the 
distinction between acute care hospitals and LTCHs by excluding LTCHs 
from the IPPS in 1983. In the FY 2003 LTCH PPS final rule (67 FR 
55954), which presented the initial payment policies that we 
established for the LTCH PPS, we briefly reviewed the history of the 
development of the distinction between hospitals that were to be paid 
under the IPPS and those that would be excluded, among which were a 
small group of hospitals that were called LTCHs. In that rule, we 
stated that ``[t]he Congress excluded these hospitals from the acute 
care hospital inpatient prospective payment system because they 
typically treated cases that involved stays that were, on average, 
longer or more costly than would be predicted by the DRG system.'' The 
legislative history of the 1983 Social Security Amendments stated that, 
``the DRG system was developed for short-term acute care general 
hospitals and as currently constructed does not adequately take into 
account special circumstances of diagnoses requiring long stays. 
(Report of the Committee on Ways and Means, U.S. House of 
Representatives, to Accompany HR 1900, H.R. Rept. No. 98-25, at 141 
(1983)) Therefore, these hospitals could be systemically underpaid if 
the same DRG system were applied to them (67 FR 55957). Following 
enactment of the Social Security Amendments of 1983, we implemented the 
acute care hospital inpatient prospective payment system on October 1, 
1983, including the initial publication in the Federal Register of the 
rules and regulations for the hospital

[[Page 26941]]

inpatient prospective payment system--the September 1, 1983 interim 
final rule'' (48 FR 39752, 67 FR 55957).
    The 33 LTCHs in existence at the start of the IPPS in 1983 (that 
were included on the HCFA exclusion list) were described in 1987, in a 
presentation letter to President George H.W. Bush from then-Secretary 
Otis R. Bowen, M.D., that preceded a Report to Congress produced by 
Health Economics Research, Inc. on the ``Developing a Prospective 
Payment System for Excluded Hospitals,'' (Department of Health and 
Human Services, Health Care Financing Administration, Office of 
Research and Demonstration, HCFA Pub. No. 03262), the Secretary notes 
that ``Long-term Hospitals are a heterogeneous set of institutions 
located on the Eastern Seaboard, whose mission is the treatment of 
patients who are seriously or terminally ill with multiple diseases. In 
other regions of the country, these same patients would be treated in 
hospitals or skilled nursing facilities * * *''
    As discussed in the 1984 Report to Congress, CMS (formerly HCFA) 
listed 61 hospitals on the ``HCFA exclusion list'' throughout the 
United States. (Medicare OSCAR files reveal that 31 of these original 
facilities are still in existence in 2007.) The Report states that 
``[t]here were 33 hospitals that both identified themselves as chronic 
care hospitals * * * [that] are most representative of those primarily 
providing chronic-disease hospital services. Perhaps of most interest 
is the very long average LOS of patients in these institutions. With 
one exception, all average length of stays are over 60 days and, with 
three exceptions, all are over 100 days. There is probably no clear 
differentiation between certain types of rehabilitative facilities and 
LTCHs. The differentiation does seem clearer in the case of psychiatric 
and children's hospitals, though because these eight psychiatric and 
three children's hospitals had average lengths of stay greater than 25 
days, they were placed under the long-term category of exclusions. The 
28 remaining hospitals on the HCFA exclusion list are characterized by 
a mixture of bed types. Many have a large percentage of psychiatric 
beds and some a large percentage of rehabilitation beds. Some of those 
hospitals are institutions with a large number of nursing home beds. 
For example, one hospital examined houses a small number of acute care 
beds available for patients routinely cared for in SNF and intermediate 
care facility (ICF)-level beds. The acute care beds are exempted under 
PPS. The State licenses beds in this facility as chronic disease 
hospital beds, though the administrator conceded that these beds are 
virtually indistinguishable from the SNF and ICF level Medicaid beds * 
* *'' (p. 3-56). The Report identified an additional 25 hospitals that 
fit the profile of LTCHs, most of which were included in a 1983 AHA 
Annual Survey. ``Lastly, there were 25 hospitals that were not on the 
exclusion list, but have either self-identified to the HA as chronic 
care hospitals or have chronic care beds. Seven of these had mostly 
acute care beds and a short average LOS, such that they would not 
qualify for the HCFA exclusion. The remaining 18 all had average length 
of stays greater than 60 days and 11 had average length of stays 
greater than 100 days. Though several of these were institutions with 
just chronic care beds, most also had a disproportionate number of 
nursing home beds. Possibly, those 18 hospitals could qualify for an 
exclusion at some future point'' (p. 3-57). ``These hospitals are 
themselves a diverse, rather anomalous class. As suspected, they have 
grown up in the interstices of acute, rehabilitation, and nursing home 
care. Their diversity results from the fact that the role they fill 
varies with individual State regulatory and financing policies, as well 
as the surrounding configuration of acute, rehabilitation, and nursing 
home beds'' (p. 3-59).
    We quote this report because we believe that it is vital to 
understand what the Congress was describing when it excluded 33 LTCHs 
(in the HCFA list) from the IPPS, ``* * * because the DRG system was 
developed for short-term acute care general hospitals and as currently 
constructed does not adequately take into account special circumstances 
of diagnoses requiring long stays'' and therefore, these hospitals 
could be systemically underpaid if the same DRG system were applied to 
them (67 FR 55957). We do not believe that the Congress was identifying 
the LTCHs in existence in 1983, described above, as facilities expected 
to deliver care at a level of medical sophistication equivalent to or 
even surpassing that of a typical acute care hospital.
    In 1983, there were 33 LTCHs (plus another 25 from the AHA list); 
in 1993, there were 105; in 2003, there were 318; and in 2007, there 
are nearly 400 LTCHs. We do not doubt that the nature and level of the 
care delivered by most LTCHs has changed markedly since 1983 but we 
believe that it is both highly inaccurate and misleading to state, as 
some of our commenters have, that `` `short term' acute care hospitals 
are ``just not capable'' of delivering the level of care required by 
typical LTCH patients; that acute care hospitals ``are diagnosis based 
where LTCHs provide specialized programs of whole-patients recovery;'' 
that acute care hospitals do not treat identical conditions and that 
patients who are forced to remain in an acute care setting could 
receive ``sub-standard care with the result being poorer health 
outcomes, longer stays, and even higher costs.'' We do not believe that 
the evidence detailed above indicates that in excluding LTCHs from the 
IPPS and explaining this act by the above-quoted rationale in 1983, 
that it was the Congress' intention to declare that henceforth, certain 
patients could only reasonably be treated in LTCHs and that treatment 
at an acute care hospitals for such patients would be ``sub-standard.'' 
Rather, we believe that the Congress was attempting to describe the 
provider landscape as it existed at that time and that in so doing, 
there was a small group of facilities that did not ``cleanly'' fit into 
any other category, having ``grown up in the interstices of acute, 
rehabilitation, and nursing home care.'' Report to Congress on the 
``Developing a Prospective Payment System for Excluded Hospitals,'' 
HCFA Pub. No. 03262) (p. 3-59).
    Since that time, there have been changes in the LTCH universe, with 
over 58 percent of the nearly 400 LTCHs being run for-profit (the 
majority by several large chains); approximately 33 percent run not for 
profit, and only 8.3 percent now run by a government instrumentality. 
Accordingly, we believe that the policy we proposed is appropriate to 
deal with present payment issues that the Medicare program is facing 
under the LTCH PPS.
    Commenters further asserted that acute care hospitals do not and 
even can not deal with the medical conditions in which LTCH specialize. 
Even though the LTCH universe has grown to nearly 400, they continue to 
not be evenly geographically dispersed and therefore, by far, most very 
sick Medicare inpatients nationwide are treated in acute care 
hospitals. In FY 2005, there were 130,000 LTCH discharges and 12.7 
million discharges from acute care hospitals. A brief review of several 
major LTCH Web sites contained the following list of conditions in 
which they specialize:
    <bullet> Chronic cardiac disorders;
    <bullet> Neuuromuscular/neurovascular diseases
    <bullet> Methicillin-resistant staph aureus (MRSA)
    <bullet> Complex orthopedic conditions
    <bullet> Wound care complications
    <bullet> Multi-system organ failure

[[Page 26942]]

    <bullet> Immuno-suppressed conditions
    <bullet> Respiratory failure
    <bullet> Dysphagia management
    <bullet> Post-operative complications
    <bullet> Multiple intravenous therapies
    <bullet> Chemotherapy
    <bullet> Pre- and post-operative organ transplant care
    <bullet> Chronic nutritional problems
    <bullet> Total parenteral nutrition (TPN) issues'
    <bullet> Intensive hemodynamic monitoring
    <bullet> Renal dialysis
    <bullet> Telemetry
    <bullet> EKG testing
    <bullet> Diagnostic bronchoscopy and endoscopy
    <bullet> Speech-language pathology
    <bullet> Surgery support
    <bullet> Nutritional therapy
    <bullet> Radiology services
    <bullet> Laboratory services
    <bullet> Respiratory therapy
    <bullet> Physical therapy
    <bullet> Occupational therapy
    <bullet> Pharmacy
    <bullet> Social services
    Furthermore, the list of services noted above, are also hardly 
unique to the LTCH setting.
    Comment: One commenter cited several provisions of Federal and 
State statutes that generally refer to patient transfers, services 
furnished to a hospital's patients by others under arrangements made by 
the hospital with them, or a hospital's responsibility to have services 
available to meet the needs of patients it accepts for treatment. For 
example, the commenter cites the provision of the Emergency Medical 
Treatment and Active Labor Act (EMTALA) (specifically, section 1867(g) 
of the Act) that requires hospitals with specialized capabilities to 
accept appropriate transfers of unstabilized individuals protected by 
EMTALA. The commenter also referred to Florida, Texas, and Illinois 
legislation authorizing arranged-for services and referral and transfer 
agreements, and The Joint Commission (formerly JCAHO) guidance 
directing their surveyors to look closely at transfers. However, no 
specific comment was made.
    Response: We do not believe this discussion in any way calls into 
question the need for the provisions relating to the policies we have 
proposed. Though the provisions cited do include references to 
transfers, they do not spell out conditions under which they are 
acceptable or otherwise establish specific standards to ensure that 
transfers and services under arrangements do not jeopardize patient 
health and safety. More importantly, they do not address the key issue 
of transfers that may not create clear risks for patients, but 
nevertheless, increase costs in the health care system because they are 
undertaken for financial rather than medical reasons. Therefore, even 
though we reviewed this discussion carefully, we made no changes to our 
proposals based on it.
    Comment: Some commenters highlighted the current medical care 
situation in New Orleans noting that the city is still trying to 
recover from Hurricane Katrina. The commenters believed that the 
proposed changes would result in the closure of LTCHs and this would 
cause hardships on the limited number of physicians practicing in the 
area. The commenters requested that affected hospitals should be 
granted a time limited exemption from these rules for up to 5 years.
    Response: We are certainly aware of the current state of medical 
care in Louisiana in general, and specifically in the New Orleans area. 
We have worked and continue to work closely with State officials and 
the hospitals in Louisiana to address issues that are important to 
helping the State rebuild its medical care infrastructure. As stated 
previously in response to commenters who claimed that these revisions 
would cause LTCHs to close, we believe that these changes are necessary 
to assure that the Medicare program is making appropriate payments to 
these hospitals in the specific situations addressed by these policies. 
In the case of the expansion of the 25 percent policy to apply to LTCHs 
and satellites that exceed the threshold on discharges that were 
admitted from a referring hospital not co-located with the LTCH or LTCH 
satellite, since a LTCH is certified as an acute care hospital, we 
believe it is appropriate to pay the LTCH under the LTCH PPS a rate 
that is comparable to the rate paid under the IPPS, where it is 
demonstrating behavior that indicates that it is serving as a ``unit'' 
of the referring hospital. Similarly, the revised SSO policy also 
provides for payments to the LTCH for those SSO cases that have a LOS 
that is comparable to the LOS of a typical IPPS patient in the same 
DRG, under the LTCH PPS at an adjusted rate that is comparable to the 
IPPS rate. We do not believe these policies will cause widespread 
closure of LTCHs nationally or in Louisiana.
    We also note that while in general the threshold under the 
expansion of the 25 percent policy as finalized in this rule will 
ultimately be 25 percent, in response to comments requesting that we 
transition the implementation of this policy, as discussed earlier we 
are providing for a 3-year transition to allow hospitals additional 
time to comply with the 25 percent threshold. Therefore, we are 
establishing a 75 percent threshold for RY 2008 and a 50 percent 
threshold for RY 2009. The threshold will be reduced to 25 percent 
beginning with RY 2010. Furthermore, for hospitals in rural areas or 
those admitting patients from a single hospital MSA effective with RY 
2008, the threshold will be 75 percent for RY 2008 and will remain at 
50 percent for subsequent rate years. In addition, for LTCHs admitting 
patients from MSA-dominant hospitals, effective with RY 2009 the 
threshold will be adjusted based on the referring hospital's percentage 
of Medicare patients discharged in the MSA, and will be not less than 
25 percent and not more than 50 percent.
    Comment: Many commenters requested that we clarify how they would 
be able to comply with the requirements of the 25 percent threshold 
payment adjustment policy if it was finalized. In the particular 
situation of a MSA-dominant or urban single hospital, where the 
threshold depends upon the percentage of referring hospital discharges 
in that MSA, it was requested that we clarify which year of data would 
applicable.
    Response: In establishing this payment provision, originally for 
co-located LTCHs for FY 2005, we consulted with Medicare's FIs and we 
were assured that LTCHs will be able to obtain the information that 
they need in order to comply with this policy from the referring 
hospital from which they would be admitting patients.
    Further, we understand that typically, acute care hospitals have 
the GROUPER software which enables them to determine the most likely 
DRG assignment for their patients and additionally, programs that track 
the costs being incurred by their patients on a daily basis. Therefore, 
they are with a high degree of accuracy, able to predict when a 
particular case crosses the outlier threshold. To facilitate such 
practices by hospitals, we have provided PRICER software for Medicare 
PPSs available for download on the CMS Web site. We understand that 
hospitals, including LTCHs, generally also purchase GROUPER software to 
track DRG assignments.
    Therefore, it is our expectation that LTCHs and their referring 
hospitals will build on their existing working relationship (since this 
policy applies to situations where over 25 percent of a LTCH's patients 
were admitted from an individual hospital) and will find it in their 
mutual interests to share necessary information. We would also expect 
LTCHs to monitor their admissions and

[[Page 26943]]

discharges from their referring hospitals, a process in which they 
would typically engage as a component of sound business practice.
    In response to the comment questioning the determination of the 
applicable MSA-dominant or urban-single percentage for purposes of LTCH 
calculations, we agree that it would be inappropriate for this 
percentage to be based on data occurring during a cost reporting 
period. Therefore, we would note that our policy is to base the 
percentage on the latest available discharge data that is available 
prior to the beginning of the LTCH's current fiscal year. We are 
revising proposed Sec.  412.536(d)(2) to reflect this policy. 
Furthermore, in response to this comment, at this time, we are also 
revising the regulation text as it applies to co-located LTCHs. 
Specifically, at Sec.  412.534(e)(2) where we describe the 
determination of the percentage threshold for MSA-dominant hosts for 
LTCH HwHs and LTCH satellites, we deleting the phrase, ``for the cost 
reporting period for which the adjustment was made''.
    Comment: One commenter stated that implementing the 25 percent 
threshold payment adjustment policy, under which Medicare payments 
would be reconciled, would ``violate a fundamental rule of PPSs that 
payments will be prospectively set and known in advance by the 
providers.'' This commenter also stated that the finalizing this 
regulation would ``in a very real sense, would convert the LTCH PPS 
into a retroactive system of recovery and settlement with related 
disputes where CMS would be called upon to produce patient records from 
hospitals that refer cases to LTCHs as well as individual patient 
coding and referral hospital financial information to support recovery 
claims.''
    Response: In response to these concerns, we would note that the 
cost report settlement process (governed by Subpart B of Part 413) is a 
standard feature of all Medicare PPSs. For example, under the IPPS, a 
hospital DRG payment may be subject to the DSH or IME adjustments. The 
DSH adjustment is based on the percentage of Medicaid patients 
discharged by the hospital during the fiscal year, while the IME 
adjustment is based on the number of residents trained by the hospital 
during the fiscal year. Both factors are subject to change based on 
final settlement of the hospital's cost report. The procedures that we 
have established for this process envision a reconciliation between 
hospitals and the Medicare program based on claims submission, special 
interim payments or periodic interim payments and the final amounts 
due, as determined by the FI. Such reconciliations are both necessary 
and expected. There are numerous provisions affecting LTCHs that could 
result in subsequent redetermination of the payment amounts. For 
example, involvement of a QIO review of a DRG assignment which may 
result in a change in DRGs as specified in Sec.  412.513(c), as well as 
any of the reconsiderations and appeals provided for under subparts G, 
I, J, or R of Part 405. Moreover, since the start of the LTCH PPS, our 
regulations on special payment provisions for patients who are 
transferred to onsite providers and readmitted to a LTCH at Sec.  
412.532, specified a 5 percent threshold for LTCH readmittances of 
patients that had been discharged to an onsite acute care hospital. 
Payments under this policy would be reconciled following cost report 
settlement. Finally, the 25 percent threshold for co-located LTCHs, 
which could result in a redetermination of the payment amount if the 
threshold is exceeded, has been in effect since FY 2005.
    Therefore, we do not believe that the principle of PPS issued by 
the Medicare program is inconsistent with the extension of the 25 
percent payment adjustment threshold under the LTCH PPS.
    Comment: Several commenters stated that both of our policy 
proposals, the extension of the 25 percent threshold policy adjustment 
and the revision of the SSO policy, are effectively establishing 
``admission criteria'' which usurp the exclusive role of QIOs in the 
Medicare program.
    Response: We reiterate that with the finalization of the extension 
of the 25 percent threshold policy adjustment and the SSO policy, we 
have not established ``admissions criteria'' for LTCHs. Rather, in 
keeping with our fiduciary responsibility to oversee Medicare 
expenditures, we have established payment policies that provide for 
appropriate Medicare payments for beneficiary care. We describe each of 
the policies in detail in this preamble. They are distinct policies but 
they both focus on our goal of determining payment for Medicare 
services delivered in LTCHs, under particular circumstances that we 
believe should not significantly exceed payment for similar services 
otherwise delivered in acute care hospitals.
    Because the comments that we received regarding the QIO's role and 
the implementation of the expansion of the 25 percent threshold policy 
were fundamentally the same comments submitted regarding the QIOs role 
and the SSO policy revision, we responded to comments in the SSOs 
section of this final rule.
    In summary, we are finalizing a new provision at Sec.  412.534(h) 
that effective with discharges occurring during cost reporting periods 
beginning on or after July 1, 2007, would apply the policies 
established under existing Sec.  412.534 to grandfathered subclause (I) 
LTCH HwHs and LTCH satellites for Medicare discharges that were 
admitted from their co-located host hospitals. We are also applying 
those policies for Medicare discharges admitted from referring 
hospitals not co-located with the LTCH or the satellite of a LTCH to 
all subclause (I) LTCHs and LTCH satellites at Sec.  412.536, generally 
tracking Sec.  412.534, where applicable. For example, in determining 
whether a hospital meets the 25 percent criterion, Medicare discharges 
that have already qualified for outlier payments at the referring 
hospital would not be included in the count of Medicare discharges 
admitted from the referring hospital. (We are entitling Sec.  412.536, 
Special Payment Provisions for LTCHs and Satellites of LTCHs that 
Discharged Medicare Patients Admitted From a Hospital Not Located in 
the Same Building or on the Same Campus as the LTCH or Satellite of the 
LTCH.)
    We are also finalizing adjustments to the 25 percent policy at 
Sec.  412.536 for specific circumstances consistent with the policy for 
co-located hospitals under Sec.  412.534. At Sec.  412.536(c) for 
Medicare discharges from subclause (I) LTCHs or LTCH satellites located 
in rural areas, Medicare discharges in excess of 50 percent, rather 
that 25 percent of the LTCH's total Medicare discharges for a cost 
reporting period from an individual referring hospital not co-located 
with the LTCH or the satellite of the LTCH would be subject to the 
payment adjustment specified at Sec.  412.536(c). In addition, in the 
case of a rural subclause (I) LTCH or LTCH satellite facility, in 
determining the percentage of Medicare discharges admitted from the 
referring hospital, any patients that had been Medicare outliers at the 
referring hospital and then discharged to the LTCH or LTCH satellite 
are not counted towards the threshold percentage (as described above).
    In Sec.  412.536, we are also providing that if the referring 
hospital not co-located with the LTCH or satellite of the LTCH is the 
only other hospital in the MSA or is an MSA-dominant hospital as 
defined at Sec.  412.536(e)(4), we are allowing the subclause (I) LTCH 
or LTCH satellite facility a threshold percentage equal to the non-co-
located referring hospital's percentage of total

[[Page 26944]]

Medicare discharges for hospitals in the MSA. Consistent with our 
policy at existing Sec.  412.534(e), we are applying a floor of 25 
percent and a ceiling of 50 percent to this threshold for these 
hospitals. As with the existing policy for co-located LTCHs, we believe 
that this adjusted payment threshold responds to ``the unique needs of 
these communities'' (69 FR 49207). Similar to the existing provisions 
at Sec.  412.534, in determining the percentage of Medicare discharges 
admitted to the LTCH or LTCH satellite facility from the urban single 
or MSA dominant hospital, any patients that had been Medicare outliers 
at the referring hospital before being admitted to the LTCH or LTCH 
satellite would not count towards the applicable threshold, as 
discussed above.
    The payment adjustment at Sec.  412.536 will be phased-in over 3 
years for all LTCH discharges affected by the policies that we are 
finalizing beginning for cost reporting periods beginning on or after 
July 1, 2007. Under the phase in, the percentage threshold will be the 
greater of the applicable threshold as specified at 412.536(b),(c), and 
(d) or the following percentages: For cost reporting periods beginning 
on or after July 1, 2007 and before July 1, 2008, under the policy that 
we are finalizing at Sec.  412.536, the percentage of Medicare 
discharges that may be admitted from a referring hospital not co-
located with the LTCH or the satellite of a LTCH with no payment 
adjustment is the lesser of the percentage of Medicare discharges 
admitted from the referring hospital during its RY 2005 cost reporting 
period or 75 percent. For cost reporting periods beginning on or after 
July 1, 2008 and before July 1, 2009, under the policy that we are 
finalizing at Sec.  412.536, the percentage of Medicare discharges that 
may be admitted from the referring hospital not co-located with the 
LTCH or the satellite of a LTCH, with no payment adjustment, is the 
lesser of the percentage of Medicare discharges admitted from the 
referring hospital during its RY 2005 cost reporting period or 50 
percent. For cost reporting periods beginning on or after July 1, 2009 
(RY 2010), all subclause (I) LTCHs and LTCH satellites will be subject 
to the 25 percent (or applicable percentage) threshold payment 
adjustment for discharges during a cost reporting period that were 
admitted from any referring hospital. In determining the percentage of 
Medicare discharges admitted from the referring hospital, patients who 
reached HCO status at the referring hospital before being admitted to 
the LTCH or LTCH satellite will not count towards the applicable 
threshold, as discussed above. A similar phase is provided for the 
expansion at Sec.  412.534 to grandfathered subclause (I) LTCH HwHs and 
LTCH satellites.
    Finally, we believe that these payment adjustments address policy 
concerns that are consistent with those that we originally expressed 
when we implemented the payment adjustment for LTCHs discharging 
patients that were admitted from co-located hospitals.
    We also believe that it is important, once again, to note that the 
3-year transition to the full 25 percent threshold payment adjustment 
will coincide with our continuing work on the MedPAC recommendations to 
attempt to develop facility and patient level criteria for LTCHs. We 
hope that the LTCH industry will work closely with CMS to pursue this 
endeavor during the transition period.

VI. Computing the Adjusted Federal Prospective Payments for the 2008 
LTCH PPS Rate Year

    In accordance with Sec.  412.525 and as discussed in section IV.C. 
of this final rule, the standard Federal rate is adjusted to account 
for differences in area wages by multiplying the labor-related share of 
the standard Federal rate by the appropriate LTCH PPS wage index (as 
shown in Tables 1 and 2 of the Addendum to this final rule). The 
standard Federal rate is also adjusted to account for the higher costs 
of hospitals in Alaska and Hawaii by multiplying the nonlabor-related 
share of the standard Federal rate by the appropriate cost-of-living 
factor (shown in Table 3 in section IV.D.2 of this preamble). In the RY 
2007 LTCH PPS final rule (71 FR 27827), we established a standard 
Federal rate of $38,086.04 for the 2007 LTCH PPS rate year. In this 
final rule, as was proposed, based on the best available data and the 
policies described in this final rule, the standard Federal rate for 
the 2008 LTCH PPS rate year will be $38,356.45 as discussed in section 
IV.C.3. of this preamble. We illustrate the methodology that will be 
used to adjust the Federal prospective payments for the 2008 LTCH PPS 
rate year in the following examples:

Example

    During the 2008 LTCH PPS rate year, a Medicare patient is in a LTCH 
located in Chicago, Illinois (CBSA 16974). This LTCH is in the final 
year of the wage index phase-in, thus, the full (that is, five-fifths) 
wage index values are applicable. The full LTCH PPS wage index value 
for CBSA 16974 is 1.0751 (see Table 1 in the Addendum to this final 
rule). The Medicare patient is classified into LTC-DRG 9 (Spinal 
Disorders and Injuries), which has a current relative weight of 1.0424 
(see Table 3 of the Addendum to this final rule).
    To calculate the LTCH's total adjusted Federal prospective payment 
for this Medicare patient, we compute the wage-adjusted Federal 
prospective payment amount by multiplying the unadjusted standard 
Federal rate ($38,356.45) by the labor-related share (75.788 percent) 
and the wage index value (1.0751). This wage-adjusted amount is then 
added to the nonlabor-related portion of the unadjusted standard 
Federal rate (24.212 percent; adjusted for cost of living, if 
applicable) to determine the adjusted Federal rate, which is then 
multiplied by the LTC-DRG relative weight (1.0424) to calculate the 
total adjusted Federal prospective payment for the 2008 LTCH PPS rate 
year ($42,258.45). (As discussed in section IV.C.5. of this preamble, 
for the 2008 LTCH PPS rate year, we are no longer applying a transition 
period BN offset (to account for the costs of the transition 
methodology) in determining the total adjusted Federal prospective 
payment.) Table 7 illustrates the components of the calculations in 
this example.

                                 Table 7
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Unadjusted Standard Federal Prospective Payment Rate...       $38,356.45
Labor-Related Share....................................        x 0.75788
Labor-Related Portion of the Federal Rate..............     = $29,069.59
Full Wage Index (CBSA 16974)...........................         x 1.0751
Wage-Adjusted Labor Share of Federal Rate..............     = $31,252.71
Nonlabor-Related Portion of the Federal Rate                + $ 9,286.86
 ($38,356.45 x 0.24212)................................
Adjusted Federal Rate Amount...........................     = $40,539.57
LTC-DRG 9 Relative Weight..............................         x 1.0424

[[Page 26945]]

 
Total Adjusted Federal Prospective Payment *...........    = $42,258.45
------------------------------------------------------------------------
* We are no longer applying a transition period BN offset to account for
  the costs of the transition methodology in determining the total
  adjusted Federal prospective payment for RY 2008.)

VII. Transition Period

    To provide a stable fiscal base for LTCHs, under Sec.  412.533, we 
implemented a 5-year transition period whereby a LTCH (except those 
defined as ``new'' under Sec.  412.23(e)(4)) received a LTCH PPS 
payment consisting of a portion based on reasonable cost-based 
reimbursement principles under the TEFRA system and a portion based on 
the Federal prospective payment rate (unless the LTCH elected payment 
based on 100 percent of the Federal rate). As discussed in the August 
30, 2002 final rule (67 FR 56038), we believed that a 5-year phase-in 
provided LTCHs time to adjust their operations and capital financing to 
the LTCH PPS, which is based on prospectively determined Federal 
payment rates. Furthermore, we believed that the 5-year phase-in under 
the LTCH PPS also allowed LTCH personnel to develop proficiency with 
the LTC-DRG coding system, which will result in improvement in the 
quality of the data used for generating our annual determination of 
relative weights and payment rates.
    Under Sec.  412.533, the 5-year transition period for all hospitals 
subject to the LTCH PPS began with the hospital's first cost reporting 
period beginning on or after October 1, 2002 and extends through the 
hospital's last cost reporting period beginning before October 1, 2007. 
During the 5-year transition period, a LTCH's total PPS payment under 
the LTCH PPS was based on two payment percentages--one based on 
reasonable cost-based principles and the other based on the standard 
Federal prospective payment rate. The percentage of the LTCH PPS 
payment based on the LTCH PPS Federal rate increased by 20 percentage 
points each year, while the reasonable portion of the LTCH PPS payment 
based on cost-based principles decreased by 20 percentage points each 
year, for the next 4 fiscal years. For cost reporting periods beginning 
on or after October 1, 2006, Medicare payment to LTCHs will be 
determined entirely under the Federal rate.
    In implementing the LTCH PPS, one of our goals was to transition 
hospitals to prospective payments based on 100 percent of the adjusted 
Federal prospective payment rate as soon as appropriate. Therefore, 
under Sec.  412.533(c), we allowed a LTCH (other than new LTCHs defined 
at Sec.  412.23(e)(4)), which was subject to a blended rate, to elect 
payment based on 100 percent of the Federal rate at the start of any of 
its cost reporting periods during the 5-year transition period. Once a 
LTCH elected to be paid based on 100 percent of the Federal rate, it 
could not revert back to the transition blend.

VIII. Payments to New LTCHs

    Under Sec.  412.23(e)(4), for purposes of Medicare payment under 
the LTCH PPS, we define a new LTCH as a provider of inpatient hospital 
services that meets the qualifying criteria for LTCHs, set forth in 
Sec.  412.23(e)(1) and (e)(2), and under present or previous ownership 
(or both), has its first cost reporting period as a LTCH beginning on 
or after October 1, 2002. As we discussed in the August 30, 2002 final 
rule (67 FR 56040), this definition of new LTCHs should not be confused 
with those LTCHs first paid under the TEFRA payment system for 
discharges occurring on or after October 1, 1997, described in section 
1886(b)(7)(A) of the Act, as added by section 4416 of the Balanced 
Budget Act of 1997 (BBA) (Pub. L. 105-33).
    Under Sec.  412.533(d), new LTCHs, as defined in Sec.  
412.23(e)(4), will be paid based on 100 percent of the standard Federal 
rate. As we discussed in the August 30, 2002 final rule (67 FR 56040), 
the transition period was intended to provide existing LTCHs time to 
adjust to payment under the new system. Since these new LTCHs with 
their first cost reporting periods as LTCHs beginning on or after 
October 1, 2002, would not have received payment under reasonable cost-
based reimbursement for the delivery of LTCH services prior to the 
effective date of the LTCH PPS, we did not believe that those new LTCHs 
required a transition period in order to make adjustments to their 
operations and capital financing, as will LTCHs that have been paid 
under the reasonable cost-based methodology.

IX. Method of Payment

    Under Sec.  412.513, a Medicare LTCH patient is classified into a 
LTC-DRG based on the principal diagnosis, up to eight additional 
(secondary) diagnoses, and up to six procedures performed during the 
stay, as well as age, sex, and discharge status of the patient. The 
LTC-DRG is used to determine the Federal prospective payment that the 
LTCH will receive for the Medicare-covered Part A services the LTCH 
furnished during the Medicare patient's stay. Under Sec.  412.541(a), 
the payment is based on the submission of the discharge bill. The 
discharge bill also provides data to allow for reclassifying the stay 
from payment at the full LTC-DRG rate to payment for a case as a SSO 
(under Sec.  412.529) or as an interrupted stay (under Sec.  412.531), 
or to determine if the case will qualify for a HCO payment (under Sec.  
412.525(a)).
    Accordingly, the ICD-9-CM codes and other information used to 
determine if an adjustment to the full LTC-DRG payment is necessary 
(for example, LOS or interrupted stay status) are recorded by the LTCH 
on the Medicare patient's discharge bill and submitted to the Medicare 
FI for processing. The payment represents payment in full, under Sec.  
412.521(b), for inpatient operating and capital-related costs, but not 
for the costs of an approved medical education program, bad debts, 
blood clotting factors, anesthesia services by hospital-employed 
nonphysician anesthetists or the costs of photocopying and mailing 
medical records requested by a Quality Improvement Organization (QIO), 
which are costs paid outside the LTCH PPS.
    As under the previous reasonable cost-based payment system, under 
Sec.  412.541(b), a LTCH may elect to be paid using the periodic 
interim payment (PIP) method described in Sec.  413.64(h) and may be 
eligible to receive accelerated payments as described in Sec.  
413.64(g).
    For those LTCHs that are being paid under the transition 
methodology set forth at Sec.  412.533, for cost reporting periods that 
began on or after October 1, 2002, and before October 1, 2006, the PIP 
amount is based on the transition blend. For those LTCHs that are paid 
based on 100 percent of the standard Federal rate, the PIP amount is 
based on the estimated prospective payment for the year rather than on 
the estimated reasonable cost-based reimbursement. We exclude HCO 
payments that are paid upon submission of a discharge bill from the PIP 
amounts. In addition, Part A costs that are not paid for under the LTCH 
PPS, including Medicare costs of an approved medical education program, 
bad debts, blood clotting

[[Page 26946]]

factors, anesthesia services by hospital-employed nonphysician 
anesthetists and the costs of photocopying and mailing medical records 
requested by a QIO, are subject to the interim payment provisions as 
specified in Sec.  412.541(c).
    Under Sec.  412.541(d), LTCHs with unusually long lengths of stay 
that are not receiving payment under the PIP method may bill on an 
interim basis (60 days after an admission and at intervals of at least 
60 days after the date of the first interim bill) and this should 
include any HCO payment determined as of the last day for which the 
services have been billed.

X. Monitoring

    In the August 30, 2002 final rule (67 FR 56014), we described an 
on-going monitoring component to the new LTCH PPS. Specifically, we 
discussed on-going analysis of the various policies that we believe 
would provide equitable payment for stays that reflect less than the 
full course of treatment and reduce the incentives for inappropriate 
admissions, transfers, or premature discharges of patients that are 
present in a discharge-based PPS. As a result of our data analysis, we 
have revisited a number of our original and even pre-LTCH PPS policies 
in order to address what we believe are behaviors by certain LTCHs that 
lead to inappropriate Medicare payments. In recent Federal Register 
publications, we have proposed and subsequently finalized revisions to 
the interruption of stay policy in the RY 2005 LTCH PPS final rule (69 
FR 25692), and we established a payment adjustment for LTCH HwHs and 
satellites in the FY 2005 IPPS final rule (69 FR 49191 through 49214). 
In section V.A.2., we revisited the payment adjustment methodology 
established for SSOs (71 FR 27845) as a consequence of recent data 
analysis and are finalizing a policy which revises one of the existing 
four alternatives under the existing SSO payment methodology for 
certain SSO cases to an amount under the LTCH PPS that is comparable to 
an amount that would otherwise be paid under the IPPS.
    As we discuss in section X. of this final rule, our monitoring of 
discharges between acute care hospitals and LTCHs reveals that a 
significant number of LTCHs that are ``freestanding'', that is, not co-
located with other hospital-level providers (as defined in Sec.  
412.22(e) and Sec.  412.22(h)), admit their patients from one specific 
acute care hospital. When we established the payment adjustment for 
LTCH HwHs and satellites of LTCHs at Sec.  412.534, we stated our 
concern that these on-site LTCHs could be functioning as units of their 
host (generally, an acute care hospital), a configuration that is not 
permitted in section 1886(d)(1)(B) of the Act. (The statute 
specifically allows only for IRF and IPF units in acute care hospitals, 
but not for LTCH units.) As a result of our data monitoring and 
analysis, which is detailed in section V.B. of this final rule, we are 
expanding the existing payment adjustment at Sec.  412.534 and we 
developed new Sec.  412.536 to apply to certain situations not 
currently covered by the existing policy for LTCHs co-located with 
other hospitals.
    As we discussed in the RY 2004 LTCH PPS final rule (68 FR 34157), 
the Medicare Payment Advisory Commission (MedPAC) endorsed our 
monitoring activity as a primary aspect of the design of the LTCH PPS. 
Furthermore, the Commission pursued an independent research initiative 
that led to a section in MedPAC's June 2004 Report to Congress entitled 
``Defining long-term care hospitals''. This study included 
recommendations that we develop facility and patient criteria for LTCH 
admission and treatment and that we require a review by QIOs to 
evaluate whether LTCH admissions meet criteria for medical necessity 
once the recommended facility and patient criteria are established (70 
FR 24209). In response to the recommendation in MedPAC's June 2004 
Report, we awarded a contract to Research Triangle Institute, 
International (RTI), on September 27, 2004, to conduct a thorough 
examination of the feasibility of implementing MedPAC's 
recommendations.
    RTI has completed its examination of the feasibility of 
implementing MedPAC's recommendations in the June 2004 Report to 
Congress, and as discussed in section XI. of the preamble to this final 
rule. Both Phases I and II are posted on the CMS Web site (as noted 
below). We also reproduced the Executive Summary of the report in 
Addendum B of the RY 2008 LTCH PPS proposed rule (72 FR 4884 through 
4886). At that time, we noted, ``[t]his material is being reproduced as 
received from the contractors and does not represent out position or 
policy'' (72 FR 48181).
    We are continuing to pursue our on-going program, existing QIO 
monitoring and studies described in the RY 2006 LTCH PPS final rule (70 
FR 24211), and our considerations of expanding the QIO role in the LTCH 
PPS.
    Comment: We received several letters from various Congressional 
delegations that were critical of the proposed revision to the SSO 
policy and the extension of the 25 percent threshold payment 
adjustments. The commenters stated that these policies do not achieve 
CMS' goal of identifying inappropriate LTCH admissions.
    The commenters urged us to establish patient and facility-level 
criteria for LTCHs to better define the appropriate patient setting and 
medical conditions required for admission. A number of the commenters 
further stated that LTCHs admit patients only after applying an 
objective and rigorous set of admissions screening criteria and 
Medicare QIOs conduct post-admission reviews of LTCH patients to ensure 
that admissions are medically-necessary. These commenters further 
stated that at our direction, QIOs have been reviewing a sample of LTCH 
cases for admission appropriateness and that these reviews ``clearly'' 
show an immaterial number of LTCH claims denied as the result of QIO 
reviews. Therefore, the commenters maintained that QIO review data does 
not support our assumption that cases were inappropriately admitted to 
LTCHs, but rather, QIOs are overwhelmingly finding that LTCH patients 
have appropriately been admitted and treated in LTCHs.
    Response: We reiterate that QIO review of Medicare cases, either 
based upon the national sample or resulting from specific appeals, 
presently determine, among other things, whether a patient required 
hospital-level care. The QIO reviews presently do not distinguish 
between acute care settings, such as acute care hospitals paid under 
the IPPS or acute care hospitals paid under the LTCH PPS. Therefore, 
although the QIO review process, as presently constituted, is a vital 
component of the Medicare program, the role played by the QIOs does 
not, at this time, provide a medium through which we can determine 
appropriate payment policy for acute care hospital patients who are 
admitted to an LTCH.
    However, regarding the commenters' statement that the proposed rule 
did not target cases that are likely the result of inappropriate 
admission and that data available to CMS clearly showed an immaterial 
number of LTCH claims denied as the result of QIO review of a sample of 
LTCH cases, we would share the results of an LTCH review from FY 2005. 
In that review, QIOs reviewed a statistically valid, representative 
national sample of 1,392 LTCH claims annually for the past few years. 
These samples were utilized for calculation of national payment error 
rates and the sampling method has been determined to be statistically 
sound by external audit. While the overall numbers of admission denials 
is low due to the sample size, statistically-based projections have 
revealed issues relative

[[Page 26947]]

to inappropriate admissions, especially admissions with short length of 
stays. For discharges occurring during FY 2005, 7.9 percent of the 
admissions were found to be inappropriate accounting for a projected 
overpayment of $215,073,309 annually; this admission denial rate is 
higher than the 4.7 percent found for acute care hospitals paid under 
the IPPS during the same time period. Of note, 72.7 percent of 
admission denials for LTCH discharges occurred in claims with a LOS of 
25 days or less.
    The commenters further asserted that QIO data does not support our 
assumption that cases were inappropriately admitted to LTCHs as a 
result of LTCHs acting as extension sites or units of other acute care 
hospitals or patients receiving less than a full episode of care at the 
acute care hospital. However, an internal analysis of LOS for FY 2005 
LTCH discharges has revealed that over 50 percent of stays were 25 days 
or less in length and many of those have an LOS comparable to an IPPS 
LOS for that DRG.

XI. MedPAC Recommendations: The RTI Contract

    With the recommendations of MedPAC's June 2004 Report to Congress 
as a point of departure, RTI evaluated the feasibility of developing 
patient and facility level characteristics for LTCHs to identify and 
distinguish the role of these hospitals as a Medicare provider.
    RTI completed this project in two phases. In Phase I, RTI prepared 
a background report summarizing existing information regarding LTCHs' 
current role in the Medicare system: their history as Medicare 
participating providers; the types of patients they treat; the criteria 
QIOs currently use to review appropriateness of care in these settings; 
and the types of regulations they face as Medicare participating 
providers. This work reviewed prior analyses of these issues and 
included discussions with MedPAC, other researchers, CMS, the QIOs, and 
the hospital associations.
    In Phase II, RTI collected additional information on tools 
currently used by the QIOs and the industry to assess patient 
appropriateness for admission; analyzed claims to understand 
differences between hospital patients with outlier stays in non-LTCHs 
and those treated in LTCHs; and visited different types of hospitals to 
observe first-hand how LTCH patients differ from those in other 
settings and how this pattern varies in different parts of the country. 
RTI worked with different associations, including the National 
Association of Long Term Hospitals (NALTH), the Acute Long Term 
Hospital Association (ALTHA), the AHA, and the American Medical Peer 
Review Association (AMPRA), as well as several of the larger LTCH 
chains. The final report submitted by RTI summarizes these efforts and 
makes numerous recommendations to CMS regarding LTCHs.
    As noted above, the reports on both Phase I and Phase II of RTI's 
research have been posted on our Web site at http://www.cms.hhs.gov/LongTermCareHospitalPPS/02a_RTIReports.asp#TopOfPage. Please note that 
this report does not represent our position or policy. We are currently 
evaluating RTI's recommendations regarding the feasibility of 
developing patient and facility level criteria from several 
standpoints. Most significantly, we have been concerned that several of 
RTI's recommendations may require statutory changes. Furthermore, even 
among those recommendations for action that would be accomplished on a 
regulatory level, there are many significant issues that require 
further analysis. RTI is proceeding with Phase III of their project and 
as during Phases I and II, we have consistently encouraged meaningful 
contact between RTI and industry stakeholders throughout this research 
phase of the contract.
    Comment: We received a comment from MedPAC that urged us to 
continue working towards the development of patient and facility 
criteria as the best way to determine appropriate LTCH patients 
particularly in light of the RTI report which included recommendations 
similar to those originally suggested by MedPAC in its June 1994 Report 
to Congress. The Commission noted that approaches other than criteria, 
such as the 25 percent rule, ``may be administratively less complex but 
are more arbitrary and increase the risk for unintended consequences.'' 
The Commission further suggested that we evaluate patient criteria 
currently in use by LTCHs and continue to work with LTCH associations 
that have developed criteria. The commenter also reiterated the 
Commission's support for severity-rated DRGs for use in the IPPS 
hospitals and noted that their adoption could reduce necessity for 
referrals to LTCHs. The Commission also endorsed a larger role for QIOs 
in the oversight of determinations of medical necessity, as well as in 
monitoring compliance with patient and facility level criteria.
    Response: We thank the Commission for its thoughtful response to 
our proposed rule. We are mindful of the importance of identifying 
patient and facility-level criteria for LTCHs and believe that we have 
contracted with RTI to continue moving in that direction as they begin 
Phase 3 of their project. The reports on Phase I and Phase II of RTI's 
work are posted on the CMS Web site. We believe that their analyses of 
LTCHs and other provider categories that treat LTCH-type patients 
provide the foundation for any future development of patient level 
criteria.
    We understand MedPAC's preference for patient criteria as opposed 
to payment adjustments for the purpose of determining appropriate 
patients for treatment at a LTCH. However, we would note that even with 
the development of patient criteria, it continues to be our statutory 
responsibility, under the BBA and BBRA to provide for appropriate 
adjustments and to establish regulations as may be necessary to 
effectively administer the Medicare program by way of implementing 
appropriate payment policies and payment adjustments. Therefore, even 
though we continue our work with RTI in Phase 3 of their project to see 
if we can identify appropriate patient and facility-level criteria for 
LTCHs, we do not see the development of those criteria as contradictory 
aspects to efforts we have undertaken while performing our fiduciary 
responsibility for the Medicare program. We further believe that it may 
be appropriate to continue to maintain such policies under the LTCH PPS 
that guard the Medicare Trust Fund from duplicative payments for what 
is one episode of patient care, even if we are able to develop and 
adopt facility and patient criteria for LTCHs and LTCH patients.
    In the following comment and response, we discuss our evaluation of 
existing patient criteria currently in use by LTCHs, including one that 
was developed by one of the LTCH associations.
    The Commission's support for the adoption of severity-rated DRGs 
for use in acute care hospitals paid for under the IPPS is discussed in 
the FY 2008 IPPS proposed rule. As discussed in that proposed rule, we 
have also proposed adopting the same severity-based DRGs for the LTCH 
PPS.
    Finally, regarding an increasing role for QIOs in the LTCH PPS, we 
are currently developing the next Quality Improvement Organization 
Scope of Work. These comments will be considered in that process.
    Comment: Many commenters took issue with the payment adjustments 
that we proposed in the RY 2007 LTCH PPS proposed rule that would 
revise the existing SSO policy and extend the

[[Page 26948]]

scope of the 25 percent threshold payment adjustment. The commenters 
suggested that rather than issuing further regulations that do not 
reasonably address our most significant concerns with LTCHs, that we 
should instead focus on developing LTCH patient criteria as was 
suggested by MedPAC in 2004 and discussed in the RTI report. Several 
commenters further contended that we have been ``ignoring MedPAC and 
RTI recommendations.'' One commenter stated, ``In 3 years, CMS has not 
implemented MedPAC recommendations.'' Many commenters questioned why we 
have not adopted existing patient criteria instruments that are 
currently used by LTCHs, such as Interqual or the system developed by 
MassPRO and the National Association of Long Term Hospitals (NALTH).
    Response: In responses to comments in the sections of this final 
rule that address the SSO policy and the extension of the 25 percent 
(or applicable percentage) threshold payment adjustment to LTCH and 
satellite discharges that were admitted from non-co-located hospitals, 
we specifically address our rationale for issuing both of these 
provisions. However, aside from objections to our policies, it also 
appears as if the commenters are combining the production of patient 
and facility level criteria by RTI with the end of further payment 
adjustments under the LTCH PPS by CMS. Notwithstanding the future 
development of appropriate patient and facility level criteria for 
LTCHs, it will continue to be our statutory responsibility under 
sections 1102 and 1871 of the Act to establish regulations as may be 
necessary to adjust LTCH payments appropriately and to effectively 
administer the Medicare program.
    Furthermore, we strongly disagree with statements by the above 
commenters that we have ``ignored'' the MedPAC recommendations, as well 
as those recently resulting from RTI's final report. In awarding 
contracts, as a Federal Agency, we are required to follow the protocols 
of the Federal contracting process that are governed by the Office of 
Federal Procurement Policy (OFPP) and Health and Human Services 
Acquisition Regulation (HHSAR) (5 U.S.C. 301 and section 205(c) of the 
Federal Property and Administrative Services Act of 1949 as amended (40 
U.S.C. 486(c)) and regulations as follows: The Federal Acquisition 
Regulation (48 CFR Ch. 1); FAR Supplements (48 CRFR Chs. 2-53); Labor 
(29 CFR, 41 CFR Ch. 50, Small Business Administration (SBA) 13 CFR, and 
OMB Circular No. A-130. Even after meeting all of the above 
requirements, however, we would note that while the MedPAC 
recommendations were originally published in June 2004, we were able to 
award the contract to RTI to evaluate MedPAC's recommendations by the 
start of FY 2005 (October 2004).
    We have included an update of RTI's progress in each notice since 
that time, and we believe that an objective evaluation of the Phase I 
and II reports presently on the CMS Web site at http://www.cms.hhs.gov/LongTermCareHospitalPPS/02a_RTIReports.asp#TopOfPage indicates steady 
progress but also demonstrates the thoughtful analysis resulting from 
RTI's high level of professionalism in pursuit of our goal.
    RTI's work over the past 2.5 years has resulted in an extensive and 
careful analysis of the Medicare populations served by LTCHs, a 
comparison of these populations with those treated in other acute 
settings, including IPPS, IRFs, and Inpatient Psychiatric populations, 
as well as those treated in less intensive settings such as SNFs. This 
work included analysis of Medicare data to compare patient 
characteristics and provider costs for certain types of patients; 
regulatory requirements governing program conditions of participation 
for these different types of facilities; interviews with private sector 
developers of level of care determinations; and site visits and 
interviews with physicians and hospitals treating these typical and 
frequently overlapping populations.
    The results suggested that, while there are distinctive populations 
with very long acute care needs, there are also many patients whose LOS 
at the LTCH may trigger a short stay outlier payment, suggesting their 
LOS was not consistent with an LTCH level of care need as defined by 
longer term acute level hospital care. While existing patient criteria 
such as Interqual are useful for distinguishing between the need for 
hospital-level treatment and a less intensive level, such as SNF care, 
RTI's analysis has determined that, in fact, the private sector 
criteria failed to distinguish between patients at LTCHs and patients 
at acute care hospitals. The criteria proposed by the National 
Association for Long Term Hospitals (NALTH) also had this shortcoming. 
While they identified the intensive acute care patient, they failed to 
identify differences between their admissions' clinical characteristics 
and those treated in a general acute care hospital step-down unit.
    At a recent Technical Expert Panel (TEP) comprised of physicians, 
nurses, and hospital administrators representing, in addition to LTCHs, 
acute care hospitals, IRFs, and SNFs, convened by RTI, all participants 
agreed that LTCHs specialize in treating the types of patients they 
admit, noting that having a high volume of these patients is one of the 
reasons for their successful outcomes. However, it was also noted that 
these services are also provided in general acute care hospitals, 
particularly in ICU step-down units. So, while LTCHs may specialize in 
a select group of patients (the more intensively ill), they are not the 
only providers to successfully provide these treatments. The TEP 
reached consensus that volume was important for successful treatment of 
the complicated cases, regardless of site of care. TEP participants 
continue to be involved in providing feedback to RTI and another TEP is 
being planned based upon the earlier meeting and participant responses.
    We continue to contract with RTI to work on these issues and RTI is 
presently involved into the next phase (phase III) of their project 
which will include the refinement of patient specific comparisons of 
total episode treatment in areas with and without LTCHs. Furthermore, 
RTI is also participating in the CMS-wide effort to better identify 
patient-level differences across the various levels of care.

XII. Payment for Direct Graduate Medical Education (GME)

A. GME Background

    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and implemented in regulations at existing Sec.  413.75 through 
Sec.  413.83, establishes a methodology for determining payments to 
hospitals for the direct costs of approved graduate medical education 
(GME) programs. Section 1886(h)(2) of the Act, as added by COBRA, sets 
forth a payment methodology for direct GME costs involving the 
determination of a hospital-specific, base-period per resident amount 
(PRA) that is calculated by dividing a hospital's allowable costs of 
GME for a base period by its number of residents in the base period. 
The base period is, for most hospitals, the hospital's cost reporting 
period beginning in FY 1984 (that is, the period beginning October 1, 
1983, through September 30, 1984). Generally, for cost reporting 
periods beginning on or after July 1, 1985, Medicare direct GME 
payments are calculated by multiplying the hospital's PRA by the 
weighted number of full-time equivalent (FTE) residents working in all 
areas of the

[[Page 26949]]

hospital (and nonhospital sites, when applicable), and by the 
hospital's Medicare percentage of total inpatient days. In addition, as 
specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting 
periods beginning between October 1, 1993, through September 30, 1995, 
each hospital-specific PRA for the previous cost reporting period is 
not updated for inflation for any FTE residents who are not either a 
primary care or an obstetrics and gynecology resident. As a result, 
hospitals that trained primary care, and obstetrics and gynecology 
residents, as well as nonprimary care residents in FY 1994 or FY 1995 
have two separate PRAs: one for primary care, and obstetrics and 
gynecology residents; and one for nonprimary care residents.
    The Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-
113) (BBRA) 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 that is equal to 70 percent of the 
locality-adjusted national average PRA. In addition, the BBRA 
established a ``ceiling'' that limited the annual inflation update to a 
hospital-specific PRA if the hospital's PRA exceeded 140 percent of the 
locality-adjusted national average PRA. Section 511 of the Benefits 
Improvement and Protection Act of 2000 (Pub. L. 106-554) (BIPA) 
increased the floor established by the BBRA to equal 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 the ceiling to determine whether a hospital-specific PRA 
should be revised.
    Section 1886(h)(4)(F) of the Act established limits on the number 
of allopathic and osteopathic residents that a hospital may count for 
purposes of calculating direct GME payments. For most hospitals, the 
limits are the number of allopathic and osteopathic FTE residents 
training in the hospital's most recent cost reporting period ending on 
or before December 31, 1996.

B. Residents Training in Nonhospital Settings

1. Background
    For purposes of direct GME payments, since July 1, 1987, the 
statute allows hospitals 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 
9314 of the Omnibus Budget Reconciliation Act of 1986 (Pub. L. 99-509) 
(OBRA 86).) Regulations regarding the treatment of time spent by 
residents training in nonhospital sites for purposes of direct GME 
payments were first implemented in the September 29, 1989 final rule 
(54 FR 40286). In regulations adopted in that same rule at Sec.  
413.86(f)(3) (now Sec.  413.78(c)), we stated 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. 
Before October 1, 1997, for IME payment purposes, hospitals were not 
permitted to count the time residents spent training in nonhospital 
settings. Section 4621(b)(2) of the BBA 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 July 31, 1998 final rule (63 
FR 41004 through 41005) at Sec.  412.105(f)(1)(ii)(C) and Sec.  
413.78(d) (formerly designated Sec.  413.86(f)(4)), we specified the 
requirements a hospital must meet to include the time spent by 
residents training in a nonhospital site in its FTE count for portions 
of cost reporting periods occurring on or after January 1, 1999 for 
purposes of both direct GME and IME payments. Section 413.75(b) 
redefined ``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. Section 413.78(e) provides that, 
in order for a hospital to be permitted to count FTE residents training 
in a nonhospital setting, a written agreement must be in place between 
the hospital and the nonhospital site providing 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.
2. Moratorium on Disallowances of Allopathic or Osteopathic Family 
Practice Residents Training Time in Nonhospital Settings, and Questions 
and Answers (Qs&As) on CMS Web Site (Section 713 of the MMA and Sec.  
413.78)
    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. (We note that the 
teaching physician's involvement in the provision of patient care is 
not considered attributable to direct GME.) As long as there are 
supervisory GME costs associated with the nonhospital training, the 
hospital must reimburse the nonhospital setting for those costs 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 
nonhospital sites 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'

[[Page 26950]]

time in the nonhospital setting. Because Sec.  413.78(d) requires 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 pay 
these costs to count FTE residents training in the nonhospital site, as 
long as these teaching physician costs exist.
    Section 713 of the MMA imposed a 1-year moratorium relating to 
certain nonhospital site teaching physician costs for the period from 
January 1, 2004, through December 31, 2004. During this 1-year period, 
we were required to allow hospitals to count FTE allopathic or 
osteopathic family practice residents training in nonhospital settings 
for IME and direct GME payment purposes without regard to the financial 
arrangement between the hospital and the teaching physician practicing 
in the nonhospital setting to which the resident was assigned.
    We instructed our contractors (formerly called ``fiscal 
intermediaries'' or ``FIs'') regarding the effect of section 713 of the 
MMA 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, 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, contractors should allow hospitals to count 
allopathic and osteopathic family practice residents training in a 
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. For further information on this 
provision and for a summary of comments and responses related to this 
provision, please refer to the FY 2005 IPPS final rule (69 FR 49176).
    Furthermore, in response to questions and concerns raised by the 
industry and Medicare contractors as to how to determine the costs 
associated with residency training at the nonhospital setting, as well 
as how and when to pay the nonhospital setting for these costs, we 
posted Qs&As on the CMS Web site on April 8, 2005 at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf. In the 
Qs&As, in response to the question of whether there are situations 
where it is acceptable for the teaching physician to ``volunteer'' his 
or her time supervising residents at the nonhospital site, we stated 
that ``* * *'the relevant question is not whether volunteerism is 
permissible, but whether there is a cost to the nonhospital site for 
supervising the resident training. If there is a cost, the hospital 
must reimburse the nonhospital site for those costs.'' We further 
stated that we believe in situations where the teaching physician 
receives a predetermined compensation amount for his or her time at the 
nonhospital site that does not vary with the number of patients he or 
she treats, there is a cost for the teaching physician time spent in 
nonpatient care direct GME activities. In contrast, if the physician's 
compensation at the nonhospital site is based solely on his or her 
billings, there is no cost for teaching physician time spent in 
nonpatient care direct GME activities. Accordingly, the statute 
continues to require that a hospital must pay ``all or substantially 
all'' the costs of training residents at the nonhospital site to count 
FTE residents training at that site, including teaching physician 
costs, as long as those costs exist.
3. Requirements for Written Agreements for Residency Training in 
Nonhospital Settings (Sec.  413.78(e))
    In implementing section 1886(h)(4)(E) of the Act, to assist 
contractors in determining whether a hospital incurred ``all or 
substantially all'' of the costs of the program in the nonhospital 
setting, we required in Sec.  413.78(c) and (d) (formerly Sec.  
413.86(f)(3) and (4)) that 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. We later specified at Sec.  413.78(d)(2) that the 
written agreement must indicate the amount of compensation provided by 
the hospital to the nonhospital site for supervisory teaching 
activities.
    In an effort to respond to concerns expressed by hospitals about 
the administrative burden associated with meeting the written agreement 
requirements, in the FY 2005 IPPS final rule (69 FR 49179), at Sec.  
413.78(e), we revised our regulations to allow hospitals to choose to 
either enter into a written agreement with the nonhospital site before 
the hospital may begin to count residents training at the nonhospital 
site, or to pay concurrently for the cost of training at the 
nonhospital setting. That is, in the absence of a written agreement, 
hospitals are required to pay ``all or substantially all'' of the costs 
of the training program in the nonhospital setting by the end of the 
third month following the month in which the training occurs.
4. Modification of the Definition of ``All or Substantially All of the 
Costs for the Training Program in the Nonhospital Setting''
    We have met numerous times with industry representatives with the 
goal of developing a proposal which would respond to the concerns 
expressed by the teaching hospital community about the administrative 
burden associated with determining and documenting that hospitals are 
paying for ``all or substantially all'' of the costs for the training 
in the nonhospital setting. Some industry representatives recently 
suggested that we could ease administrative burdens by modifying the 
requirements hospitals must satisfy to meet the statutory requirement 
to incur ``all or substantially all'' of the costs by allowing a 
teaching physician to attest that at least 90 percent of the teaching 
physician's GME time is spent in patient care activities. However, we 
explained in response that the statutory test is tied to whether the 
hospital has incurred ``all or substantially all'' of the costs of the 
training at that site, not to how the teaching physician's GME time is 
spent. Therefore, we do not believe the attestation proposed by the 
industry adequately addresses the statutory requirement that the 
hospital incur ``all or substantially all'' of the costs of the 
training program at that site. We continue to believe that any Medicare 
policy approach to allowing hospitals to count FTE residents training 
in nonhospital settings for IME and direct GME payment purposes must be 
consistent with the statutory requirement that hospitals incur ``all, 
or substantially all'' of the costs of a training program in a 
nonhospital setting. The statute is clearly concerned about the cost to 
the nonhospital site, and we believe the statute has set a priority to 
move resources, in terms of both residents and funding, out into 
community settings. Therefore, where there is a cost to the nonhospital 
setting for training residents, we believe that the Medicare program is 
obligated to ensure that the nonhospital settings receive the funding 
they are entitled to receive from hospitals under the statute.
    Accordingly, we continue to believe that our current definition of 
``all or substantially all'' of the costs, which is based on the costs 
of the training program at the nonhospital site, is true to the intent 
of the statute. However, to address the industry's concerns related

[[Page 26951]]

to burdensome documentation requirements, we are establishing an 
alternative methodology that hospitals may choose to use in determining 
and paying for the teaching physician costs attributable to direct GME 
in the nonhospital sites. As we explain below in this section, we are 
revising the current definition of ``all or substantially all'' of the 
costs to require hospitals to incur a percentage of the costs of the 
training program at the nonhospital site. This revision also generally 
incorporates the industry representatives' concept of a 90 percent 
threshold, but does not specifically relate it to the percentage of 
time spent by the teaching physician on nonpatient care direct GME 
activities, as suggested by industry representatives. Furthermore, as 
explained in more detail below in this section, in determining whether 
a hospital has met the 90 percent cost threshold, we are allowing 
hospitals to use certain shortcuts or proxies in the place of actual 
cost data specific to each teaching physician at each nonhospital site. 
However, hospitals would always still have the option of calculating 
the actual teaching physician costs and the 90 percent threshold using 
actual cost data specific to all, or some of their applicable teaching 
physicians. That is, even if a hospital chooses to calculate the direct 
GME costs of a program using actual teaching physician time and cost 
data (as under existing regulations) rather than using the proxies, 
under this revision, a hospital will only be required to pay at least 
90 percent of the total of the residents' salaries and fringe benefits 
(including travel and lodging where applicable) and the portion of the 
teaching physicians' costs attributable to direct GME for a program at 
the nonhospital site. That is, a hospital would no longer be required 
to pay 100 percent of the residents' salaries and fringe benefits 
(including travel and lodging where applicable), plus the portion of 
the teaching physicians' costs attributable to direct GME at the 
nonhospital site. Instead, a hospital will be required to pay for 90 
percent of the GME costs of a training program in a nonhospital site, 
and will have a choice between two approaches for calculating teaching 
physician's costs.
    Currently, ``all or substantially all of the costs for the training 
program in the nonhospital setting'' is defined at Sec.  413.75(b) 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. We 
are defining ``all or substantially all of the costs for the training 
program in the nonhospital setting'' under Sec.  413.75(b) 
(prospectively for cost reporting periods beginning on or after July 1, 
2007) to mean at least 90 percent of the total of the costs of the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable) and the portion of the cost of teaching physicians' 
salaries attributable to direct GME. We believe this standard is 
consistent with the statute, in that hospitals would still be required 
to incur ``all or substantially all'' of the costs of training programs 
in nonhospital settings, and we would expect this standard to further 
encourage hospitals to shift training to nonhospital settings as 
intended by the statute. Under this revised definition of ``all or 
substantially all'' of the costs for the training program in the 
nonhospital setting, we will create a 90 percent threshold that 
hospitals must meet to count FTE resident time spent training at the 
nonhospital setting for IME and direct GME payment purposes. 
Additionally, under the new definition, hospitals will only have to 
incur a minimum of 90 percent of the costs of the program at a 
nonhospital site to count FTE resident time spent training at the site. 
Furthermore, as is the case with the current definition of ``all or 
substantially all,'' the new definition will not include overhead 
costs.
    We solicited comments on our proposed effective date for purposes 
of both direct GME and IME as to whether our proposal should be 
effective immediately for portions of cost reporting periods occurring 
on or after July 1, 2007, or alternatively, for cost reporting periods 
beginning on or after July 1, 2007. Although an effective date of 
``portions of cost reporting periods occurring on or after July 1, 
2007,'' provides a more immediate response to concerns raised by 
teaching hospitals, we had concerns that establishing new policies in 
the middle of hospitals' cost reporting periods may present some 
logistical challenges, both from an implementation and an audit 
perspective. Therefore, we proposed that the new definition of ``all or 
substantially all'' of the costs would be effective for both direct GME 
and IME for cost reporting periods beginning on or after July 1, 2007.
    As we explained, rather than adopt the industry's suggested 
standard of 90 percent of the teaching physicians' time spent in 
patient care activities, which we do not believe would be sufficiently 
true to the requirements of the statute, as a compromise, we would 
accept that hospitals have incurred ``all or substantially all'' of the 
costs of the program at the nonhospital site (and are therefore 
permitted to count the FTE residents training at the nonhospital site 
for IME and direct GME Medicare payment purposes) if the hospital 
incurs at least 90 percent of the costs of training at that site. Under 
this revised policy, a hospital would not have to demonstrate that it 
has incurred the costs of the teaching physician's time if it has 
otherwise incurred at least 90 percent of the nonhospital site training 
costs by paying the residents' salaries and fringe benefits (including 
travel and lodging where applicable) during the time spent training at 
the site. However, if the residents' salaries and fringe benefits 
(including travel and lodging where applicable) account for less than 
90 percent of the costs of training at the nonhospital site, the 
hospital would have to compensate the nonhospital site for its teaching 
physician costs so that the hospital is incurring at least 90 percent 
of the training program costs at the nonhospital site. If the hospital 
does not meet the 90 percent threshold by only paying for the cost of 
the residents' salaries and fringe benefits (including travel and 
lodging where applicable), the hospital would have to meet the 
threshold by incurring some portion of the teaching physicians' 
salaries that is attributable to direct GME.
    As previously stated in the Qs&As on the CMS Web site on April 8, 
2005 at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf (Answer <greek-i>4), we believe there are typically no 
costs for teaching physician time if the physician's compensation at 
the nonhospital site is based solely and directly on the number of 
patients treated and for which he or she bills, which is the case with 
a solo practitioner. When the solo practitioner is not treating 
patients, he or she is not receiving payment for any other duties at 
the nonhospital site. Therefore, in this instance, there is no cost to 
the nonhospital site for the teaching physician's time. Thus the 
hospital has to incur only 90 percent of intern and resident salaries 
to meet the new regulatory requirements. However, in the case of a 
group practice or clinic setting, the physician often receives a 
predetermined payment amount, such as a salary, for his or her work at 
the nonhospital site. This predetermined payment amount reflects all of 
his or her responsibilities at the nonhospital site, including treating 
patients, training residents, and other administrative activities (as 
applicable), and he or she may receive that predetermined

[[Page 26952]]

payment from the nonhospital site regardless of how many patients he or 
she actually treats. The predetermined amount implicitly also 
compensates the physician for supervising residents. A portion of this 
implicit compensation is the cost attributable to teaching activities. 
Under current regulations, in order to count the residents training at 
that site, the hospital must pay the nonhospital site this amount. 
However, there may be instances in a group practice, where a teaching 
physician is not receiving a form of predetermined compensation for his 
or her work at the nonhospital site. For example, several physicians 
may work in the same office and share overhead expenses such as 
electricity and rent, but there is no sharing of revenues from patient 
care activities. Rather, the physicians operate as solo practitioners 
and are not compensated according to some predetermined arrangement. In 
cases such as these, we assume that the teaching physician is 
functioning as a solo practitioner and that teaching physician costs 
for GME training at the nonhospital site are zero. Accordingly, the 
revised policy being adopted in this final rule would more likely be 
applicable to members of group practices (or physicians in other 
arrangements) where the teaching physician receives a salary or other 
form of predetermined compensation for his or her work at the 
nonhospital site. However, we note that under the revised policy, in 
the case of solo practitioners, hospitals must continue to pay for at 
least 90 percent of the total cost of the residents' salaries and 
fringe benefits, including travel and lodging where applicable.
    Comment: We received several comments noting the commenters' 
appreciation of the efforts CMS has devoted towards the issue of 
residency training at nonhospital sites and the belief that the 
proposed rule is a good first step in further improving the regulations 
regarding residency training at nonhospital sites. The commenters 
believe that by not requiring hospitals to pay for 100 percent of the 
costs of training at the nonhospital site and by allowing the use of 
proxies, the proposed rule may provide for considerable administrative 
relief.
    Response: We appreciate the commenters' support of the proposed 
rule. We agree with the commenters and believe that the final rule will 
provide significant administrative relief and support the training of 
residents at nonhospital sites.
    Comment: Several commenters maintained that the FY 1998 IPPS final 
rule (63 FR 40986 July 31, 1998), as well as a program transmittal A-
98-44 from December 1998 stated that whatever reasonable amount was 
agreed upon by the nonhospital site and the hospital, that amount would 
be accepted as reflecting the costs of the nonhospital site.
    Response: Although some may have read our previous guidance to 
suggest that the amount of payment for teaching physician costs in the 
nonhospital setting could be decided based solely upon negotiations 
between the hospital and nonhospital site that has not been our policy. 
As we indicated in the Qs&As posted on the CMS Web site on April 8, 
2005 at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf, to the extent that there is a cost associated with 
teaching physicians for the residency training program at the 
nonhospital site, according to statute and regulations, the hospital 
must pay ``all or substantially all'' of the cost.
    Comment: Several commenters requested a return to the definition of 
``all or substantially all'' that was in place prior to 1999, which did 
not include costs associated with teaching physicians in the 
nonhospital site. One commenter specifically stated that reversing the 
unintended consequences of the previous definition change was difficult 
and, likewise, ``Once in place, the costs of reversing this new rule 
and definition would be similarly difficult.''
    Response: As explained earlier, we believe that our current 
definition of ``all or substantially all of the costs for the training 
program in the nonhospital setting,'' which includes the GME portion of 
the teaching physicians' salary, is most consistent with the statutory 
language and legislative intent. Therefore, we are not returning to the 
pre-1999 definition of that term.
    Comment: We received many comments regarding the effective date for 
our proposed policy revision. Some commenters believe that the policy 
revision should be effective for portions of cost reporting periods 
occurring on or after July 1, 2007 while others believe that the policy 
revision should be effective for cost reporting periods beginning on or 
after July 1, 2007. One commenter asked that hospitals be able to apply 
the new method to any years where residents were disallowed. Other 
commenters requested that the proposed policy revision be effective 
retroactively to previous cost reporting periods.
    Response: We solicited comments concerning the effective date of 
the proposed policy revisions. After carefully considering these 
comments, we have decided to finalize this policy revision to be 
effective for cost reporting periods beginning on or after July 1, 
2007. As we stated in the proposed rule, we are concerned that 
establishing new policies in the middle of hospitals' cost reporting 
periods would present burdensome technical and administrative 
difficulties, both from an implementation and an audit perspective. In 
addition, we do not believe that we have the authority to follow the 
commenters' suggestions to implement this provision retroactively. 
Section 1871(e)(1)(A) of the Act generally prohibits the Secretary from 
making retroactive substantive changes in policy unless retroactive 
application of the change is necessary to comply with statutory 
requirements, or failure to apply the change retroactively would be 
contrary to the public interest. Only in very rare cases do we apply a 
rule retroactively (for example, in the wake of Hurricanes Katrina and 
Rita in 2005 where a retroactive change was clearly in the public 
interest). In those instances, we believed that the failure to apply 
regulatory changes retroactively would be contrary to the public 
interest because hospitals affected by the hurricanes could otherwise 
face dramatic financial hardship, which would threaten the stability of 
GME programs in the emergency area. In contrast, we do not believe that 
there is a compelling argument that demonstrates a degree of public 
interest that would justify applying this proposed policy revision 
retroactively.
    Comment: Several commenters stated that they do not believe the 
proposed policy revision actually addresses the real concern that the 
hospital industry has with our current policy. These commenters believe 
the central issue is supervisory physician volunteerism in nonhospital 
settings. The commenters stated that volunteerism is historically 
endemic to physician education, and therefore, hospitals should not 
need to pay the costs of the supervisory physician when a physician is 
willing to volunteer as a supervisor. One commenter stated, ``We urge 
CMS in the final rule to issue a clear policy statement that volunteer 
status of faculty will be determined by the hospital and nonhospital 
site and that even physicians in group practices who are compensated a 
predetermined amount not based on patient billings may still be 
volunteering their teaching services.'' The commenter further stated 
that there is no cost for supervising residents in group practices 
since the physicians are making the same amount per year regardless of 
whether or not the teaching physicians are supervising residents. Some 
commenters believe

[[Page 26953]]

that since physicians are ``exempt'' from wage and hourly rules under 
labor law, there is no reason why the physician and the physician's 
employer could not agree that the physician's teaching responsibilities 
are undertaken voluntarily by the physician, do not lessen the 
physician's duties to the employer, and involve time besides the time 
that is necessary for the physician to meet fully his or her 
responsibilities to the employer. The commenters noted that the rules 
applicable to Federal government employers recognize that volunteer 
time, even in the course of usual business hours, is not compensated by 
the Federal government (http://www.opm.gov/oca/leave/html/volunteer2.asp).
    Response: According to the statute, a hospital is required to incur 
``all or substantially all'' of the costs for a training program at the 
nonhospital setting in order to count the FTE residents training in the 
nonhospital setting for GME payment. There is no reference in statute 
to other labor laws that might apply to physicians. Accordingly, our 
proposal only addresses the issue of determining costs of training 
programs in nonhospital settings. With regards to supervisory physician 
time, we address the issue of the costs to the nonhospital site for 
supervising the resident training. Our policy has been that if there is 
a cost, the hospital must reimburse the nonhospital site for those 
costs. If there are no costs, then no payment for supervisory physician 
time is required. Typically, there is a cost for teaching physician 
time. For example, there is a cost to the nonhospital site when the 
physician receives a predetermined compensation amount for his or her 
time at the nonhospital site that does not vary with the number of 
patients he or she treats. In contrast, there is typically no cost for 
teaching physician time if the physician's compensation at the 
nonhospital site is based solely and directly on the number of patients 
treated and for which he or she bills. The most obvious example of this 
situation would be a solo practitioner that serves at a nonhospital 
site. We note that the hospital is required to compensate the 
nonhospital site for the costs of the teaching physicians' time spent 
in activities in connection with an approved residency training program 
other than the supervision of residents while furnishing billable 
patient care services. That is, only the costs associated with teaching 
time spent in activities within the scope of the GME program, but not 
in billable patient care activities, would be considered direct GME 
costs that would need to be incurred by the hospital.
    Comment: Generally, commenters were pleased that CMS is moving away 
from the requirement that hospitals need to pay 100 percent of the 
costs of training at nonhospital sites in order to comply with the 
statutory mandate of incurring ``all or substantially all'' of the 
costs. However, many commenters feel that the threshold for ``all or 
substantially all'' should be further reduced beyond 90 percent. 
Commenters stated that the threshold should be reduced to 75 percent in 
accordance with our interpretation of ``substantially all'' under the 
``Stark'' provisions. One commenter stated that in addressing the 
``Stark'' provisions, ``CMS requires `substantially all of the patient 
care services of the physicians who are members of a group (that is, at 
least 75 percent of the total patient care services of the group 
practice members) must be furnished through the group * * *' '' In 
reference to whether these provisions conflict with the requirements 
under Stark, one commenter asked CMS to ``Please confirm in your 
commentary that a reasonable attempt to comply with the requirements to 
pay for the costs at nonhospital sites, whether it be under the written 
agreement standard or under the concurrent payment standard, using 
proxies or real costs, is considered by CMS to be in compliance with 
Stark law.'' The commenter further stated that if the action taken in 
the aforementioned sentence is not in full compliance with Stark law, 
CMS should make an exception under Stark for payments to nonhospital 
sites where the payments are made to referring physicians. Another 
commenter stated that ``* * * none of the key organizations involved in 
this issue have recommended such a [90 percent] standard. To be fair, 
the community did raise the question of preceptors attesting to 90 
percent of their time being spent with residents in patient care * * * 
but we are unaware of any stakeholder group that has recommended 
`substantially all' be defined as 90 percent of costs in the 
nonhospital setting.'' Other commenters requested that the threshold 
should be reduced to 75 percent because, as one commenter stated, 
``Courts have also defined `substantially all' as being 75 percent or 
greater in the context of corporate and securities law.'' Another 
commenter requested that the threshold be reduced to 60 or 70 percent 
because such a number would provide for increased flexibility at the 
local level, while another commenter believed that a threshold of 70 
percent was more appropriate because it was more reflective of the 
reimbursement amounts hospitals receive from the government. A request 
was also made that the threshold be reduced to 80 or 85 percent.
    Response: The statute requires hospitals to pay for ``all or 
substantially all,'' not just ``substantially all,'' of the cost of the 
training program in the nonhospital setting. We believe that in using 
the term ``all or substantially all,'' Congress' intention was that 
hospitals pay close to 100 percent of the nonhospital site GME training 
program costs (otherwise the ``all'' would add no meaning). As we 
described in the proposed rule, prior to proposing to revise the 
definition of ``all or substantially all'' to mean at least 90 percent 
of the total of the costs of the residents' salaries and fringe 
benefits (and travel and lodging if applicable) and supervisory 
teaching costs associated with direct GME, we had received a suggestion 
from industry representatives that hospitals should be considered by 
CMS to meet the statutory mandate to pay ``all or substantially all'' 
of the costs if the teaching physician can attest that he or she is 
spending at least 90 percent of his or her GME time in nonpatient care 
direct GME activities at the nonhospital site. Since the issue is the 
cost associated with that teaching time, we did not agree with this 
suggestion. However, we continue to believe that a standard of 90 
percent of the total costs is an appropriate interpretation of ``all or 
substantially all.'' In response to whether a reasonable attempt to 
comply with the regulations for residency training at nonhospital sites 
is considered to be in compliance with the Stark law, we believe that 
provided that the rate paid to the supervising physician is fair market 
value for the supervisory duties, the arrangement should not be 
inconsistent with the Stark law. Since both the use of proxies and 
actual data would be consistent with fair market value, we believe that 
this final policy conforms with the Stark law.
    Comment: One commenter believes that we clearly stated in the 
proposed regulations at Sec.  413.75(b)(2), Sec.  413.78(f)(2) and 
Sec.  413.78(f)(3)(ii) that a hospital only has to incur 90 percent of 
teaching costs. The commenter also believes that, although not restated 
in proposed regulations, the 90 percent threshold also applies to the 
requirements in Sec.  413.78(f)(3)(i).
    Response: We agree with the commenter that the 90 percent threshold 
also applies to Sec.  413.78(f)(3)(i).

[[Page 26954]]

    Comment: Many commenters stated that members of a group practice 
should be able to attest that they are volunteering and be viewed in 
the same manner as CMS views solo practitioners. Commenters also stated 
that it is more common for residents to train in group practice 
settings than with solo practitioners. One commenter stated business 
agreements vary among group practices and that, ``Compensation is based 
on patient volume and, in effect, each physician is a solo 
practitioner.'' Another commenter stated that for its specific 
nonhospital site, there is no additional payment made to a physician 
who teaches, nor is salary removed from a physician who does not teach. 
One commenter stated that although the commenter believes the proposed 
rule should not apply to solo practitioners, the commenter also 
believes that our logic is incorrect in determining why there are 
typically no teaching physician costs associated with solo 
practitioners and group practitioners that function as solo 
practitioners. The commenter stated, ``The fact that the physicians' 
compensation is derived solely from patient care revenues is not 
definitive in and of itself. Rather it demonstrates that the physician 
received no compensation for supervisory activities.'' The commenter 
further noted that, ``At a minimum, group practices should be permitted 
to rebut the `implicit' compensation presumption by demonstrating that 
no portion of physicians' salaries is linked to resident supervision.'' 
Another commenter stated that teaching hospitals and nonhospital sites 
are in the best position to determine if there are any costs for 
training residents at the nonhospital site, and if so, how the costs 
should be compensated. The commenter stated that residents gain 
clinical experience while training at nonhospital sites. Therefore, the 
costs associated with their training are de minimus and if the group 
practice decides collectively that it is volunteering as a practice, it 
should be able to do so.
    Response: As we have previously stated in the April 8, 2005 Qs&As 
and in the RY 2008 LTCH PPS proposed rule ``* * * the relevant question 
is not whether volunteerism is permissible, but whether there is a cost 
to the nonhospital site for supervising the resident training. If there 
is a cost, the hospital must reimburse the nonhospital site for those 
costs.'' Therefore, if a teaching physician in a group practice is 
receiving a predetermined salary for his or her activities, and 
included in his or her activities are supervisory GME activities at a 
nonhospital site, then there is a cost associated with those 
activities. If teaching physicians that are members of a group practice 
can document that their circumstances are similar to solo practitioners 
in that they receive no predetermined salary and receive income solely 
from the patients they treat and the services for which they bill, the 
hospital may supply this documentation to the Medicare contractor 
during audit.
5. Implementation of a 90 Percent Cost Threshold
    In revising the definition of ``all or substantially all'' of the 
costs of the program at a nonhospital site, and in establishing a 90 
percent threshold, there are several variables that are important in 
the methodology for determining the minimum amount of training program 
costs that a hospital must pay in order to count FTE residents training 
in a nonhospital site. These variables are: teaching physicians' 
salaries, residents' salaries and fringe benefits (including travel and 
lodging where applicable), the number of hours per week that the 
teaching physician spends in direct GME (not billable patient care) 
activities in the nonhospital site, and the number of hours that a 
nonhospital site is open each week. To provide the reader with a 
context for the new methodology, we will first explain the methodology 
briefly, provide two examples, and then proceed to an in-depth 
discussion of each variable (see section XII.B.5.b. of the preamble of 
this final rule).
a. Methodology
    One of the primary complaints voiced by the hospital industry over 
the past several years is that our policy requiring hospitals to 
determine the portion of the teaching physician cost attributable to 
direct GME in the nonhospital site results in an untenable 
documentation burden since many physicians are reluctant to disclose 
their salary information to the hospitals. One solution to this problem 
suggested by the hospital industry is to use national average physician 
salary information as a proxy for teaching physician-specific salaries 
in the determination of the total cost of the program at a nonhospital 
site. In addition, since the cost of the teaching physician time that 
the hospital must incur is based on the amount of time the teaching 
physician spends in nonpatient care direct GME activities, the hospital 
industry has been concerned that determining this GME time could 
require burdensome time studies. Therefore, we are adopting an 
alternative methodology that hospitals may choose to use, instead of 
actual costs, to calculate teaching physician costs in nonhospital 
sites. Using this alternative methodology, to facilitate a less 
burdensome way for a hospital to calculate the teaching physician costs 
associated with GME training at the nonhospital site, we are allowing 
hospitals to use 3 hours per week as a presumptive standard number of 
hours that a teaching physician spends in nonpatient care direct GME 
activities at a particular nonhospital site. To determine the 
percentage of the average salary associated with the 3 hours the 
teaching physician is presumed to spend in nonpatient care direct GME 
activities, a hospital would divide 3 hours by the number of hours the 
nonhospital site is open each week. Next, the hospital would multiply 
this percentage of time spent in nonpatient care direct GME activities 
by the national average salary of that teaching physician's specialty 
to calculate the cost of the teaching physician's direct GME time. The 
cost of the teaching physician's direct GME time would then be added to 
the costs of the salaries and fringe benefits (including travel and 
lodging expenses, where applicable) of the FTE resident(s) rotating in 
that program to that nonhospital site to determine the GME costs for 
that program at that site. (If FTE resident(s) are not rotating to a 
particular nonhospital site throughout a whole year, then the national 
average salary of the teaching physician would be prorated accordingly. 
The cost of the residents' salaries and fringe benefits (including 
travel and lodging where applicable) would already be reflective of an 
FTE count). The hospital must pay at least 90 percent of these total 
GME costs for the program at that nonhospital site to count the 
resident(s) training there for direct GME and IME purposes. If the 
hospital is already paying all, or even a portion of the residents' 
salaries and fringe benefits (including travel and lodging where 
applicable), and if the amount that the hospital is paying for the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable) is equal to at least 90 percent of the GME costs at 
the nonhospital site (that is, the 90 percent threshold), then the 
hospital would be considered to be incurring ``all or substantially 
all'' of the costs, and need not incur an additional amount for 
teaching physician compensation to be permitted to include the FTE 
residents training in the nonhospital site in its FTE count for 
purposes of direct GME and IME payments. However, if the costs of the 
residents' salaries and fringe

[[Page 26955]]

benefits (including travel and lodging where applicable) does not equal 
at least 90 percent of the GME costs of the training program at the 
nonhospital site, then the hospital must incur an additional amount for 
teaching physician costs based on the national average salary 
information until it is incurring at least 90 percent of the GME costs 
for that nonhospital site program. That is, under the alternative 
definition of ``all or substantially all'' of the costs, a hospital is 
required to incur at least 90 percent of the total GME costs for a 
particular program at a particular nonhospital site. The GME costs of a 
particular program at a particular nonhospital site consist of FTE 
residents' salaries and fringe benefits (including travel and lodging 
costs where applicable), and the portion of teaching physician 
compensation (which may be based on national average survey data) 
attributable to direct GME. As will be explained in more detail below 
in this section, the hospital always has the option of documenting the 
actual teaching physician's cost using actual time or salary 
information to pay at least 90 percent of the total of the costs of the 
program at the nonhospital site. In summary, the formula for 
determining the 90 percent threshold, or the minimum amount that a 
hospital must pay for the GME costs of a particular program at a 
particular nonhospital fnl;site is:

    0.90 x [(sum of each FTE resident's salary + fringe benefits 
(including travel and lodging where applicable)) plus the portion of 
the teaching physician's compensation attributable to nonpatient care 
direct GME activities.]

    The portion of the teaching physician's compensation attributable 
to nonpatient care direct GME activities may be calculated as follows:

    (3/number of hours nonhospital site is open per week) x (national 
average salary for each teaching physician*)

    * The number of teaching physicians included in this formula is 
subject to a 1:1 resident to teaching physician limit, as explained 
below in this section.

    The following are two examples of the alternative methodology:

    Example 1: Assume one teaching physician is supervising one FTE 
resident in a nonhospital site for one residency year. The national 
average published salary amount for that teaching physician's 
specialty is $120,000, and he works in a clinic that is open 60 
hours per week. Using the standard of 3 hours spent in nonpatient 
care direct GME activities per week, the teaching physician spends 5 
percent of his time in GME activities (that is, 3/60 = 0.05 or 5 
percent). To determine the cost of the teaching physician's time, 
the hospital may make the following calculation: $120,000 x 0.05 = 
$6,000. This teaching physician's cost is added to the resident's 
salary and fringe benefits to calculate the cost of the training at 
the nonhospital site in the following manner: $6,000 [cost of one 
teaching physician] + $60,000 [actual cost of the FTE residents' 
salary & fringe benefits] = $66,000. To meet the new definition of 
``all or substantially all,'' the hospital would be required to pay 
at least 90 percent of the costs of the training program at the 
nonhospital site, which in this example equals $59,400 (that is, 
0.90 x $66,000). Since in this case the cost of one FTE resident's 
salary and fringe benefits is $60,000, the hospital could reach the 
90 percent cost threshold by simply incurring the resident's salary 
and fringe benefits during training at the nonhospital site.
    Example 2: Assume one teaching physician is supervising one FTE 
resident in a nonhospital site for an entire residency year. The 
national average published salary amount for that teaching 
physician's specialty is $200,000, and she works in a clinic that is 
open 40 hours per week. Using the standard of 3 hours spent in 
nonpatient care direct GME activities per week, the teaching 
physician spends 7.5 percent of her time in GME activities (that is, 
3/40 = 0.075 or 7.5 percent). To determine the cost of the teaching 
physician's time, the hospital may make the following calculation: 
$200,000 x 0.075 = $15,000. This teaching physician's cost is added 
to the resident's salary and fringe benefits to calculate the cost 
of the training at the nonhospital site in the following manner: 
$15,000 [cost of one teaching physician] + $60,000 [actual cost of 
the FTE residents' salary and fringe benefits] = $75,000. To meet 
the new definition of ``all or substantially all,'' the hospital 
would be required to incur at least 90 percent of the costs of the 
training at the nonhospital site, which in this example equals 
$67,500 (that is, 0.90 x $75,000). Since in this case the cost of 
one FTE resident's salary and fringe benefits is $60,000, the 
hospital has not met the 90 percent threshold by only incurring the 
resident's salary and fringe benefits. The hospital would have to 
incur at least an additional $7,500 of the cost (that is, $67,500 - 
$60,000) to reach the 90 percent threshold to be permitted to count 
the FTE resident for IME and direct GME purposes. Alternatively, the 
hospital could document the actual teaching physician cost using 
time or salary information specific to that teaching physician at 
that site, and use that amount to calculate 90 percent of the actual 
training program costs.
b. Explanation of Variables
    In the following section, we discuss each variable in the 
methodology for determining the cost that a hospital must incur to 
count FTE residents training in nonhospital sites, and explain our 
rationale for employing each of these variables. As stated previously, 
the variables are: teaching physicians' salaries; residents' salaries 
and fringe benefits (including travel and lodging where applicable); 
the number of hours per week that the teaching physician spends in 
nonpatient care GME activities in a nonhospital site; and the number of 
hours that a nonhospital site is open each week.
(1) National Average Physician Salary Data by Specialty
    One of the foremost objections voiced by the hospital industry to 
our current policy is the documentation burden associated with 
requesting salary information from individual teaching physicians in 
nonhospital sites. Hospitals believe that many teaching physicians in 
nonhospital sites are reluctant to disclose their personal salary 
information, yet this disclosure is necessary to enable the hospital to 
determine and pay the nonhospital site for the actual costs of the GME 
program in accordance with our current regulations. One suggestion 
mentioned by the hospital industry as an alternative to obtaining 
individual teaching physician-specific salary information is to allow 
hospitals to use national average salary survey data by specialty. We 
understand that there are a number of organizations that conduct annual 
national surveys on physician compensation. We proposed to allow 
hospitals to use physician compensation survey data as a proxy to 
determine the teaching physician costs associated with GME in a program 
at a particular nonhospital site. For example, one such national 
organization that collects data on physician compensation that we are 
considering using is the American Medical Group Association (AMGA). 
AMGA's 2006 Medical Group Compensation and Financial Survey was 
performed under contract by RSM McGladrey. Founded in 1950, AMGA 
(formerly the American Association of Medical Clinics) is a trade 
association which dedicates itself to making the ``* * * multi-
specialty medical group model the preferred delivery system for 
patient-centered, affordable, quality medical care in America,'' and 
represents 283 medical groups that include an average of 272 
physicians. AMGA's use of the term ``medical group'' is based on the 
American Medical Association's definition of ``group practice,'' which 
is defined as a group that ``includes the provision of health care 
services by three or more physicians who are formally organized as a 
legal entity governed by physicians in which business, clinical, and 
administrative facilities, records and personnel are shared and the 
practice goals, objectives, and values are commonly defined. Income 
from medical services provided by the group

[[Page 26956]]

is treated as receipts of the group and is distributed according to 
some prearranged plan.'' AMGA has been performing surveys like the 2006 
Medical Group Compensation and Financial Survey since 1986. The 2006 
survey was sent to over 2,600 medical groups, including medical groups 
that are not members of AMGA. To give readers an idea of the average 
compensation amounts in the survey, we have randomly selected 10 
specialties included in the 2006 survey and listed their compensation 
information in Table 8. If we adopt the AMGA survey for use to 
determine the cost of teaching physicians' time attributable to GME, we 
would make the salary information for all specialties accessible to 
hospitals on our Web site and would provide it in a manner similar to 
Table 8.

                 Table 8.--Physician Salary Information
------------------------------------------------------------------------
                                            Mean salary    Median salary
               *Specialty                  (in dollars)    (in dollars)
------------------------------------------------------------------------
Cardiology..............................         411,916         363,081
Dermatology.............................         336,531         306,935
Family Medicine.........................         187,891         178,366
Gynecology and Obstetrics...............         286,418         271,273
Internal Medicine.......................         192,264         183,840
Ophthalmology...........................         307,044         281,112
Pediatrics & Adolescent: General........         191,122         182,186
Physical Medicine and Rehabilitation....         208,442         207,004
Diagnostic Radiology: Non-Interventional         415,521         400,000
General Surgery.........................         331,970        310,736
------------------------------------------------------------------------
* This information was obtained from the 2006 Medical Group Compensation
  and Financial Survey published by the American Medical Group
  Association[supreg] (AMGA). For further information, visit AMGA's Web
  site at http://www.amga.org/.

    We solicited comments as to whether we should use the mean or 
median compensation amounts for purposes of determining the teaching 
physicians' cost. In addition, although we recognize that there are 
generally geographic variations in salary amounts within each specialty 
(and, although not included in Table 8, AMGA does provide some detail 
of salaries by geographic area), we proposed to use the single national 
average or median salary amount for each specialty, rather than 
consider geographic variations, because we want to simplify and 
streamline the methodology for determining the GME costs in nonhospital 
sites as much as possible. We also solicited comments about whether 
AMGA's salary information should be used, and if not, which other 
physician compensation survey (or possible mix of surveys) would be 
more appropriate for this purpose, and whether we should consider 
additional factors such as geographic variation in physician salaries 
within each specialty. We noted that we believe it is important for the 
organization providing specialty-specific physician compensation 
information for this purpose to be one that is nationally recognized as 
an authoritative source. Additionally, we believe the data should 
contain compensation amounts for the fullest range possible of 
specialties and subspecialties, and should be issued annually so that 
hospitals will always have the most current data to use in determining 
the teaching physician costs in nonhospital sites. In addition, we 
would prefer a survey that is available to the public at no cost. (We 
understand that a number of these surveys are proprietary.) In 
addition, we solicited comments as to how to make the survey data 
available in the most efficient possible manner.
    Regardless of the survey source that we ultimately use, we proposed 
that hospitals would use the most recent survey data available as of 
the beginning of the hospital's particular cost reporting year. For 
example--
    <bullet> If residents are rotating to a particular nonhospital site 
to receive training in family practice in a hospital's cost reporting 
year beginning January 1, 2008, then the hospital would use the family 
practice average salary from the most recently issued survey (in the 
case of AMGA, 2007) as the salary cost of that teaching physician, even 
though that teaching physician may in fact earn more or less than that 
national average salary amount.
    <bullet> If the teaching physician is a neurologist providing 
residents with neurology training in a nonhospital site in a hospital's 
cost reporting year beginning July 1, 2007, then the hospital would use 
the neurology average salary from the most recently issued survey (in 
the case of AMGA, 2006, since AMGA's surveys are typically released in 
August) as the salary cost of that teaching physician.
    Comment: Numerous commenters suggested that in determining the 
proxy amount for teaching physician supervisory costs, hospitals should 
be able to use CMS's reasonable compensation equivalents (RCEs). One 
commenter, specifically stated ``The RCEs have been relied upon by CMS 
and its predecessor, the Health Care Financing Administration, for 
nearly 24 years as its measure of the reasonableness of physician 
compensation and, thus, those amounts should be used in this regulation 
as well.'' Furthermore, many commenters stated that if we choose to use 
AMGA data as its teaching physician salary proxy source, we would be 
requiring the use of data with values that ``substantially exceed'' 
what it considers to be reasonable under the RCEs. Some commenters view 
use of AMGA data, which produces physician salary amounts which are 
higher than RCEs as being ``arbitrary and capricious.'' Several 
commenters stated that if we choose not to use RCEs, we should use data 
from the AAMC's Faculty Salary Survey, which has an excellent response 
rate, can be made accessible to the public, and includes a ``broad 
range of specialties'' and as reported by one commenter, the AAMC's 
2005-2006 survey report ``* * * includes data provided by all 125 
accredited allopathic medical schools in the United States.''
    In addressing whether hospitals should be able to use mean or 
median physician salary amounts in determining the proxy for teaching 
physician supervisory costs, several commenters requested that median 
salaries be used since medians are not affected by outlier data. 
Another commenter stated that since the salary amounts in AMGA's survey 
are not adjusted by the geographic area wage index, median physician 
salary amounts

[[Page 26957]]

should be used. One commenter stated that mean salary amounts should be 
used because using the mean salary would account for both range and 
frequency, while using the median would only account for frequency. 
Another commenter stated that for situations in which there is no 
salary information available for a certain subspecialty, we should 
consult with the AMA or AOA and encourage national data survey groups 
to start tracking data for these subspecialties.
    Some commenters suggested that when available, hospitals should be 
able to use physician salary data that accounts for geographic 
variations including variations between rural and urban areas, while 
other commenters were opposed to using data that accounted for 
geographic adjustments because of the potential for added complexity. 
One commenter stated that hospitals should be allowed ``* * * to use a 
comprehensive source of locality adjusted physician compensation 
information as a proxy for actual compensation in determining non-
hospital training costs.'' Another commenter stated that if we do not 
allow hospitals to account for geographic variations, we would be 
requiring that hospitals rely on national salary data which is 
inaccurate and make it necessary for hospitals to collect their own 
hospital-specific data. One commenter stated that since the goal of 
proxies was to simplify the process, there should not be more than one 
national salary amount for each specialty. Another commenter stated, 
that within specialties, the commenter ``* * * has not identified 
significant regional variations, and any large variation that might 
exist would be accounted for by simply using the median.'' Lastly, a 
commenter stated that in states such as Utah, using a national salary 
proxy amount would not account for the fact that physicians' wages are 
lower than in other parts of the country and, therefore, if Utah used 
the national salary proxy it would be paying more than 90 percent of 
the total costs of training residents at the nonhospital site.
    Response: In the RY 2008 LTCH PPS proposed rule, we solicited 
comments on what specific survey should be used as a proxy source in 
determining supervisory teaching physician costs. We also requested 
comments on whether we should consider geographic adjustments and 
whether we should use a mean or median salary amount. We appreciate the 
commenters' suggestions regarding what survey data should be used and 
whether we should use data adjusted for geographic variations, or use 
the mean or median salary point as the proxy for physician salary 
amounts.
    In response to the commenters' suggestions that the proxy not be 
based on the AMGA data but rather be based on salary data used to 
establish Medicare's reasonable compensation equivalent (RCE) limits, 
we disagree with the commenters that the RCE limits would be an 
appropriate measure in the context of nonhospital site GME training 
programs. Although RCEs are appropriate as they are currently used in 
conjunction with other Medicare payment policies, we do not believe 
they are appropriate for use in determining a proxy for supervisory 
teaching physician costs in nonhospital sites. Currently, RCEs are only 
applied in the determination of reasonable costs of physician 
compensation in the few remaining types of facilities paid on a 
reasonable cost basis, the vast majority of which are not teaching 
hospitals. RCEs are not applied to the costs of any physician 
compensation in teaching hospitals that are paid under the IPPS. Thus, 
we do not believe RCE limits would represent an appropriate proxy to 
account for supervisory GME teaching physician costs in nonhospital 
settings. In addition, we note that under the RCE limits, exceptions 
are made for providers, such as small or rural hospitals, that may have 
difficulty recruiting or retaining physicians at the prescribed RCE 
level. As stated in the August 1, 2003 Federal Register (68 FR 45459) 
``* * * if a provider is able to demonstrate to the intermediary its 
inability to recruit or maintain physicians at a compensation level 
allowable under the RCE limits * * * the intermediary may grant an 
exception to the RCE limits established under these rules.'' Since it 
may be difficult to recruit and retain physicians in rural nonhospital 
sites, we believe the use of RCEs as a proxy for the cost of teaching 
physician time in rural nonhospital sites could underestimate those 
costs since they are generally lower than market levels, or the AMGA 
salary amounts.
    The updated RCEs published in the August 1, 2003 Federal Register 
(68 FR 45459), only include nine specialties. We do not believe the 
RCEs would provide the best representation of specialties for purposes 
of establishing proxies for supervisory teaching physician costs in 
nonhospital settings. In the August 1, 2003 Federal Register, we also 
stated, ``If no specialty category is appropriate (for example, in 
determining the reasonable cost for an emergency room physician), the 
intermediary will use the reasonable compensation equivalent level for 
the `Total' category, which is based on income data for all 
physicians'' (68 FR 45459). The goal in using the physician salary 
proxy to determine supervisory teaching physician costs, for purposes 
of determining whether a hospital has met the statutory requirement to 
pay ``all or substantially all'' of the costs of the training at the 
nonhospital site, is to allow the hospital to use a figure that 
reflects the physician's actual salary without having the 
administrative burden of determining the physician's actual salary. 
Since the RCEs only exist for nine physician specialties, it would be 
frequently necessary to use the ``Total'' category when salary 
information for a specific specialty is not available. This would be 
contrary to our goal of using a proxy which reflects the actual amount. 
For the reasons cited above in this section, we do not believe RCEs are 
the most appropriate source of physician salary data to use in the 
context of policies regarding supervisory teaching physician salaries 
in nonhospital settings; and therefore, we will not use them as proxies 
for supervisory teaching physician costs.
    In response to the request that we use the AAMC's Faculty Salary 
Survey to establish proxies for supervisory teaching physician costs, 
we question the appropriateness of using the AAMC's data in the 
determination of a proxy since we note that several salary amounts in 
the AAMC data are close in value to that of the RCE amounts which, as 
we explained earlier, may not fully reflect total physician 
compensation amounts. As we explained above, we believe AMGA's survey 
data are extremely comprehensive and by making the necessary 
information available on our Web site, AMGA data would be easily 
accessible to the public. Therefore, we are finalizing our policy to 
use survey data published by AMGA as a proxy for physician compensation 
in nonhospital settings, and thus, in determining supervisory teaching 
physician costs. However, we will continue to monitor the various 
survey options and consider whether other data sources are appropriate 
for this purpose.
    Since some members of the teaching hospital community have claimed 
that collection of actual data is burdensome, we are seeking, through 
the use of proxies, to make the calculation of supervisory teaching 
physician costs for GME training at the nonhospital site as 
straightforward as possible. Therefore, we believe that for each 
available specialty, only one national physician salary amount should 
be used. Further, we agree with many commenters that this physician 
salary amount should not be adjusted for geographic variation because 
doing so would add an

[[Page 26958]]

additional layer of complexity. In cases where no subspecialty salary 
amount is available in the AMGA data, hospitals should use the 
physician salary amount for the closest less-specialized form of that 
specialty. For example, as we proposed in the RY 2008 LTCH PPS proposed 
rule (72 FR 4824), ``* * * if residents are receiving training from a 
forensic pathologist, and the national average salary for the 
subspecialty of forensic pathology is not included in the physician 
compensation survey, then the hospital should instead use the national 
average salary for the specialty of pathology to determine the cost of 
that teaching physician.'' We also agree with the commenters' 
suggestion that median salary amounts should be used as the proxy 
physician salary amount since median salary amounts would not be 
influenced by outlier data. Therefore, we are finalizing the policy to 
require hospitals that choose to use the proxy method to calculate 
supervisory teaching physician costs to use AMGA's median physician 
salary amount for the required specialty.
    Comment: One commenter stated that CMS should use average 
compensation figures for dental faculty based on specialty and regional 
variation. The commenter stated that the commenter would be happy to 
work with CMS to develop compensation figures for dental programs.
    Response: While we appreciate the point raised by the commenter 
that the AMGA data does not apply to dental faculty, at this point we 
are unaware of a comparable data source for dental faculty salaries. We 
will work with the commenter to determine whether we can develop proxy 
salary amounts for supervisory dentists.
    Comment: One commenter suggested that for added administrative 
simplicity in determining proxies, hospitals should be able to use ``* 
* * two `blended' supervising physician salary amounts--`one for 
primary care and one for non-primary care * * *.'' These ``blended'' 
salary amounts would be determined using the published data source. The 
commenter stated that to determine which salaries should be included in 
the blends, a periodic survey could be taken to determine the 
composition of teaching physicians at each nonhospital site. Another 
commenter stated, ``We would also like to recommend that the CMS 
maintain as part of the final rule, the provision that allows providers 
to use actual teaching physician salaries for the calculation of the 
recommended cost threshold instead of the national average physician 
salary data by specialty.''
    Response: We appreciate the commenter's innovative suggestion to 
use ``blended'' salary amounts in determining a proxy for supervisory 
teaching physician costs. However, in choosing a proxy for national 
physician salaries, in order to determine the teaching physician cost 
at the nonhospital site, we believe the proxy should be as close to the 
actual salary amount as possible. Therefore, we believe it is most 
appropriate for hospitals to use the published AMGA specialty salary 
amounts in determining the supervisory teaching physician costs at the 
nonhospital site. In response to the commenter's request that we 
maintain the option for hospitals to use actual physician salary 
information, we note that the proposal was to add a proxy calculation 
as an alternative to hospitals documenting that they have paid the 
actual teaching physician costs at the nonhospital site. Hospitals 
always have the option of using actual data instead of any of the 
proxies. We also note that under our revised policy, hospitals that use 
actual data are required to only pay 90 percent of the total of the 
costs of the residents' salaries and fringe benefits (including travel 
and lodging where applicable) and the portion of the cost of the 
teaching physicians' salaries attributable to nonpatient care direct 
GME activities.
    Comment: Several commenters questioned the potential availability 
of AMGA's survey data and requested that it be made available on our 
Web site. One commenter stated that AMGA charges a fee to access its 
data and if we are requiring hospitals to use AMGA data, the data, as 
well as information on AMGA's methodology should be made available 
without cost to the public on CMS' Web site. The commenter stated ``* * 
* because the AMGA survey and its methods are not freely available, 
providers may not easily be able to analyze and concur with AMGA's 
methodology or the amounts set forth in Table 8 * * *'' One commenter 
noted that since there is a fee to access AMGA data, using that data or 
other similar data (which requires a fee) would be inappropriate 
because we would be imposing additional costs on GME. The commenter 
further noted (referring to AMGA's data), ``It is not clear how 
representative of all practicing physicians these respondents are.''
    Response: We will make available any physician specialty salary 
survey data that is needed to compute teaching physician supervisory 
costs available free of charge on our Web site. Additionally, we will 
consider posting information on the AMGA's survey methodology. By 
posting the AMGA data on our Web site, we are not imposing any 
additional cost on GME training that occurs at nonhospital sites. Since 
AMGA's survey data will be posted free of charge, we do not believe 
there will be any costs associated with accessing the necessary data.
    We disagree with the commenter regarding the level of physician 
salary representation in AMGA's survey. AMGA's survey includes a range 
of physician specialty salaries. In fact, because of the broad range of 
specialties included in the survey we believe AMGA's survey data are 
particularly appropriate for use to establish a proxy for teaching 
physician salaries and well-suited to meet our goal to use salary 
information that reflects physicians' actual salaries.
    Comment: One commenter asked whether a provider could use an 
alternative survey similar to AMGA if it can demonstrate that the 
survey was compiled in a similar manner. Another commenter stated that 
in determining the proxy salary amounts to be used, we should ``* * * 
consider the approach used by the Department of Veterans Affairs in 
setting salaries for its physicians, notably by employing multiple 
surveys of physician compensation.''
    Response: In response to the commenters' question of whether a 
survey similar to AMGA's could be used as a proxy source or a 
combination of surveys, in establishing the proxy, we are allowing a 
hospital to base its determination on either AMGA survey data or actual 
physician salary amounts. However, as previously mentioned, we will 
continue to consider the appropriateness of using other options for 
sources of physician salary data.

Determining Teaching Physicians' Cost

    In determining the teaching physicians' cost, the specialty of the 
teaching physician is the relevant criterion, not the specialty of the 
residents that the teaching physician is training in the nonhospital 
site. Generally, we believe the specialty of the teaching physician 
will be self-evident, and the hospital can easily locate the national 
average salary information for that teaching physician's specialty on 
the survey (for example, if family practice residents are rotating to a 
dermatology practice to receive training in dermatology, then the 
national average salary for dermatologists would be used from the 
survey). However, it is possible that the teaching physician is highly 
specialized and the average compensation for his or her subspecialty is 
not listed in the survey we decide to use. In such a case,

[[Page 26959]]

we proposed that the hospital should use the immediately less-
specialized form of that specialty applicable to that teaching 
physician (or the hospital may use the physician's actual salary 
information). For example, if residents are receiving training from a 
forensic pathologist, and the national average salary for the 
subspecialty of forensic pathology is not included in the physician 
compensation survey, then we proposed that the hospital should instead 
use the national average salary for the specialty of pathology to 
determine the cost of that teaching physician. We believe this is the 
simplest method of assigning a national average physician compensation 
amount in the instance where the teaching physician's actual 
subspecialty is not included in the survey. However, we solicited 
comments as to whether it is possible or appropriate to use survey data 
from other sources in the event that data is not available from the 
particular survey source.
    In addition, although it may not be a common occurrence, it is 
possible that residents could be receiving training in a nonhospital 
site from a teaching physician that is board certified in more than one 
specialty, but the residents are only receiving training in one of the 
specialties in which the physician is board certified. In this case, we 
proposed that the national average salary that should be used to 
determine the teaching physician's cost should be the one for the 
specialty in which the teaching physician is training the residents. 
For example, if residents are being supervised by a cardiologist who is 
board certified in internal medicine and cardiology, but the residents 
are training with him or her specifically to learn internal medicine, 
then we proposed that the hospital should use the national average 
salary for internal medicine, and not cardiology, to determine the 
teaching cost of that physician. That is, in instances where the 
residents are receiving training at a nonhospital site from a teaching 
physician that is board certified in more than one specialty, and it is 
unclear which specialty to use for purposes of assigning a national 
average salary to that physician, we proposed that the question for the 
hospital to ask is, why are the residents training with that physician? 
If the answer is, ``to receive training in Specialty X,'' then the 
national average salary amount for Specialty X should be used to 
determine the teaching physician's cost. If the answer is, ``to receive 
training in Specialty Y,'' then the national average salary amount for 
Specialty Y should be used to determine the teaching physician's cost, 
regardless of the specific board certification that the teaching 
physician has actually received. In general, the hospital, with 
assistance from the GME Program Director as necessary, should be able 
to document for the Medicare contractor the specialty in which the 
residents are receiving training at the nonhospital site, and the 
national average physician compensation amount for that specialty used 
in paying ``all or substantially all'' of the costs, as defined in this 
final rule.
    Comment: A commenter stated that the specialty of the resident and 
not of the teaching physician should be used in determining the 
specific salary proxy. The commenter provided the example that a 
cardiologist will teach an internal medicine resident what he or she is 
required to know regarding heart disease and the cardiovascular system 
as an internist and not a cardiologist. The commenter further requested 
that we ``* * * clearly state that proxy salaries for subspecialty 
physicians originally trained in the specialty of the residents they 
are teaching be set to the salary of specialists in the residents' 
field regardless of the certification status of the faculty person.''
    Response: In response to the commenter's request that the specialty 
of the resident be used in determining the supervisory teaching 
physician cost, we stated in the proposed rule * * * that the national 
average salary that should be used to determine the teaching 
physician's cost should be the one for the specialty in which the 
teaching physician is training the residents.'' For example, if a 
resident happens to be supervised by a physician who is board certified 
in internal medicine and cardiology, but the resident is training with 
him or her specifically to learn general internal medicine, then we 
proposed that the hospital should use the national average salary for 
internal medicine, and not cardiology, to determine the teaching cost 
of that physician. However, if the internal medicine resident is at the 
nonhospital site to receive cardiology training as part of his or her 
3-year internal medicine program, the salary for cardiologists should 
be used. In instances where the residents are receiving training at a 
nonhospital site from a teaching physician that is board certified in 
more than one specialty, and it is unclear which specialty to use for 
purposes of assigning a national average salary to that physician, we 
proposed that the question for the hospital to ask is, why are the 
residents training with that physician? If the answer is, ``to receive 
training in X,'' then the national average salary amount for Specialty 
X should be used to determine the teaching physician's cost. If the 
answer is, ``to receive training in Y,'' then the national average 
salary amount for Specialty Y should be used to determine the teaching 
physician's cost, regardless of the specific board certification that 
the teaching physician has actually received. We believe the teaching 
physician supervisory cost should reflect the value of the training 
received as it relates to the training the resident is receiving. 
Therefore, we are not adopting the commenter's suggestion to use the 
physician salary of the specialty program of the resident regardless of 
the specifics of the training received.

Multiple Teaching Physicians and Residents: 1:1 Resident to Teaching 
Physician Ratio

    We understand that it is not unusual for several residents in the 
same program to rotate to a particular nonhospital site at the same 
time, and be supervised by one teaching physician, or for residents to 
be supervised by several teaching physicians during their time at that 
nonhospital site. In determining the total costs of the training 
program at the nonhospital site, it is necessary to consider all of the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable), and the teaching physicians' national average 
salaries. However, to maintain administrative simplicity, we are 
allowing hospitals to apply a maximum of a 1:1 resident-to-teaching 
physician ratio ``limit'' in determining the total GME costs applicable 
to a program at a nonhospital site. For example, if at the nonhospital 
site there are two teaching physicians and one FTE resident, the 
hospital may determine 90 percent of the total costs of the program 
using a 1:1 resident-to-teaching physician ratio, not a 1:2 resident-
to-teaching physician ratio. The 90 percent threshold would be based on 
the total cost of the one FTE resident (salary and fringe benefits, and 
travel and lodging where applicable) and one teaching physician 
(national average salary for the specialty multiplied by the percentage 
of time spent in nonpatient care direct GME activities). Similarly, if 
a hospital rotated 3 FTE residents in the same program to a particular 
nonhospital site with 7 physicians, unless the hospital documents 
otherwise, we would assume that all 7 physicians supervise the 
residents at some point during the training, but, for purposes of 
determining the 90 percent threshold, we assume that there are only 3 
FTE residents being supervised by 3 teaching

[[Page 26960]]

physicians. Accordingly, the 90 percent threshold would be based on the 
total cost of the 3 FTE residents' salaries and fringe benefits 
(including travel and lodging where applicable) and 3 teaching 
physicians (national average salaries for the specialties multiplied by 
the percentage of time spent in nonpatient care direct GME activities). 
(In addition, we note that the 1:1 limit may be applied to FTE 
fractions, as well. That is, if in the preceding example, 3.5 FTE 
residents were being supervised by 7 physicians, the 90 percent 
threshold would be determined based on the costs associated with a 
resident-to-teaching physician ratio of 3.5:3.5.)
    In the case of multiple teaching physicians, we must also consider 
that a particular nonhospital site may be staffed by physicians in 
different specialties. For example, an orthopedics practice may include 
orthopedists and radiologists. In this case, we would still maintain 
the 1:1 resident-to-teaching physician limit, even if the teaching 
physicians are in different specialties, unless the hospital can 
document that the number of physicians actually teaching the residents 
is less than the number of FTE residents training at that nonhospital 
site. Once the number of teaching physicians is established, the 
hospital would determine the national average salary for each of those 
teaching physicians from the national survey data, and then calculate 
the average national salary of the mix of physician specialties in the 
practice to be used in computing the 90 percent threshold. For example, 
assume that 3 FTE residents are rotating to an orthopedic surgery 
practice staffed by a total of 7 physicians; 4 are orthopedic surgeons, 
and 3 are diagnostic radiologists. Again, unless the hospital documents 
otherwise, we would assume that all 7 physicians supervise the 
residents at some point during their rotation to this practice. First, 
the hospital would access the national average salary for orthopedic 
surgeons (assume $400,000), and the national average salaries for 
diagnostic radiologists (assume $412,000). Then, the hospital would 
calculate the average salary for these physicians as follows: 
[($400,000 x 4) + ($412,000 x 3)]/7 = $405,143. Next, the 1:1 resident-
to-teaching physician ratio would be applied, such that for purposes of 
determining the 90 percent threshold, there would be 3 FTE residents 
and 3 teaching physicians. Since the 3 teaching physicians are not in 
the same specialty, the hospital would multiply the average salary cost 
of $405,143 by 3 to get the total teaching physician salaries for the 
training program at that site ($405,143 x 3 = $1,215,429). The hospital 
would then multiply $1,215,429 by the percentage of time spent by the 
teaching physicians in nonpatient care direct GME activities (that 
percentage is 3 hours divided by the number of hours the practice is 
open during a week) to determine the teaching physician GME cost for 
the training program at that site. This teaching physician cost is then 
added to the salaries and fringe benefits (including travel and lodging 
where applicable) of the 3 FTE residents to determine the GME cost of 
the program at that practice, and the hospital must ensure that it 
incurs at least 90 percent of that GME cost to count the 3 FTE 
residents training at the nonhospital site.
    We note that, as we indicated above in this section, if there are 
several physicians in a nonhospital site, we would assume that they all 
supervise the residents at some point during the residents' training. 
However, it may be that in fact only some of the physicians actually 
supervise the residents, while other physicians are not involved in the 
training program at all. The hospital may wish to document that only 
certain physicians are involved in the training program (to more 
accurately represent the structure and costs of the training program in 
a particular nonhospital site). Such documentation would increase the 
number of residents relative to teaching physicians that is used to 
calculate the teaching physician costs. That is, using the example 
above where the resident-to-teaching physician limit was presumed to be 
3:3, since there were actually 3 FTE residents and 7 physicians, if the 
hospital can document that only 2 physicians supervised the residents 
(and the other 5 physicians were not involved in the GME program at 
all), then the resident-to-teaching physician ratio would be 3:2. As a 
result, the hospital might be required to incur less teaching physician 
costs, if any, to meet the 90 percent threshold.
    Comment: One commenter stated that in using a 1:1 ratio in 
determining the 90 percent threshold, it is unlikely that a hospital 
will meet the 90 percent threshold because physician salaries are quite 
a bit higher than resident salaries and fringe benefits particularly 
among specialties. Commenters also asked what documentation we are 
requiring to show that only certain teaching physicians at nonhospital 
sites are supervising residents. One commenter asked that we confirm 
that this information should be provided after the resident rotation to 
the nonhospital site has occurred.
    Response: We proposed to adopt the 1:1 ratio so that there would be 
an upper limit on the number of physicians that are supervising 
residents in the nonhospital site. We believe that use of a 1:1 ratio 
greatly reduces the cost a hospital would have to pay when there is 
actually a higher teaching physician to resident ratio. For example, if 
two teaching physicians were supervising one resident, in the absence 
of the 1:1 ratio, the costs for both of those teaching physicians would 
be included for purposes of making the ``all or substantially all'' 
calculation. Thus, hospitals could be required to pay significantly 
more of the physician salaries if the teaching physician to resident 
ratio is not capped at 1:1. The 1:1 cap does not apply to the number of 
residents (and thus the resident salary and fringe benefit 
calculation). Therefore, where there is one teaching physician training 
three residents, the hospital would calculate teaching physician costs 
using one teaching physician salary and all three of the residents' 
salary and fringe benefit data. In response to the commenters' request 
that we advise what type of documentation hospitals need to submit to 
show that only certain teaching physicians are supervising residents, 
the hospital should have the teaching physicians that were not involved 
in the training submit documentation at the end of the rotation or by 
the end of the applicable academic year (June 30) to indicate that they 
were not involved, either directly, or indirectly, with the education 
of residents in their practice. Alternatively, those physicians 
involved in the training can be identified in the written agreement, or 
the hospital may submit contemporaneous documentation from the GME 
program director specifying which physicians were involved in 
supervising the residents.
(2) Residents' Salaries and Fringe Benefits
    The second variable in our methodology for determining the costs of 
a program at a nonhospital site is the salaries and fringe benefits 
(including travel and lodging where applicable) of the FTE residents 
that are rotating to a particular nonhospital site. We understand that 
since the salaries and fringe benefits (including travel and lodging 
where applicable) of most residents are already paid by hospitals 
(either directly, or by reimbursing another entity such as a medical 
school), the portion of the actual cost of the residents attributable 
to training in the nonhospital setting can be easily identified and 
documented by a

[[Page 26961]]

hospital. Therefore, as under existing regulations, in determining the 
90 percent threshold for a particular program at a specific nonhospital 
site, the hospital must use the actual cost of each FTE resident's 
salary and fringe benefits (including travel and lodging where 
applicable). In addition, the cost of the residents will vary by 
specialty and by program year. Furthermore, as with current policy, the 
total residents' costs will be based on the FTE number rotating to a 
particular nonhospital site in a cost reporting period, not the number 
of individuals actually training in a nonhospital site.
    Comment: Several commenters requested that we specify what is 
included in resident salaries and fringe benefits. Several commenters 
also requested that we specify that resident malpractice insurance is 
included in resident fringe benefits.
    Response: It is not our intent to cause hospitals to modify their 
human resources policies regarding residents' salaries and fringe 
benefits. Hospitals should maintain their definition of residents' 
salaries and fringe benefits that was in place prior to the RY 2008 
LTCH PPS proposed rule. Hospitals should not include resident 
malpractice insurance or other costs in residents' fringe benefits 
solely for the purpose of increasing the total cost of residents' 
salaries and fringe benefits and minimizing the portion of teaching 
physician costs they have to pay. Furthermore, we note that 
historically, malpractice costs were not to be included in the intern 
and resident cost center on the cost report. Accordingly, malpractice 
costs should not be included as a fringe benefit in the calculation of 
the 90 percent threshold.
    Comment: One commenter was concerned about our requirement that a 
hospital must use the actual costs of each FTE resident's salary and 
fringe benefits as one of the variables under the proposed methodology 
for determining the minimum amount that a hospital must pay to count 
FTE residents training in a nonhospital site. The commenter stated that 
under our current policy, a hospital only needs to know in general that 
it incurred the costs of residents' salaries and fringe benefits, but 
need not know the actual amounts paid; whereas under the proposed 
methodology, a hospital would have the significant administrative 
burden knowing the precise program year and corresponding salary and 
fringe benefits amount for each resident that trains in the nonhospital 
setting. The commenter suggested that we allow hospitals the option of 
using an average salary plus fringe benefit amount as a means of 
simplifying the proposed methodology and to provide administrative 
relief for hospitals.
    Response: In the RY 2008 LTCH PPS proposed rule, we stated that we 
would allow a hospital to use physician compensation survey data as a 
proxy to determine the teaching physician costs associated with a 
program at a particular nonhospital site. We proposed to allow the 
hospital to use a proxy amount because hospitals stated that the 
existing regulation was administratively burdensome since many teaching 
physicians in nonhospital sites are reluctant to disclose their 
personal salary information. We proposed this policy because teaching 
physicians in a nonhospital site may not be employed or paid by the 
hospital, and hospitals indicated they had great difficulty 
establishing the teaching physicians' salaries and the portion of the 
cost attributable to the nonpatient care direct GME activities of the 
teaching physicians.
    In contrast, we believe resident salary and fringe benefits amounts 
are more readily available to hospitals since they ordinarily pay these 
costs directly. Because hospitals have ready access to this data, we 
believe it is appropriate that hospitals use the actual costs of 
resident salaries and fringe benefits for the calculation of the 90 
percent threshold, rather than some sort of proxy.
    The commenter is correct that to calculate the actual resident 
salary and fringe benefits amounts, hospitals will have to take into 
account the actual salary and fringe benefits for each FTE resident 
that trains in the nonhospital site, which may vary by resident.
    Comment: Several commenters inquired about which travel and lodging 
expenses should be considered as applicable to direct GME in the 
nonhospital site.
    Response: Residents' fringe benefits (including travel and lodging 
where applicable) are considered a part of ``all or substantially all 
of the costs for the training program in the nonhospital setting.'' The 
only travel and lodging costs that are applicable are the additional 
travel and lodging costs that a hospital incurs due to the fact that a 
resident is training at a nonhospital site. For example, if a resident 
needs to travel long distance to another part of the state, and is 
staying in a hotel for the duration of the nonhospital site training, 
the costs of the traveling and accommodations would be costs that the 
hospital must incur and include in the determination of the 90 percent 
threshold. However, expenses that are normally incurred when the 
resident trains at or nearby the hospital, such as commuting and living 
expenses, would not be applicable.
(3) The Number of Hours Spent in Nonpatient Care Direct GME Activities 
in a Week and the Number of Hours That the Nonhospital Site is Open in 
a Week
    The third variable used in the determination of the costs of a 
training program at a nonhospital site is the amount of time that the 
teaching physician(s) spends on direct GME (nonpatient care) activities 
in a week. As we first explained in the July 31, 1998 Federal Register 
(63 FR 40987), and more recently in the August 8, 2005 Qs&As posted on 
the CMS Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf, determination of the teaching physician costs to the 
nonhospital site is dependent upon the teaching physician's salary and 
the percentage of time he or she devotes to activities related to non-
billable direct GME activities at the nonhospital site (such as 
conferences, practice management, lectures, and administrative 
activities like resident evaluations). Hospitals and teaching 
physicians have protested that documenting the percentage of time that 
teaching physicians spend on activities relating to nonpatient care 
direct GME activities at the nonhospital site is an onerous and 
impractical task. In an effort to eliminate the documentation burden on 
physicians of keeping track of the amount of time they spend in 
nonpatient care direct GME activities in the nonhospital site, rather 
than require teaching physicians to estimate the number of hours per 
week that they spend in such activities with or on behalf of the 
residents, we proposed an alternative option that hospitals may choose 
to use to determine the percentage of the teaching physician's time 
that is spent in nonpatient care direct GME activities. This option is 
an administrative shortcut or a proxy, rather than continuing to 
require in all cases that the hospital must document and pay for the 
actual costs of a training program at a nonhospital site. However, a 
hospital always has the option of documenting and paying for at least 
90 percent of the costs of a program at a nonhospital site using the 
teaching physician's actual salary and information on the time spent in 
nonpatient care direct GME activities.
    Under the proxy methodology, we would apply a presumed standard 
number of hours spent by teaching physicians in nonpatient care direct

[[Page 26962]]

GME activities in every nonhospital site. Specifically, we proposed to 
use a standard of 3 hours per week spent in nonpatient care direct GME 
activities by teaching physicians. The 3 hour standard would be used in 
all cases in the formula for determining the teaching physician costs 
at all nonhospital sites, regardless of the specialty of the residents 
or the number of teaching physicians or residents training at that 
nonhospital site. Although some hospital industry representatives have 
stated that the amount of time spent by teaching physicians in 
nonpatient care direct GME activities in nonhospital sites is ``de 
minimus,'' and, therefore, there is typically little if any teaching 
cost to the nonhospital site, we believe there is also evidence 
indicating that in many cases the teaching physician is spending a 
significant amount of time with or on behalf of the residents in 
nonpatient care direct GME activities. We believe the standard of 3 
hours of nonpatient care direct GME activities per week is a reasonable 
proxy based on data collected from surveys conducted by the Association 
of American Medical Colleges (AAMC), the American Osteopathic 
Association (AOA), and the Academic Family Medicine Advocacy Alliance 
(AFMAA), in addition to information compiled from our own informal 
surveys of teaching physicians.
    In September 2005, in response to a request by CMS, the AFMAA, AOA, 
and AAMC conducted informal surveys to determine the amount of time 
spent in nonpatient care direct GME activities by teaching physicians 
in nonhospital sites. In the survey results shared with CMS by these 
associations, we received a range of hours for the amount of teaching 
physician time spent per week in nonpatient care direct GME activities 
at the nonhospital site. Such nonpatient care GME time included time 
spent by the teaching physician in training activities when the patient 
was not present and time spent in administrative activities related to 
the GME program. The surveys showed means ranging from 1.1 to 4.0 hours 
per week and medians of 1.5 to 4.0 hours per week for time spent on 
residency training when patients were not present. The surveys also 
showed means ranging from 1.6 to 4.7 hours per week and medians of 0 to 
2 hours per week for time spent on administrative activities related to 
residency training at the nonhospital site. Given the range of survey 
results, we believe that 3 hours per week serves as a reasonable number 
to use as a shortcut or a proxy for determining teaching physician time 
spent in nonpatient care direct GME activities at the nonhospital site. 
As previously stated, hospitals always still have the option of 
calculating teaching physician costs and the 90 percent cost threshold 
using actual data (as under current regulations) specific to the number 
of hours the teaching physician spends per week on nonpatient care 
direct GME activities at the nonhospital site. For example, if a 
hospital can document that a teaching physician actually spends 1.5 
hours per week on nonpatient care direct GME activities at the 
nonhospital site, then the hospital may use 1.5 hours per week in 
calculating the teaching physician cost and the 90 percent cost 
threshold.
    We proposed to use the standard of 3 hours of nonpatient care 
direct GME activities per week as the proxy regardless of the number of 
FTE residents the teaching physician is supervising because we believe 
that when the number of FTE residents at a nonhospital site increases, 
the teaching physician time associated with those FTE residents in many 
instances will increase by only a small multiple. For example, a 
teaching physician would provide a lecture to the residents together, 
rather than separately lecturing each FTE resident who is training at 
the nonhospital site. Accordingly, the time spent by the teaching 
physician in nonpatient care direct GME activities may increase only 
slightly with each additional FTE resident being supervised.
    While we proposed to use the standard number of hours spent by 
teaching physician(s) in nonpatient care direct GME activities across 
all training occurring at all nonhospital sites (that is, 3 hours per 
week), we are introducing a fourth variable in the determination of the 
cost of a training program in a nonhospital site that will vary 
depending on the specific nonhospital site. This fourth variable is the 
number of hours that a nonhospital site is open each week. Since only a 
percentage of the teaching physician's salary is attributable to direct 
GME activities, and that percentage is based on time he or she devotes 
to activities related to non-billable direct GME activities at the 
nonhospital site, we are determining this percentage by dividing the 
standard number of hours spent in nonpatient care direct GME activities 
by the number of hours the specific nonhospital site is open each week. 
We proposed that the numerator will always be 3 hours, and the 
denominator will vary depending on the nonhospital site. For example, 
if FTE residents rotate throughout the year to a nonhospital site that 
is open 40 hours per week, then the percentage of time spent by the 
teaching physician(s) in nonpatient care direct GME activities 
throughout the year at that site is \3/40\ = 0.075 or 7.5 percent. (If 
FTE residents rotate to that nonhospital site for only a portion of a 
year, then the ratio of \3/40\ would be further multiplied by the 
percentage of the year that the FTE residents train there. For example, 
if the FTE residents only rotate to this nonhospital site for 3 months 
of the year, then the percentage of time that the teaching physician(s) 
spends on nonpatient care direct GME activities at that site equals 
(\3/40\ x 0.25 = 0.019 or 1.9 percent). Similarly, if FTE residents 
rotate throughout the year to a nonhospital site that is open 50 hours 
per week, then the percentage of time spent by the teaching 
physician(s) in nonpatient care direct GME activities throughout the 
year is \3/50\ = 0.06 or 6 percent. We recognize that the teaching 
physician(s) may not spend 100 percent of his or her time in that 
nonhospital site. In fact, many teaching physicians spend some of their 
week working in a hospital or other facilities. However, we believe 
that deriving the true amount of time spent by each teaching physician 
in each nonhospital site in nonpatient care GME direct GME activities 
would involve the imposition of another form of the documentation 
burden that the hospital industry and teaching physicians have found 
onerous up to this point. This methodology eliminates the need for any 
time studies and it is easy to gather the information needed.
    We also acknowledge that the proposal to use the number of hours 
that a particular nonhospital site is open as a proxy in the 
denominator for determining the percentage of time spent by the 
teaching physician(s) in nonpatient care direct GME activities could, 
in some extreme instances, result in an unusually high percentage of 
teaching time, which, in turn, would result in a determination of 
unusually high teaching costs. This is so because, since 3 hours is a 
constant in the numerator, the fewer the number of hours the clinic is 
open (the denominator), the greater the calculated percentage of time 
spent by the teaching physician in nonpatient care direct GME 
activities. To use an extreme example, if a clinic is only open 10 
hours a week, then \3/10\, or 30 percent of the national average salary 
for the teaching physician's specialty would represent the teaching 
physician's cost that would be used to determine 90 percent of the 
costs of the program at the clinic. However, we believe that, for most 
nonhospital training situations, this revision to use the 3 hour 
standard and the number of hours the nonhospital

[[Page 26963]]

site is open per week is a reasonable alternative to the current 
procedures for determining the actual teaching physician's cost because 
these proxies are easily obtainable, discrete numbers that do not 
necessitate any time studies. Nevertheless, we solicited comments on 
alternative proxies that might be appropriate to use in the place of 
the ratio of 3 hours to the number of hours a nonhospital site is open 
per week. We also note that in the event that this methodology for 
calculating teaching physician costs in a particular nonhospital site 
results in an unrealistic amount, we reiterate that a hospital always 
has the option of determining and paying at least 90 percent of the GME 
costs using actual physician salary and teaching time information, for 
all, or some of its training programs occurring in nonhospital 
settings. In fact, a hospital may choose to use a combination of actual 
information and proxy information for determining the teaching 
physician cost. For example, a hospital may choose to use actual 
physician salary information instead of the national average survey 
data, but use the 3 hour standard and the number of hours the 
nonhospital site is open per week to determine the percentage of time 
spent on teaching activities, or vice versa. Furthermore, we reiterate 
that under the new definition of ``all or substantially all,'' even if 
a hospital chooses to document the teaching physician cost using actual 
teaching physician-specific information, the hospital need only incur 
90 percent of the residents' salaries and fringe benefits (including 
travel and lodging where applicable), and the portion of the teaching 
physicians' salaries attributable to direct GME, and not 100 percent of 
those costs.
    Under our revised policy, 90 percent of the GME costs for a 
particular program at a particular nonhospital site would be the 
minimum amount that a hospital must pay to count the FTE resident(s) 
training at that site for direct GME and IME purposes. If the hospital 
is already paying the resident's salaries and fringe benefits 
(including travel and lodging where applicable), and if the costs of 
the resident's salaries and fringe benefits are equal to at least 90 
percent of the total GME costs at the nonhospital site (that is, the 90 
percent threshold), then the hospital is paying ``all or substantially 
all'' of the costs in accordance with our definition, and need not pay 
an additional amount for teaching physician compensation to count the 
FTE residents. However, if the hospital is paying less than 90 percent 
of the costs of the training program at the nonhospital site, then the 
hospital must pay an additional amount toward the teaching physician 
costs until it is paying at least 90 percent of the GME costs for that 
program. We believe our revised policy is relatively simple, easy to 
administer, and eliminates the documentation burdens cited by the 
industry as being associated with the current policy. However, we note 
again that even under our revised policy, a hospital is not precluded 
from choosing to calculate and pay 90 percent of the teaching costs of 
a program in a nonhospital site in accordance with the existing policy 
requirements. That is, the hospital may still choose to document the 
actual teaching physician cost using actual time and salary information 
from the teaching physician(s) to determine what the true direct GME 
costs are at that nonhospital site. Once the hospital calculates the 
actual direct GME costs, it would only be required to pay at least 90 
percent of the actual direct GME costs, consistent with our definition 
of ``all or substantially all of the costs for the training program in 
the nonhospital setting.''
    The following is an additional example of the application of the 
methodology:
    Example: For the July 2008 through June 2009 academic year, a 
hospital with a family practice program sends 3 FTE residents (in 
different program years) to train at the Family Medicine Center (FMC), 
a nonhospital site. The hospital's cost reporting period began on 
January 1, 2008. The FMC is staffed by 5 physicians, all of whom 
supervise the residents at some point during the year. Four of the 
physicians are family practitioners, and 1 physician is a psychiatrist. 
The FMC is open for 50 hours per week. To determine the cost of the 
teaching physicians, the hospital refers to the most recent national 
average salary amounts on the national survey published prior to 
January 1, 2008, which is the 2007 survey. Assume that the national 
average published salary amount for family practice is $180,000, and 
the national average published salary amount for psychiatry is 
$187,000. Since there are multiple physicians in different specialties 
(absent specific documentation provided by the hospital), the average 
salary of one FMC physician is calculated as follows: [($180,000 x 4 
family practice physicians) + ($187,000 x 1 psychiatrist)]/5 = 
$181,400. Since the residents are on the payroll of the hospital, the 
hospital knows that the total actual cost of the 3 FTE residents' 
salaries and fringe benefits (including travel and lodging, if 
applicable) is $182,000. After applying the 1:1 resident-to-teaching 
physician limit, there are 3 FTE residents to 3 teaching physicians 
(again, absent specific documentation provided by the hospital). Thus, 
the GME cost of the 3 teaching physicians is calculated as follows: 
($181,400 x 3) x (3 hours/50 hours) = $32,652. This teaching 
physicians' cost of $32,652 is added to the residents' cost of $182,000 
to arrive at the total cost of the training program at the nonhospital 
site of $214,652. To meet the definition of ``all or substantially 
all,'' the hospital would be required to pay at least 90 percent of the 
costs of the training program at the nonhospital site, which in this 
example equals $193,187 (that is, 0.90 x $214,652). Since in this case 
the cost of the 3 FTE residents' salaries and fringe benefits is 
$182,000, the hospital would not reach the 90 percent cost threshold by 
simply incurring the costs associated with the residents. The hospital 
must pay at least an additional $11,187 (that is, $193,187-$182,000) to 
meet the 90 percent threshold and satisfy the requirement to pay ``all 
or substantially all'' of the costs of the family practice program at 
the FMC.
    Comment: One commenter, the Association of American Medical 
Colleges (AAMC), noted that in the proposed rule, we stated that ``the 
standard of 3 hours of nonpatient care GME activities per week is a 
reasonable proxy based on data collected from surveys conducted by the 
Association of American Medical Colleges (AAMC), the American 
Osteopathic Association (AOA), and the Academic Family Medicine 
Advocacy Alliance (AFMAA), in addition to our own informal surveys of 
teaching physicians'' (72 FR 4826). The AAMC commented that they would 
``like to clarify that the AAMC did not provide CMS with survey data.'' 
The AAMC indicated that we may have been confused on this issue because 
the surveys were presented to CMS in a meeting in which representatives 
of the AAMC were in attendance, and they noted that AAMC staff provided 
some input to the survey questions. A commenter said that we were 
correct to describe the surveys as ``informal'' (72 FR 4826), since 
these surveys were developed and conducted by AOA and AFMAA policy 
staff who, due to time constraints, did not consult with persons who 
have expertise in survey development. Another commenter stated that any 
data collected by CMS informally and used as the basis for a regulation 
should be available to the public. A commenter referred to the 
limitations to the data that the AFMAA

[[Page 26964]]

noted when it submitted its survey data to CMS, and questioned why CMS 
would use such ``extremely flawed'' data, when anecdotal evidence 
suggests that any time greater than one hour per week spent in didactic 
training is ``way out of line with actual circumstances.'' Commenters 
enlisted a professor from the Department of Economics at Hunter College 
in New York, to analyze the survey data and opine as to whether the 
survey responses provide a valid source for establishing a national 
proxy. The professor expressed concerns about the data provided to CMS, 
stated that the data are extremely limited and questionable and should 
not form the basis of public policy, and suggested that CMS conduct its 
own rigorous study to identify the best proxy. The professor's analysis 
also recommended that in the meantime, if CMS wishes to make a decision 
based on the AOA and AFMAA survey, a proxy that is better supported by 
the current survey is 2 hours.
    Some commenters also asked that CMS consider that the surveys were 
conducted prior to the issuance of the FY 2007 IPPS final rule in which 
CMS clarified that time spent in nonpatient care activities in 
nonhospital sites cannot be counted by a hospital for direct GME and 
IME purposes. Because of this clarification, hospitals may now be 
conducting as much of their didactic activities as possible in the 
hospital complex. Lastly, the commenters noted that to the extent that 
a resident may spend only a half a day at a nonhospital site per week, 
``the idea that [the] 2 or 3 hours of that time is spent in nonpatient 
care activities defies conventional logic.''
    Several commenters suggested that the 3 hour proxy should be 
reduced to either 1 or 2 hours. One commenter stated that according to 
the commenter's survey of 54 physicians, the average hours per week 
spent on nonpatient care direct GME activities was 1.45, with a range 
of 0 to 6 hours. Another commenter stated that teaching physicians 
spend 1.2 to 1.5 hours a week in nonpatient care direct GME activities, 
while one commenter mentioned that for family practice, a teaching 
expectation of 20 minutes per half day would work best. Several 
commenters stated that CMS should adjust the proxy according to a 
resident's program year. For example, one commenter suggested that the 
number of hours spent in nonpatient care direct GME activities per week 
should be 1 hour for third year residents, 2 hours for second year 
residents, and 3 hours for first year residents.
    Response: We regret that we inadvertently misattributed the surveys 
in part to the AAMC. The AAMC is correct that we believed they did have 
a role in conducting the surveys, but based on their comments, we 
understand that their role was limited to providing some input into the 
survey questions. We acknowledged that the surveys conducted by CMS, 
the AFMAA, and the AOA respectively were informal, and we understood 
that persons with expertise in survey development were not necessarily 
consulted due to time constraints. In light of these considerations, we 
carefully reviewed the analysis of the surveys provided by the 
professor from Hunter College. We agree that it is inappropriate to 
apply a proxy of 3 hours to one nonhospital site if the residents only 
rotate to that nonhospital site for a portion of the week. As we 
explain further below in response to the comments we received about 
prorating the teaching physician's cost, in this final rule, we are 
allowing hospitals to prorate the teaching physician's costs to reflect 
the FTE time spent by the residents in a program at each nonhospital 
site. Since we have heard from the teaching hospital industry that it 
is unlikely that a resident will spend an entire week at the same 
nonhospital site, in those cases, the hospital would be applying a 
prorated proxy, which would be less than 3 hours, and may even be less 
than the 2 hours which the professor from Hunter College indicated 
could be supported by the survey data. The suggestion from the 
professor at Hunter College that we conduct a rigorous study is 
sensible, and we will consider it.
    In response to the commenters who request that the 3 hour proxy be 
adjusted according to a resident's program year, we believe that 
requiring a hospital to adjust the proxy for each of its residents who 
are training at a nonhospital site would add unnecessary complexity. 
Therefore, we are finalizing our policy to use 3 hours in the numerator 
of the teaching physician cost ratio. We note that if a hospital 
believes that 3 hours is greater than the actual amount of time spent 
in nonpatient care direct GME activities in a particular nonhospital 
site, the hospital always has the option to work with the teaching 
physician to provide an actual amount of teaching time for use in 
calculating the 90 percent cost threshold.
    In response to the comment requesting that we consider that the 
amount of time currently spent in nonpatient care direct GME activities 
in the nonhospital site could be less than the amount shown in the 
surveys (since the surveys were conducted prior to the issuance of our 
clarification regarding didactic activities), we believe this might be 
true. We acknowledge that the availability of Medicare GME funding is 
certainly an important factor in a hospital's decision to rotate (or 
not rotate) residents to nonhospital settings. However, we also 
recognize there are other significant factors that hospitals must 
consider in making residency rotation decisions, such as the 
requirements of accrediting organizations (like the ACGME or the AOA), 
and local health ``outreach'' initiatives. Thus, we are skeptical that 
hospitals' longstanding rotational models would shift so dramatically 
and in such a short period of time due to clarification of the agency's 
policy regarding the time that residents spend in didactic activities. 
Further, the commenter is raising a point that can be made about any 
survey which captures data as of a certain period of time, and cannot 
necessarily be used to predict future scenarios. However, we may re-
evaluate the use of the 3-hour per week standard, possibly in 
conjunction with a new survey, in the future if appropriate.
    Comment: Commenters suggested that since the goal of the proposed 
rule was to reduce administrative burdens, instead of requiring that 
hospitals determine the number of hours each nonhospital site is open, 
we should consider using a national average proxy for total physician 
work hours per week. A commenter mentioned that there are limited, but 
still apparently reasonable, data that exist on national average 
physician work hours. For example, in its 2006 physician workforce 
report, the Health Resources and Services Administration (HRSA) used 
the American Medical Association's (AMA) Socioeconomic Monitoring 
System (SMS) from 1998 to estimate work hours by specialty. (The 
commenter noted that this survey has been discontinued due to response 
rates that were often too low for individual specialties and practice 
settings.) The direct patient care hours reported by HRSA ranged from 
47 to 58 hours per week. Another study conducted in 2005 by the AAMC's 
Center for Workforce Studies of physicians over age 50 showed an 
average of 55 hours worked per week based on over 9,000 respondents, 
with work hours varying by specialty. For instance, pathologists worked 
an average of 50 hours weekly on the lower range, while cardiologists 
worked an average of 63 hours a week. Similarly, data from the Center 
for Tracking Health System Change reported an average of

[[Page 26965]]

53 hours worked per week based on interviews with about 6,600 
physicians in all specialties. The commenter asked that we adopt 55 
hours as the proxy to use, but suggested that it might be best to use 
specialty-specific proxies, since there is a range of work hours across 
specialties. Another commenter suggested that physician work hours as 
published in JAMA, 2003 be used in the denominator. Alternatively, if 
we decide to adopt our proposal regarding the clinic hours of 
operation, then the commenters requested that we confirm that this 
means the ``posted'' hours, and not the actual hours (for example, the 
hospital need not account for the closure of the site due to a 
holiday). Another commenter asked that CMS include a definition of 
``hours open'' in the final rule, and specify what documentation would 
be required.
    Other commenters suggested that instead of the clinic hours of 
operation, the denominator of the ratio used to calculate the teaching 
physician cost proxy should be the number of hours the teaching 
physician is working since the physician's salary is relative to the 
number of hours worked. One commenter requested that we allow 
adjustments as appropriate when the teaching physician spends only a 
portion of his or her time at the nonhospital site. Yet another 
commenter stated that the denominator should be 51 hours, which is 
derived from the CMS data that is the basis for the RCEs that are 
currently in use. This commenter noted that if a proxy is being used 
for both the numerator and denominator, then there is no need to use 
hours at all. Instead, the formula can be simplified by using a single 
percentage proxy of the time the physician spends teaching. The 
commenter thought the formula should be:

Physician compensation proxy using RCEs
x Percentage of business days in year when resident is at site
x Percentage of presumed training time [number of proxy hours/51 hours 
based on RCEs]
= Physician compensation attributable to training.
    Response: We appreciate the commenters' proposals for alternatives 
to use in the denominator of the ratio that represents the percentage 
of time the teaching physician spends in nonpatient care direct GME 
activities. The suggestion to use national average proxies for total 
physician work hours per week is an interesting idea that we will 
explore more fully and consider for future rulemaking. In particular, 
we would like to evaluate thoroughly the alternative data sources that 
are available, and the ramifications of using specialty-specific proxy 
data. We expect to investigate this issue, and if appropriate, may 
propose to use specialty-specific data for physician work hours in the 
future. We are also not adopting the commenter's suggestion to make 
adjustments to recognize the number of hours the specific teaching 
physician works each week as the denominator in the ratio. We believe 
the relevant figure for this purpose is the time the teaching physician 
spends in the specific nonhospital site, not the time the physician 
works elsewhere. Furthermore, if we were to allow for adjustments when 
the teaching physician spends only a portion of his or her time at the 
nonhospital site as the commenter recommended, the result might be a 
physician salary percentage that is much higher than the percentage 
that would result from use of the number of hours the nonhospital site 
is open in the denominator. For example, if a teaching physician works 
a total of 60 hours per week, spending 30 hours in the hospital and 30 
hours in the nonhospital site, but the nonhospital site is open 40 
hours a week, then the teaching physician cost ratio (to be applied to 
the survey-based physician salary proxy) would be \3/30\, or 10 percent 
under the commenter's suggestion, and \3/40\, or 7.5 percent under our 
proposal. Accordingly, as we stated in the proposed rule, we believe 
that deriving the true amount of time spent by each teaching physician 
in each nonhospital site in nonpatient care direct GME activities would 
involve the imposition of another form of the documentation burden that 
the hospital industry and teaching physicians have found onerous up to 
this point. Therefore, we are finalizing our proposal to use the number 
of hours a nonhospital site is open each week as the denominator in the 
ratio for calculating the teaching physician cost ratio.
    We are also confirming that in determining the number of hours a 
clinic is open per week, we do not mean the actual hours the 
nonhospital site is open per week, but instead, we mean ``posted'' or 
advertised hours. Therefore, the fact that a nonhospital site might be 
closed several days in a year on legal holidays, for example, would not 
affect the denominator. That is, if a nonhospital site's posted hours 
are 9 a.m. to 5 p.m. from Monday through Friday, then the denominator 
would be 40 hours, even if that site was closed for a day(s) for a 
holiday or some other reason. The hospital may obtain the nonhospital 
site's posted or advertised hours of operation as documentation to 
support the number of hours used in the denominator of the teaching 
time proxy.
    Comment: Commenters stated that a reasonable and easy way to 
administer the supervisory teaching physician cost ratio would be to 
use 2 hours in the numerator, as supported by the conclusions generated 
by the professor from Hunter College, and 55 hours in the denominator, 
which would result in a ``maximum fixed ratio'' of 3.6 percent. 
Alternatively, if we reject that suggestion, the commenters urged CMS 
to adopt a ratio ``cap''. The commenters noted that we solicited 
comments on how to address situations in which that ratio ``could, in 
some extreme instances, result in a determination of unusually high 
teaching costs'' in instances where the nonhospital site is open very 
few hours per week (72 FR 4827). One commenter suggested that this 
ratio ``cap'' should be 5 percent, and would prevent any extreme or 
atypical results in determining the portion of teaching physicians' 
salaries attributable to direct GME. Another commenter recommended that 
the proxy for determining teaching costs be capped at 3 percent, which 
would be the result of using 2 hours in the numerator (as suggested by 
the professor from Hunter College's analysis), and 60 hours in the 
denominator, since 60 hours is the amount of time a typical teaching 
physician works (in total, in all settings) per week.
    Response: As we explained in response to other comments, we believe 
it is appropriate at this time to finalize our proposals to use 3 hours 
in the numerator and the number of hours the nonhospital site is open 
each week in the denominator. However, the commenter is correct that we 
solicited comments on how to address situations in which that ratio 
``could, in some extreme instances, result in a determination of 
unusually high teaching costs'' in instances where the nonhospital site 
is open very few hours per week (72 FR 4827). We believe that in light 
of these extreme circumstances, the commenters' suggestion to establish 
a ``cap'' on the ratio is reasonable. We are not adopting the 
commenters' suggested cap of 3 percent or 5 percent, since both of 
these caps are based on using 2 hours in the numerator. Since we are 
finalizing our proposal to use 3 hours in the numerator, we believe an 
appropriate cap would be 7.5 percent, which would result from using 3 
hours in the numerator and 40 hours in the denominator. We believe it 
is

[[Page 26966]]

appropriate to use 40 hours in the denominator because 40 hours is an 
established, universally recognized, typical work week. However, we may 
reevaluate this cap in the context of other possible changes we may 
consider making to the teaching physician cost ratio. Thus, in this 
final rule, we are instituting a cap of 7.5 percent on the teaching 
physician cost ratio, such that a hospital need not employ more than 
7.5 percent of the teaching physician cost in calculating the amount of 
payment necessary to meet the 90 percent threshold. However, in 
adopting this policy, we note that application of the 7.5 percent cap 
must always be after a hospital prorates the teaching physician cost to 
reflect the amount of FTE time that the residents are in the particular 
nonhospital site per year. Since half-day rotations appear to be a 
common model of nonhospital training, which would already reduce the 
ratio well below 7.5 percent, we anticipate that the cap will only be 
applicable in the extreme circumstances we mentioned when soliciting 
comments, and which were of concern to the commenters.
    Comment: One commenter referred to a letter received from CMS in 
which CMS stated that the cost of training a resident in a non-hospital 
setting is based on the ``percentage of time'' the teaching physician 
spends in GME activities. Therefore, the commenter asserted, if the 
hospital is paying for all of the costs of the resident, and the 
physician can attest that the percentage of time spent in nonpatient 
care direct GME activities is only 10 percent or less (that is, the 
remainder of the costs of the program), then the test of a hospital 
incurring ``all or substantially all'' of the costs of training the 
resident should be met.
    Response: CMS's policy for determining the costs of nonpatient care 
direct GME activities of the teaching physician is, indeed, based on 
the ``percentage of time'' that the teaching physician spends in such 
activities. We most recently explained this policy explicitly in the 
April 2005 Qs&As. In response to Question 5, we stated ``Determination 
of the teaching physician costs to the nonhospital site is dependent 
upon the teaching physician's salary and the percentage of time he/she 
devotes to activities related to non-billable direct GME activities at 
the nonhospital site.'' [see http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf] As we have stated in those Qs&As, and in this 
rule, the statutory test is tied to whether the hospital has paid ``all 
or substantially all'' of the costs of the training program, and not to 
how much time the teaching physician spends in nonpatient care direct 
GME activities, although that time percentage is certainly necessary 
for determining the amount of the cost that the hospital must pay. 
Accordingly, the revised policy is consistent with the previous policy 
in that the hospital must establish the percentage of time spent by the 
teaching physician in nonpatient care direct GME activities in order to 
determine the cost of the teaching physician's GME time. However, the 
revised policy allows for the use of proxies in order to make those 
calculations. That is, the ratio of 3 hours of nonpatient care direct 
GME time per week to the number of hours that the nonhospital site is 
open also represents the percentage of time the teaching physician 
spends in nonpatient care direct GME activities, and when applied to 
the physician's salary (as established using survey data), will result 
in a proxy for the teaching physician cost. As mentioned in the 
preceding summary of comments, commenters requested that CMS place a 
cap on the percentage of the teaching physician's time spent in 
nonpatient care direct GME activities, as determined using the ratio. 
As explained above, in this final rule, we are instituting a cap of 7.5 
percent on this teaching physician cost ratio, which is less than the 
10 percent to which this commenter requested that physicians be allowed 
to attest. Furthermore, we do not believe it is appropriate to say that 
a hospital has met the test of incurring ``all or substantially all'' 
of the costs based simply on a physician's attestation that 10 percent 
or less of his or her time is spent on nonpatient care direct GME 
activities. Again, it is the cost that is important, not the amount of 
the teaching physicians' time.
    Comment: We received several comments relating to the method for 
computing the teaching physician cost in instances where the residents 
rotate to multiple nonhospital sites for varying periods of time, and 
whether prorating is applicable. The commenters explained that 
typically, nonhospital rotations consist of partial day rotations, 
which can be either partial days or partial weeks, to 3 or 4 different 
nonhospital sites per week. The commenters mentioned that continuity 
clinics, which are required for internal medicine residents, are 
generally rotations of one half-day per week to a specific nonhospital 
site over the 3-year internal medicine program. The residents may also 
rotate to other nonhospital sites during each week. The commenters 
asserted that if hospitals were to assume 3 hours of supervisory 
teaching physician time for each clinic during a week, the estimate of 
teaching physician costs would be ``severely inflated,'' and the 
hospital would be ``paying several times over for training costs 
incurred during the same time period.''
    One commenter noted that we mention the issue of prorating in 
instances where the residents are not rotating to the nonhospital site 
for a whole year. Specifically, the preamble states, ``If FTE residents 
are not rotating to a particular nonhospital site throughout a whole 
year, then the national average salary of the teaching physician would 
be prorated accordingly. The cost of the residents' salaries and fringe 
benefits (including travel and lodging where applicable) would already 
be reflective of an FTE count (72 FR 4822).'' In addition, the preamble 
stated in the context of the teaching physician cost ratio, ``For 
example, if FTE residents rotate throughout the year to a nonhospital 
site that is open 40 hours per week, then the percentage of time spent 
by the teaching physician(s) in nonpatient care direct GME activities 
throughout the year at that site is \3/40\ = 0.075 or 7.5 percent. If 
FTE residents rotate to that nonhospital site for only a portion of a 
year, then the ratio of \3/40\ would be further multiplied by the 
percentage of the year that the FTE residents train there. For example, 
if the FTE residents only rotate to this nonhospital site for 3 months 
of the year, then the percentage of time that the teaching physician(s) 
spends on nonpatient care direct GME activities at that site equals 
(\3/40\ x 0.25 = 0.019 or 1.9 percent)'' (72 FR 4827). The commenter 
continued that although the concept of prorating is supported by the 
preamble, in discussions with CMS staff, it seems that we intended to 
allow prorating ``selectively.'' The commenter stated that their 
understanding of our position is that if a resident rotates to a 
nonhospital site for several days each week over a period of time, the 
resident's salary and fringe benefits would be prorated, but not the 
physician's salary. The physician's salary would only be prorated if 
the rotation occurred in a block situation, such as 3 months (in the 
proposed rule example mentioned above).
    The commenter included an addendum which contained examples to 
illustrate what they believe to be the ``flaws'' in our position. In 
the first example, a resident rotates to a nonhospital site for 6 
consecutive months, and then spends the rest of the year in a hospital. 
In the second example, the resident spends 2.5 days a

[[Page 26967]]

week at a nonhospital site throughout the entire year (an aggregate 
time of 6 months), with the remaining time in a hospital setting. In 
the first example, the commenter understands that we would prorate by 
0.5 the resident's stipends and benefits, as well as the physician's 
salary. In the second example, the commenter understands that we would 
only prorate the resident's stipends and fringe benefits. The commenter 
stated that the result is that even though ``in the aggregate'' the 
resident spends the same amount of time in the nonhospital site, if he 
or she rotates in increments of less than a week, the hospital will 
incur more in supervisory costs. Another commenter believed that there 
is no basis for distinguishing between these ``half-time'' rotations, 
and teaching hospitals should not have to incur any additional costs if 
the sum of the assignments for the resident on an FTE basis is the same 
in either case. The former commenter concluded that as long as both the 
resident and physician salaries are prorated to match the length of 
time of the rotation, the supervisory cost amount will not be 
overstated. Alternatively, the commenter noted that the three hour 
presumption could be prorated, rather than the physician salary, as the 
result would be the same either way.
    Response: In responding to these comments on the issue of 
prorating, it is important to first understand the context in which we 
made the decision to propose that 3 hours be used as the proxy for the 
amount of time a teaching physician spends per week in nonpatient care 
direct GME activities. As we explained in the proposed rule, we derived 
the 3 hour figure from informal surveys conducted by the AFMAA and the 
AOA, which essentially showed ranges of 0 hours to 4.7 hours for the 
time that physicians spend on nonpatient care direct GME activities (72 
FR 4826). Although we acknowledge that the surveys were not rigorous, 
we believed (and still believe) the survey data warrant the use of 3 
hours, and not a lower number, as a proxy in determining the costs 
hospitals must pay in accordance with the statute. This is especially 
so since, as explained above, the 3 hour figure is subject to prorating 
based upon the proportion of time residents are present in the 
nonhospital site. If ``half day'' rotations to nonhospital sites are a 
very common training model as the commenters suggest, then it is 
reasonable to conclude that the amount of nonpatient care direct GME 
hours reported in the survey results reflects this common mode of 
training. Given that our motivation was to remove the burden on 
teaching physicians in documenting their teaching time, we do not 
believe it was unreasonable for us to propose that 3 hours be used as a 
``one size fits all'' proxy. Given further that, as mentioned above and 
explained below, our final policy will permit the 3 hour figure to vary 
when residents are not rotating to the nonhospital site during the 
entire year, we believe this policy allows sufficient flexibility to 
recognize the circumstances under which most residency training occurs 
in nonhospital settings. And finally, we recognize that proxies, by 
definition, are not perfect. Therefore, we note again that hospitals 
always have the option of working with the nonhospital site teaching 
physician(s) to obtain actual data specific to the number of hours the 
teaching physician spends per week on nonpatient care direct GME 
activities in calculating the 90 percent threshold (72 FR 4826).
    However, we do believe that the commenters raise a legitimate 
concern in that if the 3 hour proxy were to be applied to each 
nonhospital site, then, in cases where the residents rotate to multiple 
nonhospital sites each week, the percentage of teaching physician costs 
for each site would be considerably overstated. We agree with the 
commenters that if both the resident and physician costs are prorated 
to match the length of time of the rotation, the teaching physician 
cost amount will not be overstated. We are also convinced by the 
commenters that, for the amount of teaching physician costs, there 
should be no distinction between part-time rotations that occur in 
consecutive blocks as compared to part-time rotations that are not 
consecutive over the course of a training year, but equate to the same 
amount of time on an FTE basis. That is, we agree that just as the 
residents' salary and fringe benefit portion is prorated to reflect the 
actual FTE time spent in a particular nonhospital site, the teaching 
physician cost should also be prorated to reflect that FTE time (that 
is, either the physician's salary would be prorated, or the 3 hours 
would be prorated by the FTE percentage; the result would be the same 
either way). Accordingly, we are modifying our proposal to allow for 
prorating in this final rule. Thus, in the example on page 4827 of the 
proposed rule quoted by the commenter above, where the FTE residents 
only rotate to the nonhospital site for 3 months of the year, the 
percentage of time that the teaching physician(s) spends on nonpatient 
care direct GME activities at that site would be multiplied by 0.25, 
regardless of whether the rotation occurs in a 3-month consecutive 
block, or in increments that equate to 3 months (or 0.25 FTE) over the 
course of the entire training year.
    Comment: Many commenters recommended that we allow physicians at 
nonhospital sites to sign attestation forms estimating the average time 
they spend supervising residents per week. Another commenter said that 
since the primary reason for residents to rotate into nonhospital sites 
is to perform patient care activities (as opposed to nonpatient care or 
didactic activities), the amount of time that a supervising physician 
spends teaching residents is ``typically very low.'' Therefore, CMS 
should accept attestations stating that the only teaching time ``in a 
resident's entire nonhospital rotation was for the resident evaluation 
and that it took a half hour or less.'' One commenter asserted that 
``it's a waste of money'' to have physicians attest to the amount of 
money they earn, and that if CMS is going to make payment mandatory, 
then a minimum of $60 per hour should be established. Several 
commenters asked that we specify the type of actual documentation that 
is acceptable in the case where a hospital chooses not to use the 
proxies we specify in this final rule. (That is, the commenters 
requested that we specify how they might use local surveys and sampling 
techniques to obtain actual data to calculate nonhospital teaching 
physician costs, rather than comprehensive time and motion studies). 
Another commenter asked whether the teaching physician must keep 
continuous time records or whether the hospital can use time studies. 
This commenter further stated that if time studies are to be used, we 
should indicate that they are to ``* * * be kept in accordance with CMS 
Pub. 15-1, Section 2313.2.''
    Response: In the cases where a hospital wishes to use the actual 
amount of time a particular teaching physician is spending in 
nonpatient care direct GME activities with or on behalf of the 
residents, we do not believe that attestations from the teaching 
physician without any supporting documentation is acceptable. 
Furthermore, if a hospital chooses not to use the proxies specified in 
this final rule, then we believe the hospital should use actual data 
specific to the teaching physician in the particular nonhospital site, 
and not an arbitrary amount such as $60 or information from local 
surveys or broader samples. However, it would be acceptable for the 
physician to provide to the hospital a signed document specifying, 
based on actual records kept, the amount of such

[[Page 26968]]

time spent with the residents, whether this amount is greater than 3 
hours, or, as one commenter indicated, a half hour or less. Similar to 
the documentation that was historically required of hospitals to 
allocate teaching physician costs between Part A and Part B and between 
operating costs and direct medical education costs, if the physician is 
supervising residents in the nonhospital site throughout the academic 
year, the physician may complete a 2-week time study at two different 
points during the academic year (that is, two separate 2-week time 
studies). If a physician only supervises residents in the nonhospital 
site for the equivalent of a month or less in an academic year, then 
the physician may complete a 1 week time study. The percentage of time 
a teaching physician spends with or on behalf of the residents in 
nonpatient care direct GME activities over the course of the time study 
may then be extrapolated to apply to the rest of the academic year. 
Accordingly, we are not requiring that time studies completed by 
teaching physicians in nonhospital sites for the purpose of determining 
the 90 percent cost threshold meet the requirements in CMS Pub. 15-1, 
Section 2313.2. For example, under CMS Pub. 15-1, Section 2313.2.E.2, a 
minimally-acceptable time study must encompass at least 1 full week per 
month of the cost reporting period, whereas for purposes of determining 
the percentage of time the teaching physician spends in nonpatient care 
direct GME activities in the nonhospital site, the teaching physician 
may complete two separate 2-week time studies (or a 1 week time study 
if the teaching physician supervises residents for the equivalent of a 
month or less during the academic year). Since the teaching physician 
may not know the percentage of time spent on nonpatient care direct GME 
activities at the time the written agreement between the hospital and 
the nonhospital site is being entered into (since the written agreement 
must be in place before the rotation begins), the written agreement can 
be made based upon either the 3-hour per week proxy or an estimated 
percentage (based on the prior year's rotations, if applicable), and 
the percentage may be modified during the academic year if necessary. 
Further, the teaching physician (or the nonhospital site employer) and 
the hospital should modify the calculation of the 90 percent cost 
threshold and the written agreement in order to reflect the actual 
percentage by June 30 of that academic year. The source documentation 
used to determine the amount of teaching physician compensation should 
be made available to the Medicare contractor upon request during audit.
    Comment: One commenter asked CMS to ``* * * expressly clarify in 
either the text of the regulation or in the preamble to the final rule 
that the alternative proxies will not be used by CMS or fiscal 
intermediaries as a way to disallow a hospital's computation and 
payment using actual teaching time and teaching costs.'' The commenter 
expressed concern ``* * * that the alternative proxies * * * will be 
used against hospitals as some sort of floor in analyzing the 
reasonableness of actual costs for those hospitals that choose not to 
use these alternative proxies.'' The commenter believes that our 
proxies would be viewed as a floor or a cap when taking into 
consideration actual data. The commenter believes we should affirm that 
the proxies are an option we have made available to providers because 
of the difficulty of documenting actual teaching costs at the 
nonhospital site. Another commenter urged CMS ``* * * to make a clear 
statement to this effect, that is, that the intent of the parties is 
the controlling factor, and that neither CMS nor its contractors will 
substitute their judgment for [that] of the parties directing the 
training program.'' The commenter noted that in the cases where there 
is a cost, the commenter supports the use of a formula to calculate 
faculty costs.
    Response: We do not intend to use the proxies specified in this 
final rule to establish a ``floor'' or ``cap.'' Rather, they represent 
an option that hospitals may choose to use in making the calculations 
to ensure they are incurring ``all or substantially all'' of the 
training costs at the nonhospital site if it is too burdensome for them 
to collect actual data. Furthermore, we would like to emphasize that 
when there is a cost associated with the residency training program at 
the nonhospital site, regardless of the ``intent of the parties,'' the 
hospital must either pay the actual cost or the cost as determined 
using the proxies.

C. Other Issues To Be Considered

    Although we are revising the standard used for a hospital to incur 
``all or substantially of the costs for the training program in the 
nonhospital setting'' such that the hospital is permitted to count FTE 
residents training in nonhospital sites, the other existing regulations 
regarding nonhospital sites would still generally apply, but would 
require some modification. Under the existing regulations at Sec.  
413.78(e), a hospital is permitted to count residents training in 
nonhospital sites only if the residents spend their time in patient 
care activities, and the hospital must comply with either of the 
following: (a) It must pay all or substantially all of the costs of the 
training program in the nonhospital site by the end of the third month 
following the month in which the training in the nonhospital site 
occurred; or (b) it must have a written agreement with the nonhospital 
site that states 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 written agreement must indicate the compensation the 
hospital is providing to the nonhospital site for supervisory teaching 
activities. We proposed to add a new Sec.  413.78(f) for cost reporting 
periods beginning on or after July 1, 2007, to reflect the revised 
definition of ``all or substantially all of the costs for the training 
program in the nonhospital setting.'' First, if a hospital chooses to 
make concurrent payments; that is, pay the training costs by the end of 
the third month following the month in which the training occurred, 
then the hospital must be able to document for audit purposes that the 
concurrent payments it makes reflect ``all or substantially all'' of 
the costs, in accordance with the new definition at Sec.  413.75(b).
    Alternatively, if the hospital chooses to maintain a written 
agreement with the nonhospital site (which, we note, must be in place 
before the residents begin training at a nonhospital site), the new 
Sec.  413.78(f) would state that the written agreement must indicate 
that the hospital will incur at least 90 percent of the total of the 
costs of the resident's salary and fringe benefits (including travel 
and lodging where applicable) while the resident is training in the 
nonhospital site and the portion of the cost of the teaching 
physician's salary attributable to direct GME. The written agreement 
should specify the total compensation amount the hospital will incur to 
meet the 90 percent ``all or substantially all'' threshold, and whether 
this amount reflects only residents' salaries and fringe benefits 
(including travel and lodging where applicable), or reflects an amount 
for teaching physician compensation as well. We believe the written 
agreement should specify the total amount of nonhospital site training 
costs the hospital will incur and specify what costs are included in 
that amount because the hospital would need to determine up front the 
amount it must

[[Page 26969]]

pay to meet the 90 percent threshold and incur ``all or substantially 
all'' of the cost in accordance with our definition. In addition, the 
provision of this information in the written agreement will simplify 
the audit process when the Medicare contractor determines whether the 
amount paid by the hospital to the nonhospital site reflects ``all or 
substantially all'' of the costs of the program in the nonhospital site 
in accordance with the new definition at Sec.  413.75(b). We note that 
regardless of whether a hospital chooses to make concurrent payments to 
the nonhospital site, or to have a written agreement, the hospital must 
demonstrate that it is paying for at least 90 percent of the costs of 
each program at each nonhospital site according to the following 
formula (although actual data may be used in place of the proxies):
    0.90 x [(sum of each FTE resident's salary + fringe benefits 
(including travel and lodging where applicable)) plus the portion of 
the teaching physician's compensation attributable to nonpatient care 
direct GME activities].
    The portion of the teaching physician's compensation attributable 
to nonpatient care direct GME activities may be calculated as follows: 
(3/number of hours nonhospital site is open per week) x (national 
average salary for each teaching physician).
    If there are no teaching costs (because, for example, the residents 
are rotating to a nonhospital site where the teaching physician is a 
solo practitioner), then the written agreement should indicate that the 
specified compensation amount reflects only residents' salaries and 
fringe benefits (including travel and lodging where applicable) because 
there are no teaching physician costs (since the teaching physician is 
a solo practitioner). Finally, we note that, as under existing 
regulations, if the hospital does choose to have a written agreement 
with the nonhospital site, the hospital must, at a minimum, liquidate 
the costs identified in the written agreement in accordance with the 
regulations at Sec.  413.100(c)(2)(i).
    In addition, we note that under current policy, a hospital may 
choose to provide non-monetary, in-kind compensation rather than 
provide direct financial compensation to the nonhospital site for 
supervisory teaching activities. Under the new definition of ``all or 
substantially all,'' a hospital would still be permitted to provide in-
kind compensation to the nonhospital site, but, as under current 
policy, the hospital must be able to document that the value of the in-
kind compensation is at least equivalent monetarily to the portion of 
the actual or proxy-based costs for that teaching physician 
attributable to nonpatient care direct GME activities. That is, the 
hospital must show that the value of in-kind compensation is sufficient 
to meet the 90 percent threshold using the formula stated above in this 
section.
    We also believe it is important to review how the written agreement 
requirements apply when a hospital's residents rotate to nonhospital 
sites such as clinics owned by a medical school. As we stated in 
response to Question 9 on the Qs&As on our Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf, ``rather 
than having a written agreement with each clinic, it would be 
appropriate for the hospital to have a written agreement with the 
medical school, since the medical school owns the clinics. If the 
residents are training in various medical school clinics, the hospital 
must have written agreement(s) reflecting the compensation arrangements 
for each clinic'' (emphasis added). Unfortunately, we have learned of 
numerous situations where a hospital has a single agreement with the 
medical school in which the hospital specifies a lump sum dollar amount 
that it is paying the medical school for GME-related services that the 
medical school is providing, but there is no breakout at all as to the 
specific training costs attributable to individual clinics, or to the 
specific programs at those clinics. Without a breakout of the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable), and the portion of the teaching physicians' salaries 
attributable to nonpatient care direct GME activities at each 
nonhospital site, the Medicare contractor is unable to determine 
whether the hospital has properly paid the costs of each specialty 
training program at each nonhospital site in accordance with the 
statutory and regulatory requirements. Likewise, under the new 
definition of ``all or substantially all,'' whether hospitals pay for 
the costs of a program at a nonhospital site on a concurrent basis, or 
if they have a written agreement, they must be able to document how 
they are paying for ``all or substantially all'' of the costs of a 
particular program at each nonhospital site. Global agreements with 
lump sum payment amounts, either for teaching physician costs or for 
nonhospital training in general, have not been sufficient under 
existing policy and would not be sufficient under the finalized policy. 
Similarly, as under current policy, if two (or more) hospitals train 
residents in the same accredited program, and the residents rotate to 
the same nonhospital site(s), the hospitals cannot share the costs of 
that program at that nonhospital site (for example, by dividing the FTE 
residents they wish to count according to some predetermined 
methodology), as we do not believe this is consistent with the 
statutory requirement at section 1886(h)(4)(E) of the Act which states 
that the hospital incur ``all, or substantially all, of the costs for 
the training program in that setting'' (emphasis added). Finally, as 
under current policy, we note that in the instance where a hospital is 
sending residents in several different specialty programs to train in 
the same nonhospital site, and it wishes to count all of those FTE 
residents for purposes of IME and direct GME payment, the hospital must 
be able to document that it is separately meeting the ``all or 
substantially all'' threshold for each specialty program at that site. 
(That is, the hospital would determine the 90 percent threshold in 
accordance with the methodology described above separately for the 
teaching physicians and residents involved in each specialty program, 
and would apply the resident-to-teaching physician ratio limit if 
applicable).
    Comment: We received several comments on our existing policy as 
reiterated in the proposed rule for ``global'' written agreements, 
which are common with academic medical centers. According to the 
commenters, global agreements are designed to provide an 
administratively simple mechanism for teaching hospitals to compensate 
the medical school for a variety of reasons, one of which may be for 
supervisory physician costs--both in the hospital and in clinics owned 
by the medical school, and for other purposes which may not be 
specified in detail. The commenters believe that to the extent that 
nonhospital supervisory costs are included in the global agreement, a 
straightforward mechanism for documenting the costs should be devised, 
so as not to complicate the process of entering into the agreements, 
which are entered into only once a year. One commenter noted that we 
stated in the proposed rule that ``global agreements with lump sum 
payment amounts, either for teaching physician costs or for nonhospital 
training in general, have not been sufficient under existing policy and 
would not be sufficient under the proposed policy'' (72 FR page 4829). 
The commenter argued that if our stated purpose in issuing the proposed 
rule was to simplify and relieve administrative burdens, then the 
proposed rule has not

[[Page 26970]]

achieved its goal ``at all in a large number of instances.'' A 
commenter requested that we should issue an interim final rule with 
comment period to solicit additional comments to ensure that global 
agreements between teaching hospitals and medical schools can be used 
to simplify the administrative complexity of this regulation while 
addressing the intent of the statute as CMS sees it. One commenter 
suggested that, at a minimum, hospitals should be allowed to make their 
``best estimate'' of the number and length of each rotation and modify 
them throughout the year as necessary. In addition, the commenter 
stated that we should allow hospitals to use historical nonhospital 
site rotation experiences to determine an aggregate nonhospital 
supervisory amount that could be referenced in the global agreement for 
the upcoming year. Another commenter asked that CMS suggest a standard 
written agreement template for hospitals to use.
    Response: In the preamble to the proposed rule, we mentioned 
several existing issues that we believed were important to reiterate 
and to discuss in the context of our new proposals. One such issue was 
``global agreements.'' We believed it was necessary to remind the 
public about the concerns we had with global agreements, precisely 
because we understand that they are quite common among teaching 
hospitals and related medical schools, but if lacking relevant details, 
are not sufficient in a statutory and regulatory framework that 
requires a hospital to ``incur all, or substantially all, of the costs 
for the training program in that setting'' (that is, for each program 
at each nonhospital site as specified in section 1886(h)(4)(E) of the 
Act). In the proposed rule, we explained that global agreements often 
do not break out the specific training costs attributable to individual 
clinics, or to the specific programs at those clinics. ``Without a 
breakout of the residents' salaries and fringe benefits (including 
travel and lodging where applicable), and the portion of the teaching 
physicians' salaries attributable to nonpatient care direct GME 
activities at each nonhospital site, the Medicare contractor is unable 
to determine whether the hospital has properly paid the costs of each 
specialty program at each nonhospital site in accordance with the 
statutory and regulatory requirements. Likewise, under the new proposed 
definition of ``all or substantially all,'' whether hospitals pay for 
the costs of a program at a nonhospital site on a concurrent basis, or 
if they have a written agreement, they must be able to document how 
they are paying for ``all or substantially all'' of the costs of a 
particular program at each nonhospital site. Global agreements with 
lump sum payment amounts, either for teaching physician costs or for 
nonhospital training in general, have not been sufficient under 
existing policy and would not be sufficient under the proposed policy'' 
(72 FR 4829). Accordingly, while it was our intent in the proposed 
rule, and in this final rule, to minimize hospitals' documentation 
burdens for resident training in nonhospital sites, the issues to which 
we were particularly sympathetic were those beyond the control of a 
hospital, such as a teaching physician who refuses to disclose salary 
information. Further, our proposals were intended to encourage more 
transparency in those arrangements that are pertinent to Medicare 
payments, so as to eliminate the ``deadlock'' that hospitals and 
Medicare contractors have experienced, and to provide for an audit and 
reimbursement process that is as smooth and as ``painless'' as 
possible. As indicated by the commenters, these global agreements are 
entered into to cover a variety of funding issues, and are not entered 
into solely (if at all) for the purpose of meeting Medicare 
regulations. Thus, these agreements often do not provide the level of 
detail that is sufficient to comply with the Medicare regulations. 
Since 1987, when hospitals were first allowed to count the time that 
residents spent training in nonhospital sites for direct GME purposes, 
we instituted the written agreement requirement precisely to provide an 
administrative tool for use by the Medicare contractors to assist in 
determining whether hospitals incurred the necessary training costs in 
accordance with the statute and regulations. Similarly, that is why we 
stated in the answer to Question 9 in the 2005 Qs&As on the CMS Web 
site at http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf that, while it is permissible for a hospital to have an 
agreement with a medical school on behalf of the clinics owned by the 
medical school, in such a case the hospital also must ``have written 
agreement(s) reflecting the compensation arrangements for each clinic'' 
(emphasis added). Thus, while we certainly would like to simplify 
matters, we also want to ensure that hospitals receiving payment 
relating to training occurring in nonhospital settings are properly 
incurring the training program costs in accordance with the statute. If 
hospitals wish to count residents training in nonhospital sites for 
direct GME and IME purposes, they must be able to document that they 
are paying for ``all, or substantially all'' of the training costs for 
each program at each site. We believe that a written agreement 
reflecting the amounts being paid by the hospital for each site is a 
reasonable requirement for in such documentation. Alternatively, we 
note that under Sec.  413.78(e) and new Sec.  413.78(f), hospitals are 
not required to have written agreements with nonhospital sites but 
instead may opt to pay for the nonhospital training program costs on a 
concurrent basis, although the hospital certainly must still be able to 
document that the concurrent payments reflect ``all or substantially 
all'' of the cost, in accordance with the current and new definition at 
Sec.  413.75(b). However, given that a hospital's residents may train 
at hundreds of nonhospital sites, we do understand that it may be 
difficult for hospitals to finalize the details of all of their written 
agreements by the start of an academic year. Accordingly, in response 
to the commenters' suggestions, we are modifying our policy with 
respect to written agreements (for cost reporting periods beginning on 
or after July 1, 2007). Current policy requires that the written 
agreement be in place prior to the time that the residents begin 
training in the nonhospital site (that is, signed by both the hospital 
and the nonhospital site). Since residents rotate to various 
nonhospital sites at different points in the residency year, a written 
agreement may or may not have to be in place with a particular 
nonhospital site by July 1. Rather, the agreement should be in place by 
the day before the rotation is scheduled to begin. For example, if a 
resident is scheduled to rotate to Clinic A on July 1, then the written 
agreement between the hospital and Clinic A must be in place by June 30 
(that is, the day before July 1, not the end of the following residency 
year). However, if residents first rotate to Clinic B on December 1, 
then the written agreement between the hospital and Clinic B would have 
to be in place by November 30. In response to the commenters' 
suggestions, we are changing our policy to allow hospitals to modify 
the 90 percent threshold calculations in their written agreements by 
the end of the academic year (that is, June 30) to reflect that the 
hospital is meeting the requirement to incur at least 90 percent of the 
costs associated with the actual training program rotations. This 
policy would work in a fashion similar to our current policy on 
Medicare GME affiliation agreements, but with some

[[Page 26971]]

differences. Under Sec.  413.79(f), Medicare GME affiliation agreements 
must be entered into (and received by the Medicare contractor and CMS) 
by July 1 of the applicable residency program year, but hospitals may 
modify these agreements by June 30 of that residency year to reflect 
changes in the rotations that may not have been anticipated. With 
respect to nonhospital training, the hospital would have the option of 
using either the proxies for teaching physician costs as finalized in 
this final rule, or actual data for the physician salary and teaching 
time spent in nonpatient care direct GME activities. If the hospital 
opts to use actual data and not the proxies, the hospital may use the 
prior year's cost amounts as a placeholder upon entering into the 
written agreement, and must modify the agreements by June 30 of that 
residency year to properly reflect the actual costs that the hospital 
must incur in accordance with the 90 percent threshold for ``all or 
substantially all'' of the costs of the training program in the 
nonhospital setting. In addition, in the event that hospitals send 
residents to unanticipated or originally unscheduled rotations in 
nonhospital sites, the hospitals may make their ``best estimate'' by 
the day before the rotations occur (the hospital may use the prior 
year's rotation experiences as a model), and must make modifications by 
the end of the academic year to ensure that they have properly met the 
90 percent threshold. We are modifying the proposed regulations text at 
Sec.  413.78(f)(3)(ii) to reflect this new policy change with respect 
to modification of the written agreements by June 30 of the applicable 
academic year.
    With respect to the comment requesting that we create a standard 
template for written agreements, we do not believe a template would 
necessarily be helpful, considering that, even within one hospital, the 
rotations can differ significantly across specialties. The formula for 
determining the 90 percent threshold, which is the crux of the written 
agreement, is clearly written in this final rule, and should be 
followed for all programs.
    Comment: One comment centered on the various arrangements teaching 
hospitals have with affiliated medical schools for training residents 
both inside and outside the hospital. The teaching physicians, as 
medical school employees, are compensated in a ``variety of manners'' 
for various types of services, including patient care, administrative 
duties, research, etc. The commenter asked that in the case where the 
hospital is paying the medical school an amount that the medical school 
determined ``in good faith'' to be the compensation for ``teaching 
services'' both in the hospital and in nonhospital sites, CMS should 
consider that the hospital has ``borne the full costs of teaching 
services in nonhospital sites * * * even where there is no allocation 
of those amounts between'' the training in the hospital and the 
training in the nonhospital sites.
    Response: Although the commenter does not specifically use the term 
``global agreement'' in his comment, it appears that the scenario being 
described has many of the same features as a global agreement. That is, 
the hospital pays the medical school a lump sum for ``teaching 
services,'' often occurring in the hospital and various nonhospital 
sites, but there is no allocation as to the teaching costs particular 
to each program at each nonhospital site. In the proposed rule, and in 
response to a comment above, we explained that global agreements do not 
break out the specific training costs attributable to individual 
clinics, or to the specific programs at those clinics. Without a 
breakout of the residents' salaries and fringe benefits (including 
travel and lodging where applicable), and the portion of the teaching 
physicians' salaries attributable to nonpatient care direct GME 
activities at each nonhospital site, the Medicare contractor is unable 
to determine whether the hospital has actually paid the costs of each 
specialty program at each nonhospital site, in accordance with the 
statutory and regulatory requirements. This scenario differs from one 
described in Question 7 in the April 2005 Qs&As [see http://www.cms.hhs.gov/AcuteInpatientPPS/Downloads/nonhospQA.pdf]. In that 
instance, the teaching physician receives a salary directly from the 
hospital for teaching services inside the hospital and in nonhospital 
sites, rather than the medical school, and when the physician is 
supervising the residents in nonhospital sites, he/she is not receiving 
any other type of salary payment from the nonhospital sites. Thus, to 
the extent that there are teaching costs in those nonhospital sites, 
the hospital is already paying for those costs. The situation described 
in the Qs&As is different from the situation outlined by the commenter, 
in which the teaching physician receives a salary from the medical 
school covering a variety of activities, and, without a determination 
as to the costs of each training program in each nonhospital site, the 
Medicare contractor cannot determine if the hospital properly paid 
``all or substantially all'' of the costs.
    Comment: One commenter found our proposal to require hospitals to 
specify the total amount the hospital will incur, and to specify what 
costs are included in that amount, as ``quite surprising.'' The 
commenter believes that this requirement will complicate the 
preparation of the written agreements, and that it is not necessary to 
specify the cost amount which will be used to determine if the hospital 
meets a certain threshold for reimbursement within a contract between 
two parties. The commenter recognized the need for this information to 
be available upon audit, but strongly encouraged CMS not to require 
that the cost information be included in the written agreements. Other 
commenters also recommended that the regulation not require that the 
details of the computation be included in the written agreement, 
because the scheduled issuance of the final rule is so close to the 
beginning of the upcoming academic year (July 1, 2007), and also 
because the actual costs a hospital will incur cannot be accurately 
determined until after the fact. For example, the residents' travel and 
lodging costs may be higher or lower than the amount initially 
estimated when the written agreement was made. Commenters questioned 
whether our proposal to use proxies to reflect the time the time the 
teaching physician spends in nonpatient care direct GME activities will 
actually reduce the documentation burden on hospitals since hospitals 
would be required to collect information on, in some cases, hundreds of 
clinics. One commenter noted that the paperwork burden required by the 
proposed rule is ``still massive,'' and disproportionately 
disadvantages family medicine programs and perhaps other primary care 
programs, threatening rural access to care. One commenter stated that 
hospitals which meet the 90 percent threshold by incurring the resident 
salaries and fringe benefits should not be required to state in the 
written agreements that ``* * * the hospital will pay all or 
substantially all of the cost for resident rotations to the nonhospital 
site'' or ``* * * that the hospital will incur at least 90 percent of 
the cost of the resident's salary and fringe benefits (and travel and 
lodging where applicable) while the resident is training in the non 
hospital site.'' The commenter provided examples of how the regulation 
text should be changed to conform to the commenter's suggestion and 
further stated that hospitals which meet the 90 percent threshold by

[[Page 26972]]

incurring the resident salaries and fringe benefits should not be 
required to identify the compensation paid to residents for their 
salary and fringe benefits. Another commenter stated that documentation 
burdens associated with written agreements can be eliminated if CMS 
would permit a one time agreement with a ``major affiliated partner,'' 
and allow for multi-year agreements. Finally, one commenter argued that 
in light of the limited time that hospitals would have to enter into 
written agreements with all of their nonhospital sites in accordance 
with the policies set forth in the final rule by July 1, CMS should 
impose a one year transition or grace period in which a written 
agreement can be amended or newly executed at any time prior to June 
30, 2008, and still be effective for the applicable portions of the 
academic year starting on July 1, 2007. If CMS does not agree with this 
request, then the commenter suggested that alternatively, CMS should 
allow a 180 day grace period through December 31, 2007. Under either 
scenario, the commenter stated that the grace period would not ``impact 
in any way the requirement that hospitals actually incur 90 percent of 
the training costs,'' and would ``still afford intermediaries with 
fully executed written agreements for use during their audits.'' If CMS 
does not grant the commenter's request for a grace period, then the 
commenter asked that CMS relax the requirement to specify the precise 
teaching compensation amount in the written agreements for at least the 
next academic year. The commenter also requested that in general, CMS 
should allow the written agreements to be executed during or shortly 
after rotations or to allow the written agreements to be more general 
about the amounts to be paid. CMS should also indicate that the 
ultimate amounts paid can vary from the amounts set forth in the 
written agreements. Finally, CMS should provide a clarification or 
preferably a detailed example demonstrating how to apply the various 
proxies when a hospital sends residents in two or more specialty 
programs to the same nonhospital site. The commenter was unclear how 
separate computations should be made when different specialty programs 
operate at the nonhospital site for a different number of hours per 
week (for example, internal medicine for 15 hours per week and family 
practice for 25 hours per week, while the nonhospital site is open for 
40 hours a week).
    Response: We do not believe the specification of the actual amounts 
the hospital is to pay the nonhospital site will complicate the process 
of the written agreements. The details of the 90 percent cost threshold 
are the essence of the written agreement, and it is appropriate that 
they be included at the time the written agreement is being entered 
into. Considering that we are already allowing hospitals to use easily 
accessible proxy data, we do not believe it would be appropriate to 
allow for additional ``short cuts'' and imprecision in the development 
of the written agreements. Additionally, we do not believe it is 
advisable to encourage hospitals to delay the process of making the 
cost calculations necessary to establish that a hospital meets the 90 
percent threshold. Allowing hospitals to delay the process of ironing 
out the details of the costs the hospital needs to incur in order to 
meet the ``all or substantially all'' requirements could possibly lead 
to unforeseen disallowances 2 or more years after the fact when the 
applicable cost report is being audited. We believe it is better that 
hospitals take the time to compute the correct payment amounts at the 
beginning of (or modified during, as applicable) the academic year, 
rather than scramble to provide the details during an audit. 
(Similarly, hospitals that do not employ written agreements but instead 
are paying for training program costs on a concurrent basis also need 
to determine up front what they are paying to each nonhospital site to 
ensure that they pay the proper amount every three months). However, we 
are sympathetic to the comment regarding the limited time in which 
hospitals have to enter into or modify existing contracts in accordance 
with the policy set forth in this final rule. While we do not believe a 
transition or grace period is necessary, in this final rule, as we 
stated in response to a comment above, we are modifying our policy to 
allow modifications of written agreements. Should hospitals, urban or 
rural, find it difficult to calculate the exact amounts to be paid 
under the 90 percent cost threshold at the time they are entering into 
the agreements, our decision to allow modifications to the 
determination of the 90 percent threshold by June 30 of the applicable 
academic year should provide some relief. Additionally, we continue to 
believe it is important for the written agreements to specify the 
compensation amounts provided for resident salaries and fringe benefits 
because doing so will be useful for hospitals in that they will have 
greater assurance that they are meeting requirements to count FTE 
residents training in nonhospital settings and for Medicare contractors 
in that they will have available more of the information needed for the 
audit process. Even in the instance where the hospital is paying at 
least 90 percent of the total cost just by paying the residents' 
salaries and fringe benefits, the Medicare contractor would still need 
to know what the total costs are in order to verify that the residents' 
portion is, in fact, 90 percent of the total costs. Thus, we are also 
specifying in the regulations text of this final rule that the written 
agreement should include the amount that represents the total cost of 
the nonhospital site, in addition to including the amount that 
represents 90 percent of the costs.
    In instances where residents in more than one specialty program are 
rotating to the same nonhospital site, the 90 percent threshold must be 
determined separately for each program. In the example mentioned by the 
commenter, where a nonhospital site is used for internal medicine for 
15 hours per week and for family practice for 25 hours per week, and 
the nonhospital site is open for 40 hours a week, the teaching time 
ratio for internal medicine and family practice respectively would be 
3/40. In the preamble above (and on page 4825 of the proposed rule), we 
included an example of how the 1:1 resident to teaching physician ratio 
would be applied in the instance where a nonhospital site is staffed by 
physicians in different specialties. We stated that unless the hospital 
can document that only certain physicians were involved in supervising 
the residents, we would apply the 1:1 ratio to all of the physicians in 
the nonhospital site. Then, an average national salary of the mix of 
physician specialties in the practice would be computed, and would be 
multiplied by 3/40 for use in the 90 percent threshold for internal 
medicine and family practice respectively.
    Lastly, we are requiring that hospitals have written agreements in 
place with nonhospital sites regardless of the nonhospital site's 
relationship to the hospital, and we do not believe an exception is 
warranted for a ``major affiliated partner.'' While we do not believe 
there is anything wrong per se with one time or multi-year agreements 
with nonhospital sites with which a hospital has a long-standing 
rotational relationship, we question whether such agreements would 
properly reflect the true costs in the 90 percent threshold that must 
be incurred from year to year, since, as so many commenters have 
pointed out, rotations to nonhospital sites can be so dynamic.
    Comment: Several commenters asserted that there is no legal

[[Page 26973]]

requirement that an agreement must be signed before nonhospital 
training under an agreement begins. The commenters stated that if the 
presence of an agreement can be established after the fact by 
concurrent payments, CMS should not deny payment as long as there is an 
agreement that is ratified by the signature of all parties at any time 
during the agreement. At a minimum, CMS should recognize the presence 
of a binding agreement as of the time that all parties execute the 
agreement.
    Response: With respect to GME policy concerning written agreements 
relating to residency training in nonhospital sites, our policy has 
always been that the written agreement must be in place prior to the 
time the residents begin training at the nonhospital site. A written 
agreement signed before the time the residents begin training at the 
nonhospital site, stating that the hospital will incur the costs of the 
training program at the nonhospital site, indicates the hospital's 
ongoing commitment to incur those costs. Written agreements that are 
retroactive to the time the residents began training at the nonhospital 
site do not demonstrate that there was an ongoing commitment by the 
hospital to incur the costs. In fact, we are taking this opportunity to 
clarify the regulations text at Sec.  413.78(f)(3)(ii) to specify that 
the written agreement must be in place between the hospital and the 
nonhospital site before the training begins in that nonhospital site. 
The commenters suggest that if the presence of an agreement can be 
established after the fact by concurrent payments, CMS should not deny 
payment when an agreement is not in place at the outset of the training 
but is later ratified by the signature of all parties at any time. 
However, we note that if the hospital can show that it made payments 
representing all or substantially all of the costs of the training 
program in the nonhospital setting on a concurrent basis, then under 
the regulations at section 413.78(e) or (f), a written agreement is not 
needed. This is because these regulations require either a written 
agreement or concurrent payments. However, if, for whatever reason, the 
Medicare contractor finds that a written agreement is not in accordance 
with CMS policy, if the hospital can demonstrate that it paid for the 
nonhospital training (and the payments represent all or substantially 
all of the cost of the training program in accordance with our 
regulations) by the end of the third month following the month in which 
the training occurred, then, assuming the other requirements are met, 
we would allow the hospital to count the FTE resident time spent 
training in the nonhospital setting for purposes of direct GME and IME 
payments.
    Comment: One commenter asked if a hospital that first chooses one 
methodology of meeting the 90 percent threshold (that is, the proxy 
data or actual data), could later change to the other methodology to 
elicit a more favorable outcome. The commenter further inquired as to 
whether the hospital would be considered to have met the 90 percent 
threshold if it changes its methodology.
    Response: As we stated previously in this preamble, we believe that 
any Medicare policy approach to allowing hospitals to count FTE 
residents training in nonhospital settings for IME and direct GME 
payment purposes must be consistent with the statutory requirement that 
hospitals incur ``all, or substantially all'' of the costs of a 
training program in a nonhospital setting. Further, we continue to 
believe that the definition of ``all, or substantially all'' of the 
costs which entails documentation of and payment for the costs of a 
training program based on the actual costs of the program is truest to 
the intent of the statute. Yet, as we explained, the alternative 
methodology, which attempts to address the various administrative 
difficulties that could occur in documenting actual costs and which 
employs proxies in the place of actual data, is acceptable as well. 
However, we certainly would not encourage hospitals to make a practice 
of using one methodology during the applicable academic year, and 
attempting to switch to the other methodology during audit to determine 
if they met the 90 percent threshold under the latter methodology. 
Nevertheless, if for example, during an audit, a Medicare contractor 
determines that a hospital did not pay for the costs of a particular 
program in accordance with the 90 percent threshold calculated using 
one method, and the hospital requests that it be allowed to attempt to 
demonstrate that it properly paid the costs had the other method been 
used, the Medicare contractor should contact CMS to determine on 
whether the hospital met the regulations under the other method. 
However, we caution that, even if CMS does allow a hospital the 
opportunity to demonstrate that it met the regulations under the other 
method, this may not necessarily provide the escape from an impending 
disallowance that a hospital is seeking. Payment for ``all or 
substantially all'' of the costs must be made in a timely fashion in 
accordance with the regulations at section 413.100(c)(2)(i) in either 
case, and it could be difficult for the hospital to meet those 
requirements if it did not initially determine and pay the actual costs 
of the program. Moreover, it could be difficult for the hospital to 
identify actual costs several years after the training occurred, 
especially since the teaching physician probably would not have kept 
records on the amount of time spent with the residents in nonpatient 
care direct GME activities. For example, a hospital initially used 
actual data to determine that 90 percent of the total costs of a 
program in a particular nonhospital site is $70,000. The hospital 
identified the costs as being $70,000 in the written agreement and 
liquidated the costs in a timely fashion in accordance with the 
regulations at section 413.100(c)(2)(i) (that is, within one year after 
the end of the cost reporting period in which the liability is 
incurred). However, during audit, the FI determined that the actual 
costs of the program were $75,000, not $70,000, which means the 
hospital did not pay 90 percent of the costs of the program. The 
hospital requests that it be allowed to demonstrate that it paid at 
least 90 percent of the costs of the program as calculated based upon 
the proxies instead, and CMS permits the hospital to do so. If the 
hospital shows that 90 percent of the cost of the program based on the 
proxies was $70,000 or less, then it may be considered to have paid 
``all or substantially all'' of the costs of the program. However, if 
the hospital, as verified by the Medicare contractor, demonstrates that 
90 percent of the costs using proxies was $73,000, then in either case, 
the hospital would not have paid ``all or substantially all'' of the 
costs. The hospital would not, in all likelihood, be able to resolve 
the problem by paying the difference ($3,000) at the time of the audit 
since the timeframe for liquidating the liabilities may have passed. If 
the reverse situation had occurred, where the hospital first used 
proxies, but then requested to demonstrate that it would meet the 90 
percent threshold if actual data were used, as explained above, we 
believe it would be quite difficult for the hospital to be able to 
successfully identify the actual costs of the program several years 
after the fact. In any case, the hospital would not be allowed to count 
the FTE residents training in the nonhospital site unless it ultimately 
demonstrates that it incurred all or substantially all of the costs for 
the training program in the nonhospital site in accordance with the 
definition at section 413.75(b) of the regulations (that

[[Page 26974]]

is, 90 percent). We would also apply this principle in determining 
whether the hospital actually incurred 90 percent of the costs of the 
training program in a nonhospital site in the instance where the amount 
ultimately paid by the hospital differs from the amount specified in 
the written agreement. If the amount paid by the hospital is at least 
90 percent of the total of the costs of the residents' salaries and 
fringe benefits (and travel and lodging where applicable) and the 
portion of the cost of teaching physicians' salaries attributable to 
nonpatient care direct GME activities, then, assuming all other 
requirements are met, the hospital may count the FTE residents training 
in the program at the nonhospital site.
    Comment: A commenter noted that the requirement that a hospital 
must liquidate the costs identified in the written agreement in 
accordance with the regulations at section 413.100(c)(2)(i) only 
applies in the case where a hospital enters into a written agreement 
with the nonhospital site, but does not apply in the instance where a 
hospital chooses to pay the nonhospital site on a concurrent basis. The 
commenter recommended that the requirements for liquidation of 
liabilities be consistent for both situations (that is, with or without 
a written agreement).
    Response: Under the Medicare payment rules at Sec.  413.100 
concerning accrued costs, hospitals are required to liquidate their 
short-term liabilities within one year after the end of the cost 
reporting period in which the liability is incurred. With respect to 
the payments that hospitals make to nonhospital sites, in the August 
11, 2004 final rule (69 FR 49179), in an effort to provide more 
flexibility to hospitals, we gave hospitals the option of either 
entering into a written agreement, or paying for the costs on a 
concurrent basis--that is, to pay for the costs of the training that 
occurs during a month by the end of the third month following the month 
in which the training in the nonhospital site occurred. The latter 
option (that is, concurrent payments) would require that payments be 
made on a more frequent basis than the timeframe specified at Sec.  
413.100(c)(2)(i). Alternatively, if a hospital opts to enter into 
written agreements, since the hospital would be committing upfront to 
incur the costs, the longer timeframe at Sec.  413.100(c)(2)(i) would 
apply. Consequently, under the written agreement option, in order for 
the accrued costs to be recognized by Medicare in the year of the 
accrual, the costs incurred in a given cost reporting year for 
nonhospital training must be liquidated within one year after the end 
of that cost reporting period. For example, if a hospital has a 
December 31, 2007 fiscal year end, costs that the hospital incurred for 
nonhospital training occurring during July 2007 through December 2007 
must be liquidated by December 31, 2008. Costs incurred by this 
hospital for nonhospital training occurring during January 2008 through 
June 2008 would accrue during the December 31, 2008 fiscal year end and 
must be liquidated by December 31, 2009. We believe these two options 
at Sec.  413.78(e) and (f) give hospitals additional flexibility in 
paying for the costs of training occurring in nonhospital settings. 
Therefore, we are not changing the regulations to require that the 
liquidation of liabilities be consistent in both situations.
    Comment: One commenter asked about our policy for nonhospital sites 
that are owned by a hospital, as articulated in the April 2005 Qs & As 
document. The document (under Answer <greek-i>8) states that the 
hospital must ``actually [pay] the nonhospital site through the 
hospital's accounts payable system. (If the hospital and nonhospital 
site share a single accounting system, the hospital could demonstrate 
payment of the nonhospital site training program costs using journal 
entries that expense these costs in the hospital's GME cost center and 
credit the nonhospital site.)''
    The commenter stated that we do not provide any rationale for this 
position, which seems to impose an administrative burden on hospitals 
(requiring the hospital to essentially pay itself). The commenter urged 
CMS to state in the final rule that these teaching hospitals need not 
specify the supervisory teaching physician costs in the written 
agreement because the teaching hospitals either own the nonhospital 
site or both institutions are owned by the same organization.
    Response: We agree with the commenters that the proposal to require 
hospitals to include the details of the 90 percent cost threshold in 
the written agreement might be unnecessarily burdensome for hospitals 
that own nonhospital sites in which residents are training. While the 
hospital certainly must pay for the costs of training (in accordance 
with the 90 percent threshold) occurring in the nonhospital sites that 
it owns in order to be permitted to count the time residents spend 
training there for direct GME and IME purposes, the written agreements 
between the hospital and the nonhospital sites it owns need not specify 
the total amount of costs the hospital will incur, and what costs are 
included in that total amount. However, we note that there may be some 
cases where the hospital is not automatically paying for the training 
program costs in the nonhospital sites it owns, simply because it owns 
those nonhospital sites. For example, there may be instances where a 
hospital contracts with a third party to provide teaching physicians to 
supervise its residents in the hospital-owned nonhospital sites. In 
such a case, the teaching physicians are paid a salary by that third 
party (for example, they are on the staff of a medical school). 
Therefore, in this case, the written agreement would need to be between 
the hospital on behalf of the clinics that it owns and the third party, 
and the written agreement must specify the total cost at the 
nonhospital site, and the amount the hospital will incur (at least 90 
percent of the total), and must indicate the portion of the amount the 
hospital will incur that reflects residents' salaries and fringe 
benefits (and travel and lodging where applicable), and the portion of 
this amount that reflects teaching physician compensation.
    Comment: One commenter noted that the regulations concerning 
written agreements at section 413.78(e)(3)(ii) state that the hospital 
must provide ``reasonable compensation'' to the nonhospital site, while 
the regulations concerning concurrent payments have no requirement 
regarding the reasonableness of the compensation. The commenter 
recommended that CMS make the regulations for written agreements and 
concurrent payments consistent, by either inserting a requirement for 
reasonableness of compensation for both circumstances, or excluding the 
requirement under both circumstances.
    Response: The commenter is referring to the regulations at section 
413.78(e)(3) pertaining to the requirements for counting residents 
training in nonhospital settings on or after October 1, 2004. However, 
we believe the commenters point regarding the regulatory requirement 
for ``reasonableness'' of compensation is not a concern under the new 
regulation. Although the new section 413.78(f), effective for cost 
reporting periods beginning on or after July 1, 2007, does not 
specifically refer to reasonableness of compensation, it requires that 
the costs of the training program be determined in accordance with the 
90 percent threshold. Additionally, we note that the reference in the 
regulation at Sec.  413.78(e)(3)(ii) to reasonable compensation was 
intended as a guide for the content of the written agreement and as a 
preface to the requirement to specify in the written agreement the

[[Page 26975]]

amount of compensation the hospital is providing for supervisory 
teaching activities. Given that, and the fact that the regulation at 
Sec.  413.78(e) will not apply to cost reporting periods beginning on 
or after July 1, 2007, we do not believe it is necessary to modify this 
section of the regulations.
    Comment: One commenter believes that since residency training is 
the final educational step before a resident is capable of independent 
practice, residents are students and not employees, and therefore, CMS 
should refer to resident stipends and not resident salaries.
    Response: We acknowledge that there are multiple terms to refer to 
the compensation a resident receives while participating in a residency 
training program. For our purposes, we have always referred to the 
compensation received by residents as salary and benefits, and will 
continue to do so even though different terms may be used by other 
organizations and entities.
    Comment: Several commenters inquired about whether a hospital must 
comply with the nonhospital site regulations for training residents in 
a nonhospital setting with respect to FTE residents that are not 
counted for purposes of Medicare IME or direct GME payments because 
they are in excess of the hospital's FTE resident caps. These 
commenters further inquired about whether such a hospital could still 
include the FTEs in excess of its cap on its cost report even if the 
hospital didn't comply with the regulations for training those FTE 
residents in nonhospital settings. The commenters believe that 
hospitals should be able to include those residents in their current 
year FTE counts on their cost reports based on the reasoning that, in 
the event the Congress makes a legislative change regarding FTE 
resident caps, the cost reports would reflect an accurate count of the 
residents that the hospital trained.
    Response: The regulations specify what a hospital must do to count 
residents that train at a nonhospital site for purposes of both direct 
GME and IME. If the hospital fails to meet the regulatory requirements 
at Sec.  412.105(f) and Sec.  413.78(f), it may not include those 
residents in its FTE count, regardless of whether the hospital is 
otherwise above or below its caps. However, a hospital may choose not 
to pay for the costs relating to the training of residents in a 
nonhospital setting if it is training FTE residents in excess of its 
caps, and therefore, would also not include those FTE residents 
training in nonhospital sites in its FTE count. With respect to FTE 
residents that a hospital does count on its Medicare cost report (for 
example, on line 3.05 on Worksheet E-3 Part IV, and on line 3.08 on 
Worksheet E Part A), a hospital must have proper documentation to 
demonstrate that the FTE residents are valid FTEs that, in the absence 
of the FTE caps, would otherwise be permitted to be counted for direct 
GME and IME payment purposes. Therefore, a hospital may only claim 
residents training at nonhospital sites on its cost report if the 
hospital would, in the absence of the FTE caps, be permitted to count 
those FTE residents for direct GME and IME payment purposes, even if 
those residents would be over its caps. We recognize the issues that 
could arise if hospitals choose not to take the required steps under 
our regulations to be permitted to count certain FTE residents, and if 
the Congress should pass new legislation involving residency caps. 
However, we believe it is more likely than not that new legislation 
would be based on the premise that hospitals have properly complied 
with the regulations and reported accurate data on their cost reports 
regardless of whether it was to their particular benefit to do so at 
the time. Thus, we would encourage hospitals to meet the regulatory 
requirements and report FTE residents to the fullest possible extent.
    Comment: Several commenters stated that our policy would continue 
to be administratively burdensome. One commenter stated that for its 
family medicine program, private physicians are used as preceptors and 
in 1 week residents may work with 10 to 20 teaching physicians. The 
commenter states that, ``It would be administratively impossible to 
calculate all of their supposed teaching costs.'' Another commenter 
noted that its teaching program relies on 20 to 30 private teaching 
physicians who volunteer their time training residents in their 
offices. The commenter stated that due to the flow of patient care, 
without the use of burdensome time studies, it would be impossible to 
accurately determine the amount of GME teaching time at the nonhospital 
site. The commenter requested that we work more closely with program 
directors to formulate a methodology which addresses the true costs of 
GME.
    Response: We believe that use of the proxies being adopted in this 
final rule, coupled with the 1:1 resident to teaching physician ratio, 
can greatly reduce the burdens associated with determining teaching 
physician supervisory GME costs, even in the relatively complex 
training arrangements described by the commenters. Although we 
acknowledge that hospitals with multiple nonhospital sites may face a 
larger task to comply with our regulations than hospitals with just a 
few nonhospital sites, we continue to believe the statute mandates that 
hospitals are required to pay for ``all or substantially all'' of the 
costs of the training program at the nonhospital site, and that this 
final policy conforms with the statutory requirement while providing 
additional administrative flexibility.
    Comment: One commenter noted that in the proposed rule, CMS used 
the terms ``direct GME activities,'' ``nonpatient care activities,'' as 
well as ``activities related to non-billable GME activities'' in 
illustrating activities for which it is required that hospitals pay 
supervisory costs. The commenter urged CMS to consider including a 
definition in the final rule.
    Response: We appreciate the commenter's suggestion to define terms 
such as those included in the above paragraph. We did not propose to 
define these terms since we did not believe it would be necessary to 
include a definition in the rule. However, we do believe it is 
important to be consistent in the way we reference those activities for 
which the hospital is required to incur the costs in the nonhospital 
site--that is, nonpatient care direct GME activities. While we do not 
currently specifically define ``nonpatient care direct GME activities'' 
in the regulations, we note that the term ``patient care activities'' 
is currently defined at Sec.  413.75(b) as, ``the care and treatment of 
particular patients, including services for which a physician or other 
practitioner may bill.'' Therefore, the use of the term ``nonpatient 
care'' would denote those activities which do not involve the care and 
treatment of specific patients, including non-billable time. Further, 
the term ``direct GME'' denotes those activities in which the physician 
engages because of his/her involvement in supervising residents in an 
approved GME program. We are also modifying our proposed definition of 
``All or substantially all of the costs for the training program in the 
nonhospital setting'' at Sec.  413.75(b) to specify the portion of the 
cost of teaching physicians' salaries attributable to ``nonpatient 
care'' direct GME ``activities.'' If we find that there are continuing 
questions regarding these terms, we will consider proposing definitions 
in future rulemaking so that the proposed definitions can be included 
in the normal comment process.
    Comment: One commenter maintained that CMS' interpretation of

[[Page 26976]]

Section 1886(h)(4)(E) of the Act is not correct. The commenter believes 
that the statutory language does not prohibit payment to the ``main'' 
teaching hospital if it incurs ``all or substantially all'' of the 
costs of the residency training in ``small, rural emergency 
departments'' since the residents ``* * * are not serving in more than 
one hospital `simultaneously.' '' The commenter further notes that few 
small rural hospitals want to assume the burden of becoming teaching 
hospitals, therefore, the main teaching hospital continues to bear the 
costs of the resident rotations to the rural emergency departments. The 
commenter urges CMS to change its policy with regard to ``emergency and 
possibly other hospital-based physicians'' to allow for payment to the 
``main'' teaching hospital for resident training time at rural 
hospitals.
    Response: We did not propose to make any changes to our regulations 
concerning the counting of FTE residents training in more than one 
hospital. Therefore, we believe the comments are out of the scope of 
this rule and we will not be responding to them at this time.
    Comment: One commenter stated ``CMS currently insists that the 
three-month (90 day) timeframe for payment be based on a calendar month 
without regard to programs such as ours that conduct rotations on a 4-
week basis (13 rotations per year) * * * We believe the written 
agreement is reasonable but the 90 day time frame for payment to the 
non-hospital physician should be relative to the last day of the block 
rotation.''
    Response: We did not propose making any changes to CMS' rules 
regarding concurrent payment for training at nonhospital sites and, 
therefore, we believe this comment is outside the scope of our proposed 
rule and we will not be responding to it at this time.
    Comment: One commenter asked ``How is CMS going to ensure 
responsible and consistent application of these lengthy new rules?''
    Response: CMS typically will instruct its contractors as to the 
implementation of any new regulatory provisions. We intend to do the 
same for these provisions. We urge any individuals, including both 
members of the teaching hospital community and Medicare contractors, to 
contact us when they have questions regarding application of this rule.
    Comment: We received several comments on the IME formula and other 
nonhospital site issues that were not included in the proposed rule.
    Response: Since these comments are out of the scope of this rule, 
we are not responding to them at this time.
    Comment: Several commenters requested that hospitals have the 
option of recalculating their PRA to include allowable GME costs.
    Response: We did not propose any changes to the existing 
methodology for calculating GME PRAs. Therefore, we believe this 
comment is outside the scope of our proposed rule, and therefore, we 
are not responding to it in this final rule.

D. Summary of Final Provisions

    In summary, we are revising Sec.  413.75(b) to modify the 
definition of ``all or substantially all of the costs for the training 
program in the nonhospital setting'' to reflect the policies in place 
between January 1, 1999 and July 1, 2007, and our policy for cost 
reporting periods beginning on or after July 1, 2007. We are revising 
the definition of ``all or substantially all of the costs for the 
training program in the nonhospital setting'' to mean: (a) Effective on 
or after January 1, 1999 and for cost reporting periods beginning 
before July 1, 2007, 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); and (b) effective for cost 
reporting periods beginning on or after July 1, 2007, at least 90 
percent of the total of the costs of the residents' salaries and fringe 
benefits (including travel and lodging where applicable) and the 
portion of the cost of teaching physicians' salaries attributable to 
nonpatient care direct GME activities.
    In addition, we are revising Sec.  412.105(f)(1)(ii)(C) for IME and 
adding Sec.  413.78(f) to reflect the revised requirement to pay ``all 
or substantially all'' of the GME costs in a nonhospital site, 
effective for cost reporting periods beginning on or after July 1, 
2007. In this final rule, we are also clarifying the regulations text 
at Sec.  413.78(f)(3)(ii) to specify that the written agreement must be 
in place between the hospital and the nonhospital site before the 
training begins in that nonhospital site. We are also specifying in the 
regulations text of this final rule that the written agreement should 
include the amount that represents the total cost of the training 
program in the nonhospital site, in addition to including the amount 
that the hospital will incur (at least 90 percent of the cost), and 
must indicate the portion of the amount that reflects residents' 
salaries and fringe benefits (and travel and lodging where applicable), 
and the portion of the amount that reflects teaching physician 
compensation. Lastly, we are revising the regulations text to indicate 
that the amounts specified in the written agreement may be modified by 
June 30 of the applicable academic year.

XIII. Technical Amendment

    In the Revisions to Hospital Inpatient Prospective Payment 
Systems--FY 2007 final rule (71 FR 47870 through 48136), in an 
amendatory instruction to Sec.  412.22(h)(3), we inadvertently omitted 
the words ``introductory text.'' Therefore, paragraphs Sec.  
412.22(h)(3)(i) and (ii) were removed. We are replacing Sec.  
412.22(h)(3)(i) and (ii) in this final rule.

XIV. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 30-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
    <bullet> The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
    <bullet> The accuracy of our estimate of the information collection 
burden.
    <bullet> The quality, utility, and clarity of the information to be 
collected.
    <bullet> Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We solicited public comments on each of these issues for the 
following sections of this document that contain information collection 
requirements.

Section 413.78 Direct GME Payments: Determination of the Total Number 
of FTE Residents.

    Section 413.78(f) outlines the requirements that must be met for 
the time residents spend in non-provider settings to be included in 
determining the number of FTE residents used in the computation of a 
hospital's resident count. A resident must spend his or her time in 
patient care activities; the hospital must incur substantially all of 
the costs of the training program in a nonhospital setting.
    In addition, Sec.  413.78(f)(3) requires that a hospital comply 
with one of the two requirements listed in Sec.  413.78(f)(3)(i) and 
Sec.  413.78(f)(3)(ii).

[[Page 26977]]

    Section Sec.  413.78(f)(3)(i) states that a hospital must document 
that it is paying for all or substantially all of the costs associated 
with the training program in a nonhospital setting. The costs must be 
incurred between the training date and the end of the third month after 
the training date. The burden associated with this requirement is the 
time and effort associated with documenting and maintaining records of 
the incurred costs and subsequent payments made by a hospital.
    Section 413.78(f)(3)(ii) states that a hospital must have a written 
agreement with the nonhospital site. The agreement must state that the 
hospital will incur at least 90 percent of the cost of the resident's 
salary and fringe benefits (and travel and lodging, where applicable) 
while the resident is training in the nonhospital site and the portion 
of the cost of the teaching physician's salary that is attributable to 
GME. The written agreement must also specify the compensation amount 
the hospital is paying the nonhospital site, and whether this amount 
reflects only residents' salaries and fringe benefits (and travel and 
lodging, where applicable), or includes an amount for teaching 
physician compensation. The burden associated with this requirement is 
the time and effort associated with drafting, signing, and maintaining 
the written agreement.
    The requirements listed in Sec.  413.78(f)(3)(i) and Sec.  
413.78(f)(3)(ii) are exempt from the Paperwork Reduction Act of 1995 in 
accordance with Pub. L. 99-272.
    We will be submitting a copy of this final 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.

XV. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 
1995 (UMRA) (Pub. L. 104-4), and Executive Order 13132.

1. Executive Order 12866

    Executive Order 12866 (as amended by Executive Order 13258, which 
merely assigns responsibility of duties) directs agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). A 
regulatory impact analysis (RIA) must be prepared for major rules with 
economically significant effects ($100 million or more in any one 
year). We are using the rates, factors and policies presented in this 
final rule, including updated wage index values, and the best available 
claims and CCR data to estimate the change in payments for the 2008 
LTCH PPS rate year. Based on the best available data for 377 LTCHs, we 
estimate that the expansion of the existing payment provision for co-
located LTCHs (HwHs and satellites of LTCHs) at existing Sec.  412.534 
to certain situations not presently covered by existing Sec.  412.534 
for subclause (I) LTCHs (as discussed in section V.B. of the preamble 
of this final rule), in conjunction with the update to the Federal rate 
for RY 2008 (discussed in section IV.C. of the preamble of this final 
rule), the changes to the area wage adjustment (discussed in section 
IV.D.1. of the preamble of this final rule), the revision to the SSO 
policy and the increase in the outlier fixed-loss amount (discussed in 
section IV.D.3.c. of the preamble of this final rule) for the 2008 LTCH 
PPS rate year, will result in a decrease in estimated payments from the 
2007 LTCH PPS rate year of approximately $156 million (or about 3.8 
percent). (An estimate of Medicare program payments for LTCH services 
for the next 5 years is shown in section IV.D.5. of the preamble of 
this final rule. The impact of the policy change relating to payment 
for Hospital Direct and Indirect Graduate Medical Education Payments 
(GME) is discussed in section XV.C.2. of this regulatory impact 
analysis.) The estimated impact of the provisions presented in this 
final rule (as detailed above) for the 377 LTCHs in our database are in 
Table 9.

   Table 9.--Estimated Impact of the Provisions of this Final Rule \1\
------------------------------------------------------------------------
                                                            Estimated
                                                         percent change
                                                          in estimated
                        Policy                           aggregate LTCH
                                                          PPS payments
                                                            (percent)
------------------------------------------------------------------------
Payment Rate and Policy Changes:
    Changes to the Federal Rate \2\...................               0.6
    Changes to the Area Wage Adjustment...............              -1.0
    Revision of the SSO Policy........................              -0.9
    Adjustment of the High Cost Outlier Threshold \3\.              -2.5
                                                       -----------------
        Subtotal \4\..................................              -3.8
                                                       -----------------
Expansion of the ``25 Percent'' Policy \5\............                 0
                                                       -----------------
        Total \6\ (-3.8% + 0%)........................              -3.8
------------------------------------------------------------------------
\1\ Percent change in estimated aggregate LTCH PPS payments from the
  2007 LTCH PPS rate year to the 2008 LTCH PPS rate year based on the
  best available data for 377 LTCHs.
\2\ As discussed in greater detail in section XV.B.4. of this regulatory
  impact analysis, about 34 percent of all LTCH cases are projected to
  receive a payment under the existing SSO policy that is based either
  on the estimated cost of the case or the ``IPPS comparable amount''
  (rather than the Federal rate). Therefore, the percent change in
  estimated aggregate LTCH PPS payments due to the changes to the
  Federal rate, 0.61 percent, is slightly less than the update to the
  Federal rate of 0.71 percent.
\3\ This estimated 2.5 percent decrease in estimated payments per
  discharge from RY 2007 to RY 2008 is due to the changes in the fixed-
  loss amount resulting from the use of more recent LTCH data to
  estimate the cost of each LTCH case.
\4\ We also note that the estimated percent change for all payment rate
  and policy changes may not exactly equal the sum of the estimated
  percent change for the changes to the Federal rate, the changes to the
  area wage adjustment and the revision of the SSO policy due to the
  effect of estimated changes in aggregate HCO payments, as well as
  other interactive effects that cannot be isolated.

[[Page 26978]]

 
\5\ Expansion of the existing special payment provision for co-located
  LTCHs (HwHs and satellites of LTCHs) at existing Sec.   412.534 to
  certain situations not presently covered by existing Sec.   412.534
  for subclause (I) LTCHs (as discussed in section V.B. of the preamble
  of this final rule).
\6\ Total estimated impact of the provisions of this final rule (that
  is, sum of the estimated impact of the payment rate and policy change,
  including the revision of the SSO policy, and the estimated impact of
  the expansion of the ``25 percent'' policy).
 

    Because the combined distributional effects and estimated changes 
to the Medicare program payments would be greater than $100 million, 
this final rule would be considered a major economic rule, as defined 
in this section. We note the $156 million (or 3.8 percent) decrease in 
estimated aggregate LTCH PPS payments resulting from the provisions 
presented in this final rule does not reflect changes in LTCH 
admissions or case-mix intensity in estimated LTCH PPS payments, which 
would also affect overall payment changes.
2. Regulatory Flexibility Act (RFA)
    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 hospitals and most other providers and suppliers 
are small entities, either by nonprofit status or by having revenues of 
$6.5 million to $31.5 million in any 1 year. For purposes of the RFA, 
proprietary hospitals are small entities if they meet the small 
business size standard described above (for further information, see 
the Small Business Administration's regulation at 70 FR 72577, December 
6, 2003). Because we lack data on individual hospital receipts, we 
cannot determine the number of small proprietary LTCHs. Therefore, we 
assume that all LTCHs are considered small entities for the purpose of 
the analysis that follows. Medicare FIs are not considered to be small 
entities. Individuals and States are not included in the definition of 
a small entity.
    Currently, our database of 377 LTCHs includes the data for 83 non-
profit (voluntary ownership control) LTCHs and 254 proprietary LTCHs. 
Of the remaining 40 LTCHs, 14 LTCHs are Government-owned and operated 
and the ownership type of the other 26 LTCHs is unknown (as shown in 
Table 11). The impact of the payment rate and policy changes for the 
2008 LTCH PPS rate year (including the update to the Federal rate, 
changes to the area wage adjustment, and the revision of the SSO 
policy) is discussed in section XV.B.4.c. of this regulatory impact 
analysis. The impact of other policy changes, such as the effects of 
the expansion of the special payment provisions for LTCH HwHs and LTCH 
satellites to certain situations not presently covered by Sec.  412.534 
for subclause (I) LTCHs, is discussed in section XV.C. of this 
regulatory impact analysis.
    As we discuss in detail throughout the preamble of this final rule, 
based on the most recent available LTCH data, we believe that although 
the provisions of this final rule would result in a decrease in 
estimated aggregate LTCH PPS payments, we believe the resulting LTCH 
PPS payment amounts result in appropriate Medicare payments. However, 
we believe that although appropriate, the provisions of this final rule 
could have a significant impact on some small entities (as defined 
above in this section). As also discussed in greater detail below in 
this section, we are unable to determine how significant the impact of 
some of the provisions of this final rule may be on small entities 
since we expect many LTCHs to adjust their admission practices in 
implementation of these provisions. We note that LTCHs have been 
adapting their behavior in response to the policy changes we have 
implemented over the past few years (for example, the annual update to 
the LTC-DRG relative weights, the ``25 percent policy'' at existing 
Sec.  412.534, the revision to the SSO payment formula at existing 
Sec.  412.529(c)(2), and the zero percent update to the RY 2007 Federal 
rate). Although those policy changes were projected to result in 
decreases in estimated aggregate LTCH PPS payments, the growth in the 
number of LTCHs has continued (although at a reduced rate). Based on 
the most recent available OSCAR data, the number of LTCHs has increased 
over 10 percent in the past 2 years (from October 1, 2004 and October 
1, 2006). Because we acknowledge that many of the affected entities are 
small entities, the analysis discussed throughout the preamble of this 
final rule, in conjunction with the discussion presented in greater 
detail below in this section and throughout the remainder of this 
regulatory impact analysis, constitutes our initial analysis under the 
RFA.
    As shown in Table 9, we estimate that the provisions of this final 
rule could result in approximately a 3.8 percent (or $156 million) 
decrease in estimated payments per discharge in the 2008 LTCH PPS rate 
year, on average, to all LTCHs. Table 9 shows that the payment rate and 
policy changes are projected to result in a 3.8 percent decrease in 
estimated aggregate LTCH PPS payments, and the expansion of the ``25 
percent'' policy is projected to result in neither an increase nor a 
decrease in estimated aggregate LTCH PPS payments. Thus, while a 
significant portion of the approximately 3.8 percent decrease in 
estimated aggregate payments in the 2008 LTCH PPS rate year as compared 
to the 2007 LTCH PPS rate year would not be due to the expansion of the 
special payment provisions for co-located LTCHs to certain situations 
not presently covered by existing Sec.  412.534 for subclause (I) LTCHs 
(as discussed in section V.B. of this final rule), this is due to our 
adoption of a 3 year transition to this policy. However, as that policy 
is fully implemented at 25 percent (or the applicable level) there will 
be a significant impact in LTCH payments. We predict the 5 year impact 
of this policy to be as shown in Table 10.

                                Table 10
------------------------------------------------------------------------
                                                         ``25 Percent''
                                                          policy with 3
                       Rate year                         year transition
                                                          (expressed in
                                                           millions)*
------------------------------------------------------------------------
2008..................................................                 0
2009..................................................                20
2010..................................................               110
2011..................................................               160
2012..................................................               170
    Total.............................................              460
------------------------------------------------------------------------
* Projected decrease in estimated aggregate payments in the LTCH PPS
  rate years for 5 years due to the expansion of the special payment
  provisions for co-located LTCHs to certain situations not presently
  covered by existing Sec.   412.534 for subclause (I) LTCHs (as
  discussed in section V.B. of this final rule).

    As discussed in greater detail in section XV.C.1. of this 
regulatory impact analysis, because we believe that this policy would 
discourage inappropriate patient shifting to LTCHs and would encourage 
all subclause (I) LTCHs to engage in more appropriate admission 
policies since, no payment adjustment would be made if the patient has 
reached HCO status at the co-located host (under the revision to Sec.  
412.534) or at the referring hospital (under Sec.  412.536) prior to 
being admitted for additional post-acute care at the LTCH (as discussed 
in greater detail in section V.B. of this final rule) since patients 
who achieved HCO status prior to admission to the LTCH will not be 
counted toward the applicable threshold

[[Page 26979]]

under Sec.  412.536 or under the revision to Sec.  412.534 (although 
the admission would still be counted toward the LTCH's total Medicare 
discharges). Because we expect that such a policy would reduce the 
financial incentives that may be present currently for certain 
situations not presently covered by existing Sec.  412.534 to admit 
patients prematurely discharged from other hospitals, we believe this 
policy would result in fewer admissions to LTCHs before a complete 
course of patient care is provided at the non-co-located referring 
hospital (under Sec.  412.536) or co-located referring hospital (under 
the revision to Sec.  412.534). Thus, any change in admission practices 
as a result of this policy would result in less of a decrease in 
estimated aggregate LTCH PPS payments once this policy is fully 
implemented at 25 percent (or the applicable level). Thus, the 
projected decrease in estimated aggregate LTCH PPS payments resulting 
from this policy change would only occur if there were no changes in 
LTCH admission practices. Furthermore, we believe that this policy 
would result in appropriate Medicare payments since, as noted above, we 
expect that such a policy would reduce the financial incentives to 
admit patients prematurely discharged from other hospitals and would 
encourage all LTCHs to engage in more appropriate admission policies. 
For these reasons, although we estimate that this policy would result 
in a decrease in estimated aggregate LTCH PPS payments beginning in the 
second year of the transition, we do not believe that such a projected 
decrease in estimated aggregate LTCH PPS payments, although possibly 
significant, would adversely affect LTCHs' ability to deliver efficient 
care to Medicare beneficiaries nor would there be an adverse affect on 
Medicare beneficiaries' access to care.
    Additionally, as shown in Table 9, we project an estimated 2.5 
percent decrease in estimated payments per discharge from RY 2007 to RY 
2008 due to the changes in the fixed-loss amount resulting from the use 
of more recent LTCH data to estimate the cost of each LTCH case. That 
is, as discussed in detail previously in the preamble of this final 
rule, to determine the proposed fixed-loss amount for RY 2008 of 
$18,778, we used claims data from the March 2006 update of the FY 2005 
MedPAR file and CCRs from the July 2006 update of the provider specific 
file (PSF), as that was the best available data at that time. However, 
to determine the fixed-loss amount for RY 2008 in this final rule, the 
most recent available data are the December 2006 update of the FY 2006 
MedPAR claims data and the CCRs from the December 2006 update of the 
PSF. Our analysis of the FY 2006 claims data showed that, in general, 
the average cost per case has increased as compared to the FY 2005 
claims data. If we had kept the fixed loss amount at $18,778, it would 
have caused the estimated aggregate high-cost outlier payments to 
exceed the 8 percent regulatory limit. In fact, our analysis shows that 
if we were to apply the proposed fixed-loss amount of $18,774, we 
estimate that outlier payments would be over 9 percent of total 
estimated LTCH PPS payments in RY 2008. Similarly, to determine the 
fixed-loss amount for RY 2007 of $14,887, we used the December 2005 
update of the FY 2005 MedPAR claims data and the CCRs from the December 
2005 update of the PSF, as that was the best available data at that 
time. Based on the most recent updated claims and CCR data available to 
us at the time of this final rule, we estimate that the current fixed-
loss amount (RY 2007, $14,887) would result in an aggregate outlier 
payment amount of 10.3 percent. As discussed in previously of this 
rule, when we implemented the LTCH PPS, under the HCO policy we 
established the aggregate outlier payment amount at 8 percent of 
estimated total LTCH PPS payments to allow us to achieve a balance 
between the need to protect hospitals with costly cases while providing 
an incentive for hospitals to operate efficiently. An aggregate outlier 
payment amount in excess of 8 percent would not allow us to achieve 
this goal. Consequently, while increasing the fixed-loss amount to 
$22,954 is projected to result in a decrease in estimated aggregate 
LTCH PPS payments of 2.5 percent, we believe that this is necessary in 
order to maintain the aggregate outlier payment amount at the 
appropriate 8 percent. Furthermore, hospitals are aware of our 
longstanding policy which limits high-cost outlier payments to 8 
percent of estimated total LTCH PPS payments. For these reasons, 
although we estimate that the change in the fixed-cost amount would 
result in a decrease in estimated aggregate LTCH PPS payments, we do 
not believe that such an impact on estimated aggregate LTCH PPS 
payments would adversely affect LTCHs' ability to deliver efficient 
care to Medicare beneficiaries nor would there be an adverse affect on 
Medicare beneficiaries' access to care.
    The impact analysis of payment rate and policy changes in Table 11 
shows that estimated payments per discharge are expected to decrease 
approximately 3.8 percent, on average, for all LTCHs from the 2007 LTCH 
PPS rate year as compared to the 2008 LTCH PPS rate year. Although we 
are finalizing a 3.8 percent decrease to the Federal rate for RY 2008 
(as discussed in section IV.C. of this final rule), the projected 
percent decrease in estimated payments per discharge from the 2007 LTCH 
PPS rate year to the 2008 LTCH PPS rate year is attributable to the 
changes to the area wage adjustment (discussed in section IV.D.1. of 
this final rule), the revision of the SSO policy discussed in section 
V.A.2. of this final rule, as well as the increase to the HCO fixed-
loss amount (as discussed in section IV.D.3.c. of this final rule). (As 
discussed in greater detail in section XV.B.4., the impact due to the 
expansion of the ``25 percent policy'' to certain situations not 
presently covered by existing Sec.  412.534 for subclause (I) LTCHs is 
not reflected in Table 11. However, as noted above, the impact of that 
policy is discussed in greater detail in section XV.C.1. of this 
regulatory impact analysis.)
    As the impact analysis in Table 11 shows, estimated changes to the 
area wage adjustment from RY 2007 to RY 2008 (resulting from both 
established policy and changes presented in section IV.D.1. of this 
final rule, as discussed in greater detail below in this section) 
contribute to the decrease in estimated aggregate LTCH PPS payments 
from the 2007 LTCH PPS rate year to the 2008 LTCH PPS rate year. As 
discussed in section IV.D.1. of this final rule, we are updating the 
wage index values for RY 2008, in accordance with the progression of 
the existing 5-year phase-in of the area wage adjustment, based on the 
most recent available wage data. We believe that updating the LTCH PPS 
wage index based on the most recent available wage data would ensure 
that the LTCH PPS wage index adjustment appropriately accounts for and 
reflects the relative hospital wage levels in the geographic area of 
the hospital as compared to the national average hospital wage level. 
In addition, we are increasing the labor-related share from 75.665 
percent to 75.788 percent under the LTCH PPS for RY 2008 based on the 
most recent available data on the relative importance of the labor-
related share of operating and capital costs of the LTCH PPS market 
basket (also discussed in section IV.D.1. of this final rule). We 
believe that revising the labor-related share based on the most recent 
available data would appropriately identify the portion of the LTCH PPS 
Federal rate that is adjusted to account for geographic differences in 
area wage levels by applying the applicable LTCH PPS wage index value. 
As discussed in greater detail in section IV.D.1. of this

[[Page 26980]]

final rule, we believe that these changes to the LTCH PPS area wage 
adjustment based on the most recent available wage data and data on the 
relative importance of the labor-related share of the LTCH PPS market 
basket, respectively, would result in appropriate and accurate LTCH PPS 
payments for the resources used by LTCHs in a given area. Such updated 
data appropriately reflects national differences in area wage levels 
and identifies the portion of the Federal rate that should be adjusted 
to account for such differences in area wages.
    We also note that, even though we are not making any changes to the 
existing 5-year phase-in of the wage index adjustment that was 
established when the LTCH PPS was implemented (August 30, 2002; 67 FR 
56018), the continued progression of this phase-in also contributes to 
the decrease in estimated aggregate LTCH PPS payments for RY 2008. That 
is, since under the established phase-in of the wage-index adjustment, 
LTCHs receive an increasing percentage of the applicable full wage 
index value (which is less than 1.0 for the majority of LTCHs), we 
expect that estimated aggregate LTCH PPS payments would decrease from 
RY 2007 to RY 2008 as a result of the progression of the existing 5-
year phase-in of the area wage adjustment. Thus, the majority of the 
1.0 percent decrease in estimated payments per discharge, on average, 
for all LTCHs (see Table 11) is due to the existing 5-year phase-in of 
the wage index adjustment, and is not due to policy changes presented 
in this final rule. Because the existing 5-year phase-in of the area 
wage adjustment has been a feature of the LTCH PPS since it was 
implemented beginning October 1, 2002, and since a large majority (over 
70 percent) of LTCHs are located in areas where historically the wage 
index value is less than 1.0, the decrease in estimated aggregate LTCH 
PPS payments resulting from this policy should be anticipated by LTCHs, 
and therefore, already accounted for in their fiscal planning. In 
addition, we note that, although the portion of the decrease in 
estimated aggregate LTCH PPS payments that is due to the existing 5-
year phase-in of the wage index adjustment is expected, we believe that 
any change in LTCHs' wage index values under this policy is appropriate 
since LTCHs will be receiving an increasing percentage of the 
applicable full wage index value, which, by definition, reflects the 
relative hospital wage levels for the area in which the LTCH is located 
as compared to the national average hospital wage level.
    Because we cannot determine to what extent LTCHs may have planned 
for the decrease in estimated aggregate LTCH PPS payments that is due 
to the existing 5-year phase-in of the area wage adjustment, even 
though the impact may be significant for some LTCHs, we believe that 
most LTCHs would not be adversely affected since, as explained above, 
we believe that the changes to the area wage adjustment (that is, the 
use of update wage data and the change in the labor-related share), in 
conjunction with the continued progression of the 5-year phase-in of 
the area wage adjustment, would result in appropriate LTCH PPS payments 
in RY 2008. For these reasons, we believe that the decrease in 
estimated aggregate LTCH PPS payments resulting from changes to the 
area wage adjustment, although possibly significant for some LTCHs, is 
appropriate and would not adversely affect LTCHs' ability to deliver 
efficient care to Medicare beneficiaries nor would there be an adverse 
affect on Medicare beneficiaries' access to care.
    In addition, as also shown in Table 11, the revision of the SSO 
policy discussed in section V.A.2. of this final rule would also 
contribute to the estimated 3.8 percent decrease in estimated aggregate 
LTCH PPS payments in RY 2008, on average, for all LTCHs. We believe 
that the LTCH cases that appear to be ``similar to'' the same type of 
cases treated in an acute care hospital and paid for under the IPPS, as 
discussed in greater detail in section V.A.2. of this final rule, would 
receive an appropriately adjusted LTCH PPS payment to treat such cases. 
We believe that those SSO cases that are ``similar to IPPS cases'' most 
likely do not receive a full course of an LTCH-level of treatment in 
such a short period of time since, in general, LTCHs are intended to 
treat longer stay patients. Although we project a decrease in estimated 
aggregate LTCH PPS with the revision of the SSO policy, we believe the 
change would result in appropriate and adequate Medicare payments for 
the treatment of Medicare beneficiaries with a LOS that is ``similar 
to'' typical IPPS cases.
    Furthermore, we believe that, the revision to the SSO policy would 
accomplish our stated goal of removing the incentive for LTCHs to admit 
patients for whom a long-term hospital stay is not necessary, and 
therefore, for whom the LTCH would not be providing complete treatment. 
As noted previously, the vast majority of LTCH cases, including SSO 
cases, are admitted to the LTCH directly from an acute-care hospital, 
and therefore, many SSO cases may still be in need of acute-level care 
(as we discuss in greater detail in section V.A.2. of the preamble of 
this final rule). Therefore, we believe that in response to the 
revision of the SSO policy, LTCHs may reduce the number of SSO cases 
that are ``similar to IPPS cases'' that they admit (and most of those 
patients would continue to receive treatment at the acute-care 
hospital). To the extent that LTCHs continue to admit SSO cases that 
are ``similar to IPPS cases,'' we believe that this would result in an 
adjusted LTCH PPS payment that is appropriate.
    For these reasons, although we estimate that the revision of the 
SSO policy would result in a decrease in estimated aggregate LTCH PPS 
payments, we do not believe that such an impact on estimated aggregate 
LTCH PPS payments, although possibly significant, would adversely 
affect LTCHs' ability to deliver efficient care to Medicare 
beneficiaries nor would there be an adverse affect on Medicare 
beneficiaries' access to care.
    For all of the reasons discussed above in this section, although we 
do not expect an estimated incremental decrease of 3.8 percent 
(approximately $156 million) in estimated aggregate LTCH PPS payments 
to have a significant adverse financial impact on LTCHs, nor do we 
expect there would be an effect on beneficiaries' access to care, we 
acknowledge that the provisions of this final rule could have a 
significant impact on some small entities. However, we believe that the 
provisions of this final rule would result in appropriate LTCH PPS 
payments in RY 2008. We also note that LTCHs provide some services to 
(and generate revenue from) patients other than Medicare beneficiaries 
and the revenue to LTCHs from treating those patients is not affected 
by this final rule. This analysis, in conjunction with the remainder of 
this section, demonstrates that this final rule is consistent with the 
regulatory philosophy and principles identified in the RFA. We believe 
the provisions presented in this final rule would affect payments to 
LTCHs, and the effects on some LTCHs, although they may be significant, 
are appropriate.
3. Impact on Rural Hospitals
    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. For 
purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100

[[Page 26981]]

beds. As shown in Table 11, we are projecting a 6.2 percent decrease in 
estimated payments per discharge for the 2008 LTCH PPS rate year as 
compared to the 2007 LTCH PPS rate year for rural LTCHs as a result of 
the payment rate changes, based on the data of the 23 rural LTCHs in 
our database of 377 LTCHs for which complete data were available.
    As shown in Table 11, a significant portion of the estimated 
decrease in estimated LTCH PPS payments in the 2008 LTCH PPS rate year 
as compared to the 2007 LTCH PPS rate year for payment rate and policy 
changes for rural LTCHs is due to the change in the area wage 
adjustment (as discussed in greater detail in section V.D.1. of the 
preamble of this final rule). Specifically, although we are not making 
any changes to the existing 5-year phase-in of the wage index 
adjustment that was established when the LTCH PPS was implemented 
(August 30, 2002; 67 FR 56018), the continued progression of this 
phase-in contributes to the decrease in estimated payments to rural 
LTCHs for RY 2008. This is because, under the established phase-in of 
the wage-index adjustment, LTCHs receive an increasing percentage of 
the applicable full wage index value (which is less than 1.0 for all of 
the 23 rural LTCHs in our database), we expect that estimated payments 
per discharge for rural LTCHs would decrease from RY 2007 to RY 2008 as 
a result of the progression of the 5-year phase-in of the wage index 
adjustment. Thus, the majority of the projected decrease in estimated 
payments per discharge shown in Table 11 for rural LTCHs is due to the 
existing 5-year phase-in of the wage index adjustment, and is not due 
to policy changes presented in this final rule. We believe that the 
decrease in estimated aggregate LTCH PPS payments resulting from this 
existing policy should be anticipated by LTCHs, and therefore, already 
accounted for in their fiscal planning. In addition, we note that, 
although the portion of the decrease in estimated aggregate LTCH PPS 
payments that is due to this existing policy is expected, we believe 
that any change in LTCHs' wage index values due to the continued 
progression of the phase-in of the area wage adjustment is appropriate 
since LTCHs will be receiving an increasing percentage of the 
applicable full wage index value, which, by definition, reflects the 
relative hospital wage levels for the area in which the LTCH is located 
as compared to the national average hospital wage level.
    Furthermore, as also explained in greater detail above, we believe 
that the changes to the area wage adjustment presented in this final 
rule (that is, the use of update wage data and the change in the labor-
related share) would result in accurate and appropriate LTCH PPS 
payments in RY 2008 since they are based on the most recent available 
data. Such updated data appropriately reflect national differences in 
area wage levels and identifies the portion of the Federal rate that 
should be adjusted to account for such differences in area wages, 
thereby resulting in accurate and appropriate LTCH PPS payments. 
Because we cannot determine to what extent LTCHs may have planned for 
the decrease in estimated aggregate RY 2008 LTCH PPS payments that 
results from the existing 5-year phase-in of the area wage adjustment, 
we believe that although the effects of the changes to the area wage 
adjustment on some rural LTCHs may be significant, most rural LTCHs 
should not be adversely affected because those changes are expected to 
result in appropriate LTCH PPS payments in RY 2008.
    We also believe that the expansion of the payment adjustment at 
existing Sec.  412.534 to certain situations not presently covered by 
that policy for subclause (I) LTCHs may have a significant adverse 
impact on some rural LTCHs, although we cannot determine how 
significant for the reasons explained below in this section. Even 
though this policy, once it is fully implemented at 25 percent (or the 
applicable level), is estimated to reduce estimated aggregate LTCH PPS 
payments and may result in a significant impact on some rural LTCHs, we 
also believe that such changes would result in appropriately adjusted 
LTCH PPS payments (as explained below in this section). As discussed in 
greater detail in section V.B. of this final rule, in designing 
features of the original ``25 percent policy'' for co-located LTCHs 
(HwHs and LTCH satellites), which we proposed to extend to certain 
situations not presently covered by existing Sec.  412.534 for 
subclause (I) LTCHs, we provided special treatment for rural hospitals 
which would increase the threshold from 25 percent to 50 percent. When 
we established the 25 percent (or applicable percentage) payment 
adjustment for co-located LTCHs at existing Sec.  412.534, after which 
this payment adjustment for situations not presently covered by that 
policy has been modeled, we noted in response to comments that ``the 
Congress has authorized special treatment for rural areas under the 
Medicare program because of the particular geographic and demographic 
challenges in those locations, as well as the difference between the 
provision and availability of medical services as compared to urban 
areas'' (69 FR 49206). Therefore, under our policy, we will apply the 
same rationale to certain situations not presently covered by existing 
Sec.  412.534 that would occur in subclause (I) LTCHs that are located 
in rural areas. Accordingly, rather than a 25 percent threshold (as is 
being implemented for most urban LTCHs), for rural LTCHs, the payment 
adjustment will only be applied to those LTCH's or LTCH satellite 
facility's Medicare discharges that were admitted from a non-co-located 
referring hospital under Sec.  412.536 or co-located host under the 
revision to Sec.  412.534 that are in excess of 50 percent of the 
LTCH's total Medicare discharges for that hospital for any cost 
reporting period. Under this revision, consistent with the existing 
policy at Sec.  412.534, no payment adjustment will be made if the 
patient has reached HCO status at the referring hospital (under Sec.  
412.536) or at the co-located host (under the revision to Sec.  
412.534) prior to being admitted for additional post-acute care at the 
LTCH. That is, in calculating the 50 percent threshold (for rural 
LTCHs), patients who achieved HCO status prior to admission to the LTCH 
will not be counted toward the applicable threshold under Sec.  412.536 
or under the revision to Sec.  412.534 (although the admission would 
still be counted toward the LTCH's total Medicare discharges).
    Furthermore, because such a policy would reduce the financial 
incentives for all LTCHs, including rural LTCHs, to admit patients 
prematurely discharged from other hospitals, we believe this policy 
will result in fewer admissions to LTCHs before a complete course of 
patient care is provided at the referring hospital. As noted above, any 
changes in admission practices as a result of this policy will result 
in less of a decrease in estimated aggregate LTCH PPS payments based on 
current admission practices. Thus, the decrease in estimated aggregate 
LTCH PPS payments to rural LTCHs resulting from this policy change will 
only occur if there were no change in rural LTCH admission practices. 
It is our intention, under this policy, to discourage LTCHs from 
serving as ``step-down'' units after a patient has been diagnosed and 
received initial treatment at another hospital, a scenario that results 
in two Medicare payments (one to the referring hospital and one to the 
LTCH) for what was essentially one episode of patient care. Rather, it 
is our intent to encourage LTCHs to admit patients who required

[[Page 26982]]

additional long-stay hospital-level treatment following the provision 
of a full episode of care at the referring hospital. For those 
patients, under this policy Medicare would pay an unadjusted amount 
under the LTCH PPS. We believe that this policy would result in more 
appropriate admission policies by rural LTCHs. Therefore, we believe 
that although the effects on some rural LTCHs of the expansion of the 
payment adjustment at existing Sec.  412.534 to certain situations not 
presently covered by that policy for subclause (I) LTCHs may be 
significant, most rural LTCHs will not be adversely affected because 
this policy change is expected to result in changes in admission 
practices and appropriate payments for such cases, as explained above 
in this section.
    Additionally, according to our analysis, we project an estimated 
2.8 percent decrease in estimated payments per discharge to rural LTCHs 
from RY 2007 to RY 2008 due to the changes in the fixed-loss amount 
resulting from the use of more recent LTCH data to estimate the cost of 
each LTCH case. As discussed previously in this impact analysis 
regarding small entities, based on the most recent updated claims and 
CCR data, we increased the fixed-loss amount in order to maintain an 
aggregate outlier payment amount of 8 percent of estimated total 
payments. As discussed previously in this final rule, when we 
implemented the LTCH PPS, under the HCO policy we established the 
aggregate outlier payment amount at 8 percent of estimated total LTCH 
PPS payments to allow us to achieve a balance between the need to 
protect hospitals with costly cases while providing an incentive for 
hospitals to operate efficiently. An aggregate outlier payment amount 
in excess of 8 percent would not allow us to achieve this goal. 
Consequently, while the increase in the fixed-loss amount to $22,954 
for RY 2008 is projected to result in a decrease in estimated aggregate 
LTCH PPS payments to rural hospitals by 2.8 percent, we believe that 
this is necessary in order to maintain the aggregate outlier payment 
amount at the appropriate 8 percent. Furthermore, hospitals are aware 
of our longstanding policy which limits high-cost outlier payments to 8 
percent of estimated total LTCH PPS payments. For these reasons, 
although we estimate that the change in the fixed-loss amount would 
result in a decrease in estimated aggregate LTCH PPS payments, we do 
not believe that such an impact on estimated aggregate LTCH PPS 
payments would adversely affect LTCHs' ability to deliver efficient 
care to Medicare beneficiaries, nor would there be an adverse effect on 
Medicare beneficiaries' access to care.
    In addition, the revision of the SSO policy will also contribute to 
the projected decrease in estimated payments to rural LTCHs for RY 
2008. About 40 percent of rural LTCHs treat a larger than average 
percentage of SSO cases (in fact, based on FY 2005 data for a few rural 
LTCHs, SSO cases represent over half of their total cases). However, we 
are not able to determine whether the revision to the SSO policy would 
result in an adverse financial impact on rural LTCHs because we believe 
that most LTCHs (including rural LTCHs) would reduce the number of SSO 
cases that they admit that are ``similar to IPPS cases'' (as discussed 
in greater detail above). (We note that although we expect most LTCHs 
(including rural LTCHs) to admit fewer SSO cases under the revision of 
the SSO policy, most of those patients would continue to receive 
treatment at the acute-care hospital from which they are typically 
discharged immediately prior to their LTCH (short-stay) admission.) 
Thus, the projected 6.2 percent decrease in estimated payments per 
discharge shown in Table 11 for rural LTCHs represents an average 
maximum reduction in estimated aggregate LTCH PPS payments in RY 2008, 
and since we anticipate that LTCHs (including rural LTCHs) would admit 
fewer SSO patients for whom payments would be affected by the revision 
of the SSO policy, we believe that the actual decrease in rural LTCHs' 
payments for RY 2008 would be less than the 6.2 percent decrease in 
estimated payments for RY 2008 shown in Table 11.
    Furthermore, to the extent that rural LTCHs would continue to admit 
SSO cases with a LOS that is ``similar to IPPS cases,'' we believe the 
revision of the SSO policy will result in an appropriate adjusted LTCH 
PPS payment because we believe that many of those SSO cases most likely 
do not receive a full course of a LTCH-level of treatment in such a 
short period of time since, in general, LTCHs are intended to treat 
longer stay patients. Therefore, although we estimate the revision to 
the SSO policy could result in a decrease in estimated aggregate LTCH 
PPS payment to rural LTCHs, we do not believe that such an estimated 
impact on rural LTCHs' LTCH PPS payments, even though possibly 
significant, would adversely affect most rural LTCHs because the 
revision would be expected to result in changes in admission practices 
and in appropriate payments for such cases.
    For these reasons, we believe that there may be a significant 
impact on some rural LTCHs resulting from the changes present in this 
final rule. However, a portion of the decrease in rural LTCHs' 
estimated payments per discharge from RY 2007 to RY 2008 would be less 
than what we estimate based on current admission practices (as 
explained above in this section). We also believe (as discussed 
previously) a significant portion of the projected decrease in 
estimated payments per discharge for RY 2008, which is due to the 
established phase-in of the wage index adjustment, and the increased 
fix-loss amount in order to maintain the aggregate outlier payment 
amount of 8 percent, is not a result of a policy change, and may 
already be accounted for in LTCHs' fiscal plans. Therefore, although we 
believe this final rule would affect payments to rural LTCHs, and the 
effects on some rural LTCHs, although appropriate, may be significant, 
we are unable to determine how significantly the changes presented in 
this final rule, would adversely affect rural LTCHs. However, because 
we expect changes in admission practice and appropriate payments, (as 
discussed above), we do not anticipate that the provisions of this 
final rule would affect the ability of the vast majority of rural LTCHs 
to provide cost efficient services to Medicare patients nor do we 
expect there would be an adverse effect on beneficiaries' access to 
care. The analysis presented above, in conjunction with the remainder 
of this regulatory impact analysis, demonstrates that this final rule 
is consistent with the regulatory philosophy and principles identified 
in section 1102(b) of the Act. (For additional information on the 
estimated impact of the changes on rural LTCHs presented in this final 
rule, refer to section XV.B.4.a. of this regulatory impact analysis.)
4. Unfunded Mandates
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. That 
threshold level is currently approximately $120 million. This final 
rule would not mandate any requirements for State, local, or tribal 
governments, nor would it result in expenditures by the private sector 
of $120 million or more in any 1 year.
5. Federalism
    Executive Order 13132 establishes certain requirements that an 
agency

[[Page 26983]]

must meet when it publishes a final rule (and subsequent final rule) 
that imposes substantial direct requirement costs on State and local 
governments, preempts State law, or otherwise has Federalism 
implications.
    We have examined this final rule under the criteria set forth in 
Executive Order 13132 and have determined that this final rule would 
not have any significant impact on the rights, roles, and 
responsibilities of State, local, or tribal governments or preempt 
State law, based on the 14 State and local LTCHs in our database of 377 
LTCHs for which data were available.
6. Alternatives Considered
    In the preamble of this final rule, we are setting forth the annual 
update to the payment rates for the LTCH PPS, as well as proposing 
other policy changes and discussing approaches for other areas of 
concern. In this preamble, we specify the statutory authority for the 
provisions that are presented, identify those policies when discretion 
has been exercised, and present rationale for our decisions, 
alternatives that were considered and solicit comments on suggested 
alternatives from commenters (where relevant).

B. Anticipated Effects of Payment Rate Changes

    We discuss the impact of the changes to the payment rates, factors, 
and other payment rate policies presented in the preamble of this final 
rule in terms of their estimated fiscal impact on the Medicare budget 
and on LTCHs. (We note that the impact of other policy changes 
presented in this final rule, which do not directly affect the LTCH PPS 
per discharge payment rates (for example, the expansion of the existing 
payment provision for co-located LTCHs to certain situations not 
presently covered by existing Sec.  412.534 for subclause (I) LTCHs 
discussed in section V.B. of this final rule and the policy change 
relating to GME payments discussed in section XII. of this final rule), 
are not included as part of the impact analysis shown in Table 11. 
However, the impact of certain other policies are discussed separately 
in section XV.C. of this regulatory impact analysis.
1. Budgetary Impact
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs ``maintain budget neutrality.'' We believe that the statute's 
mandate for budget neutrality (BN) applies only to the first year of 
the implementation of the LTCH PPS (that is, FY 2003). Therefore, in 
calculating the FY 2003 standard Federal rate under Sec.  
412.523(d)(2), we set total estimated payments for FY 2003 under the 
LTCH PPS so that estimated aggregate payments under the LTCH PPS are 
estimated to equal the amount that would have been paid if the LTCH PPS 
had not been implemented. However, as discussed in greater detail in 
the August 30, 2002 final rule (67 FR 56033 through 56036), the FY 2003 
LTCH PPS standard Federal rate ($34,956.15) was calculated based on all 
LTCHs being paid 100 percent of the standard Federal rate in FY 2003. 
As discussed in section IV.D.5. of this final rule, during LTCH rate 
years governed by the 5-year transition period policy set forth at 
Sec.  412.533(a), we applied a BN offset to payments to account for the 
monetary effect of the applicable transition period methodology 
(including the option to elect payments based on 100 percent of the 
Federal rate in lieu of the transition blend methodology) in a given 
LTCH PPS rate year. Specifically, for FY 2003 and RYs 2004 through 
2007, the amount of the transition period BN offset was equal to 1 
minus the ratio of the estimated payments based on 100 percent of the 
LTCH PPS Federal rate to the projected total Medicare program payments 
that would be made under the transition methodology and the option to 
elect payment based on 100 percent of the Federal prospective payment 
rate. However, as we discuss in greater detail in section IV.D.5. of 
this final rule, we are no longer projecting a small cost for the 2008 
LTCH PPS rate year (July 1, 2007 through June 30, 2008) even though 
some LTCH's will have a cost reporting period for the 5th year of the 
transition period which will be concluding in the first 3 months of the 
2008 LTCH PPS rate year. Based on the most recent available data, we 
are projecting that the vast majority of LTCHs would have made the 
election to be paid based on 100 percent of the Federal rate rather 
than the transition blend, which would result in a negligible cost to 
the Medicare program. Therefore, in this final rule, we did not propose 
a transition BN offset to all LTCH PPS payments for RY 2008 to account 
for the estimated cost of the transition period methodology (including 
the option to elect payment based on 100 percent of the Federal rate) 
in RY 2008.
2. Impact on Providers
    The basic methodology for determining a per discharge LTCH PPS 
payment is set forth in Sec.  412.515 through Sec.  412.525. In 
addition to the basic LTC-DRG payment (standard Federal rate multiplied 
by the LTC-DRG relative weight), we make adjustments for differences in 
area wage levels, COLA for Alaska and Hawaii, and SSOs. Furthermore, 
LTCHs may also receive HCO payments for those cases that qualify based 
on the threshold established each rate year.
    To understand the impact of the changes to the LTCH PPS payment 
rates and payment rate policy changes discussed in sections IV. and 
V.A. of this final rule on different categories of LTCHs for the 2008 
LTCH PPS rate year, it is necessary to estimate payments per discharge 
under the LTCH PPS rates, factors and policies established for RY 2007 
(established in the RY 2007 LTCH PPS final rule (71 FR 27798 through 
27939)) and to estimate payments per discharge that would be made under 
the LTCH PPS rates, factors and policies for the 2008 LTCH PPS rate 
year (as discussed in the preamble of this final rule). We also 
evaluated the change in estimated 2007 LTCH PPS rate year payments to 
estimated 2008 LTCH PPS rate year payments (on a per discharge basis) 
for each category of LTCHs.
    Hospital groups were based on characteristics provided in the OSCAR 
data, FY 2002 through FY 2004 cost report data in HCRIS, and PSF data. 
Hospitals with incomplete characteristics were grouped into the 
``unknown'' category. Hospital groups include:
    <bullet> Location: Large Urban/Other Urban/Rural.
    <bullet> Participation date.
    <bullet> Ownership control.
    <bullet> Census region.
    <bullet> Bed size.
    To estimate the impacts of the payment rates and payment rate 
policy changes among the various categories of existing providers, we 
used LTCH cases from the FY 2006 MedPAR file to estimate payments for 
RY 2007 and to estimate payments for RY 2008 for 377 LTCHs. While 
currently there are just under 400 LTCHs, the most recent growth is 
predominantly in for-profit LTCHs that provide respiratory and 
ventilator-dependent patient care. We believe that the discharges from 
the FY 2006 MedPAR data for the 377 LTCHs in our database, which 
includes 254 proprietary LTCHs, provide sufficient representation in 
the LTC-DRGs containing discharges for patients who received LTCH care 
for the most commonly treated LTCH patients' diagnoses.
    As discussed in greater detail in section VII. of this final rule, 
under the 5-year transition set forth at Sec.  412.533(a), a LTCH's 
total payment under the LTCH PPS was based on an increasing percentage 
of the Federal rate

[[Page 26984]]

with a corresponding decrease in the percentage of its LTCH PPS payment 
based on reasonable cost principles. However, effective for cost 
reporting periods beginning on or after October 1, 2006, total LTCH PPS 
payments are based entirely on the Federal rate. Therefore, even though 
some LTCHs will have a cost reporting period for the 4th year of the 
transition period that will be concluding in the first 3 months of the 
2008 LTCH PPS rate year, the portion of those LTCHs' LTCH PPS payments 
that will be based on reasonable cost principles during RY 2008 is 
negligible relative to LTCH PPS payments based on the Federal rate. 
This is because, as discussed in greater detail in section IV.D.5. of 
this final rule, based on the most recent available data, we are 
projecting that the vast majority of LTCHs have already made the 
election to be paid based on 100 percent of the Federal rate rather 
than the transition blend prior to the start of their FY 2006 cost 
reporting period (that is, the 4th year of the transition period as set 
forth at Sec.  412.533(a)), and even for those few remaining LTCHs paid 
under the transition blend methodology set forth at Sec.  412.533(a), 
their total LTCH PPS payments are now based mostly on the Federal rate 
(since the transition blend percentages for cost reporting periods 
beginning during FY 2006 are 80 percent of the Federal rate and 20 
percent of the LTCH PPS payment based on reasonable cost principles). 
Therefore, in this final rule, we are no longer providing a separate 
impact table reflecting the applicable transition blend percentages, 
which required cost data to determine estimated LTCH PPS payments based 
on reasonable cost principles. Accordingly, the impact analyses of the 
payment rates and payment rate policy changes presented below reflects 
estimated LTCH PPS payments to all LTCHs based solely on the Federal 
rate.
    These impacts reflect the estimated ``losses'' or ``gains'' among 
the various classifications of LTCHs for the 2007 LTCH PPS rate year 
(July 1, 2006 through June 30, 2007) compared to the 2008 LTCH PPS rate 
year (July 1, 2007 through June 30, 2008) based on the payment rates 
and payment rate policy changes presented in this final rule. 
Prospective payments for the 2007 LTCH rate year were based on the 
standard Federal rate of $38,086.04, the outlier fixed-loss amount of 
$14,887, and the LTCHs' estimated case-mix based on FY 2006 LTCH claims 
data. Estimated prospective payments for the 2008 LTCH PPS rate year 
would be based on the standard Federal rate of $38,356.45 (based on the 
0.71 percent update discussed in section IV.C.3. of the preamble to 
this final rule), the outlier fixed-loss amount of $22,954, and the 
same FY 2006 LTCH claims data.
3. Calculation of Prospective Payments
    To estimate per discharge payments under the LTCH PPS, we simulated 
payments on a case-by-case basis by applying the established (for RY 
2007) and (for RY 2008) adjustments for area wage differences (as 
described in section IV.D.1. of the preamble of this final rule), and 
the COLA for Alaska and Hawaii (as described in section IV.D.2. of the 
preamble of this final rule). As discussed above, we also accounted for 
the existing payment policy for SSOs in RY 2007 and the revision of the 
SSO policy in RY 2008. Additional payments would also be made for HCOs 
(as described in section IV.D.3. of this final rule). As noted in 
section IV.D.4. of this final rule, we are not proposing to make 
adjustments for rural location, geographic reclassification, indirect 
medical education costs, or a DSH payment for the treatment of low-
income patients because sufficient new data have not been generated 
that would enable us to conduct a comprehensive reevaluation of these 
payment adjustments.
    We adjusted for area wage differences for estimated 2007 LTCH PPS 
rate year payments by computing a weighted average of a LTCH's 
applicable wage index during the period from July 1, 2006 through June 
30, 2007 because some providers may experience a change in the wage 
index phase-in percentage during that period. For cost reporting 
periods beginning on or after October 1, 2005, and before September 30, 
2006 (FY 2006), the labor portion of the Federal rate is adjusted by 
four-fifths of the applicable LTCH PPS wage index. For cost reporting 
periods beginning on or after October 1, 2006, and before September 30, 
2007 (FY 2007), the labor portion of the Federal rate is adjusted by 
five-fifths (that is, the full amount) of the applicable LTCH PPS wage 
index. Therefore, during RY 2007, a provider with a cost reporting 
period that began October 1, 2006, would have 3 months (July 2006 
through September 2006) of payments under the four-fifths wage index 
value and 9 months (October 2006 through June 2007) of payment under 
the (full) five-fifths wage index value. For this provider, we computed 
a blended wage index of 25 percent (3 months/12 months) of the four-
fifths wage index value and 75 percent (9 months/12 months) of the 
(full) five-fifths wage index value. The applicable LTCH PPS wage index 
values for the 2007 LTCH PPS rate year are shown in Tables 1 and 2 of 
the Addendum to the RY 2007 LTCH PPS final rule (71 FR 27906 through 
27930). We adjusted for area wage differences for estimated 2007 LTCH 
PPS rate year payments using the current LTCH PPS labor-related share 
of 75.665 percent (71 FR 27830).
    Similarly, we adjusted for area wage differences for estimated 2008 
LTCH PPS rate year payments by computing a weighted average of a LTCH's 
applicable wage index during the period from July 1, 2007, through June 
30, 2008, because, although under the established phase-in of the wage 
index adjustment for cost reporting periods beginning on or after 
October 1, 2006, the applicable LTCH wage index value is the full 
(five-fifths) LTCH PPS wage index value, during RY 2008 some providers 
will still experience a change in the wage index phase-in percentage 
during that period. For example, during RY 2008, a provider with a FY 
2006 cost reporting period that began September 1, 2006, (and will end 
on August 31, 2007) would have 2 months (July 2007 and August 2007) of 
payments under the four-fifths wage index value and 10 months 
(September 2007 through June 2007) of payment under the (full) five-
fifths wage index value. For this provider, we computed a blended wage 
index of 16.7 percent (2 months/12 months) of the four-fifths wage 
index value and 83.3 percent (10 months/12 months) of the (full) five-
fifths wage index value. The applicable LTCH PPS wage index values for 
the 2008 LTCH PPS rate year are shown in Tables 1 and 2 of Addendum A 
to this final rule. We adjusted for area wage differences for estimated 
2008 LTCH PPS rate year payments using the LTCH PPS labor-related share 
of 75.511 percent (see section IV.D.1.c. of this final rule).
    As noted previously in this final rule, under the 5-year transition 
set forth at Sec.  412.533(a), a LTCH's total payment under the LTCH 
PPS was based on an increasing percentage of the Federal rate with a 
corresponding decrease in the percentage of the LTCH PPS payment that 
is based on reasonable cost principles. However, effective for cost 
reporting periods beginning on or after October 1, 2006, total LTCH PPS 
payments are based solely on the Federal rate. Therefore, even though 
some LTCHs will have a cost reporting period for the 4th year of the 
transition period that will be concluding in the first 3 months of the 
2008 LTCH PPS rate year, the portion of those LTCH PPS payments that 
will be based on reasonable cost principles during RY 2008 is 
negligible relative to LTCH PPS

[[Page 26985]]

payments based on the Federal rate, and therefore, we are no longer 
estimating transition payments as we have done in past impact analyses 
(for example, 71 FR 27892).
    Furthermore, in estimating both RY 2007 and RY 2008 LTCH PPS 
payments, we did not apply a transition period BN offset to payments to 
account for the effect of the 5-year transition methodology and 
election of payment based on 100 percent of the Federal rate on 
Medicare program payments (established in the August 30, 2002 final 
rule (67 FR 56034)). This is because, for RY 2007, we established a 0.0 
percent BN offset (a BN factor of 1.0) to payments to account for the 
effect of the 5-year transition methodology and election of payment 
based on 100 percent of the Federal rate on Medicare program payments 
in RY 2007 (71 FR 27841). As noted above and discussed in greater 
detail in section IV.D.5. of this final rule, we are not proposing a 
transition period BN offset to all LTCH PPS payments in RY 2008 to 
account for the estimated cost of the transition period methodology 
(including the option to elect payment based on 100 percent of the 
Federal rate) in RY 2008 since we are projecting that such costs would 
be negligible.
    As noted in Table 11, we show the impact as if all LTCHs would be 
paid 100 percent of the Federal rate since, based on the most recent 
available data and the transition blend percentages set forth at Sec.  
412.533(a), nearly all LTCH PPS payments would be based on 100 percent 
of the applicable LTCH PPS standard Federal rate during the majority of 
RYs 2007 and 2008. Table 11 illustrates the estimated aggregate impact 
of the LTCH PPS among various classifications of LTCHs.
    <bullet> The first column, LTCH Classification, identifies the type 
of LTCH.
    <bullet> The second column lists the number of LTCHs of each 
classification type.
    <bullet> The third column identifies the number of LTCH cases.
    <bullet> The fourth column shows the estimated payment per 
discharge for the 2007 LTCH PPS rate year.
    <bullet> The fifth column shows the estimated payment per discharge 
for the 2008 LTCH PPS rate year.
    <bullet> The sixth column shows the estimated percentage change in 
estimated payments per discharge from the 2007 LTCH PPS rate year to 
the 2008 LTCH PPS rate year for changes to the Federal rate.
    <bullet> The seventh column shows the percentage change in 
estimated payments per discharge from the 2007 LTCH PPS rate year to 
the 2008 LTCH PPS rate year for changes to the area wage adjustment at 
Sec.  412.525(c) (as discussed in section IV.D.1. of the preamble of 
this final rule).
    <bullet> The eighth column shows the percent change in estimated 
payments per discharge from the 2007 LTCH PPS rate year to the 2008 
LTCH PPS rate year for the revision of the SSO policy at Sec.  412.529.
    <bullet> The ninth column shows the estimated percentage change in 
estimated payments per discharge from the 2007 LTCH PPS rate year to 
the 2008 LTCH PPS rate year for all changes.

                      TABLE 11: Projected Impact of Payment Rate and Payment Rate Policy Changes to LTCH PPS Payments for RY 2008*
                          [Estimated 2007 LTCH PPS Rate Year Payments Compared to Estimated 2008 LTCH PPS Rate Year Payments*]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Percent
                                                                                                                    change \3\
                                                                                                        Percent         in        Percent
                                                                                                       change in    estimated    change in     Percent
                                                                                                       estimated     payments    estimated    change in
                                                                             Average RY   Average RY    payments       per        payments     payments
                                                                             2007 LTCH    2008 LTCH       per       discharge       per          per
                                                Number     Number of LTCH     PPS rate     PPS rate    discharge     from RY     discharge    discharge
             LTCH Classification               of LTCHs      PPS cases          year         year       from RY     2007 to RY    from RY      from RY
                                                                            payment per  payment per   2007 to RY    2008 for    2007 to RY   2007 to RV
                                                                              case \1\     case \2\     2008 for    finalized     2008 for     2008 for
                                                                                                       finalized    changes to   finalized   all changes
                                                                                                       changes to    the area    changes to      \6\
                                                                                                      the Federal      wage       the SSO
                                                                                                        rate \3\    adjustment   policy \5\
                                                                                                                       \4\
--------------------------------------------------------------------------------------------------------------------------------------------------------
ALL PROVIDERS                                       377            129,812    32,948.31    31,690.36          0.6           -1         -0.9         -3.8
By Location:
    RURAL....................................        23              5,300    26,996.15    25,311.01          0.7         -2.8         -0.9         -6.2
    URBAN....................................       354            124,512    33,201.67    31,961.90          0.6           -1         -0.9         -3.7
    LARGE....................................       182             75,064    34,569.39    33,479.26          0.6         -0.6         -0.9         -3.2
    OTHER....................................       172             49,448    31,125.41    29,658.50          0.6         -1.7         -0.9         -4.7
By Participation Date:
    BEFORE OCT. 1983.........................        16              6,989    28,710.08    27,984.35          0.6         -0.4         -0.6         -2.5
    OCT. 1983-SEPT. 1993.....................        44             20,751    34,144.47    32,974.16          0.6         -0.8         -0.9         -3.4
    OCT. 1993-SEPT. 2002.....................       203             73,460    32,799.56    31,565.05          0.6           -1         -0.8         -3.8
    AFTER OCTOBER 2002.......................       108             27,949    33,576.33    32,052.78          0.6         -1.5         -1.1         -4.5
    UNKNOWN PARTICIPATION DATE...............         6                663    30,193.71    29,182.43          0.6         -0.7         -0.7         -3.3
By Ownership Type:
    VOLUNTARY................................        83             25,732    32,158.56    30,868.01          0.6         -1.2           -1           -4
    PROPRIETARY..............................       254             97,294    33,085.40    31,855.57          0.6           -1         -0.9         -3.7
    GOVERNMENT...............................        14              2,694    36,386.88    34,739.92          0.6         -1.8         -0.9          4.5
    UNKNOWN OWNERSHIP TYPE...................        23              4,027    32,383.98    30,918.43          0.6         -1.4           -1         -4.5
By Census Region:
    NEW ENGLAND..............................        16              9,634    27,868.81    27,195.59          0.6         -0.3         -0.7         -2.4

[[Page 26986]]

 
    MIDDLE ATLANTIC..........................        30              8,114    33,633.19    32,342.46          0.6         -1.1         -0.9         -3.8
    SOUTH ATLANTIC...........................        47             13,402    36,618.12    35,064.93          0.6         -1.5           -1         -4.2
    EAST NORTH CENTRAL.......................        69             19,477    35,727.90    34,565.61          0.6         -0.5         -0.9         -3.3
    EAST SOUTH CENTRAL.......................        28              7,848    33,523.34    31,749.31          0.6         -2.3           -1         -5.3
    WEST NORTH CENTRAL.......................        18              5,337    35,460.12    33,952.08          0.6         -1.4         -0.9         -4.3
    WEST SOUTH CENTRAL.......................       129             50,983    29,548.10    28,136.94          0.6         -1.7         -0.9         -4.8
    MOUNTAIN.................................        22              5,768    35,112.45    34,384.29          0.6          0.6         -1.1         -2.1
    PACIFIC..................................        18              9,249    41,923.26    41,407.75          0.6          0.8         -0.7         -1.2
By Bed Size:
    BEDS: 0-24...............................        32              4,998    30,256.35    28,833.57          0.7         -1.4         -0.9         -4.7
    BEDS: 25-49..............................       196             45,487    33,211.07    31,783.23          0.6         -1.4           -1         -4.3
    BEDS: 50-74..............................        65             24,371    33,228.43    31,986.77          0.6         -0.9         -0.9         -3.7
    BEDS: 75-124.............................        48             22,364    33,612.00    32,369.11          0.6           -1         -0.8         -3.7
    BEDS: 125-199............................        21             17,716    33,261.36    32,056.82          0.6         -0.9         -0.9         -3.6
    BEDS: 200 +..............................        15             14,876    31,219.79    30,423.78          0.6         -0.2         -0.7         -2.5
    UNKNOWN BED SIZE.........................         0                  0         0.00         0.00            0            0            0           0
--------------------------------------------------------------------------------------------------------------------------------------------------------
* We also note that, as discussed above in section XV.B.4. of this regulatory impact analysis, the 2.2 percent decrease in estimated aggregate LTCH PPS
  payments due to the expansion of the special payment provision for co-located LTCHs to certain situations not presently covered by existing Sec.
  412.534 for subclause (I) LTCHs (as discussed in section V.B. of this final rule) is not reflected in this impact table. However, the impact of the
  expansion of the ``25 percent'' policy is discussed in greater detail below in section XV.C.1. of this regulatory impact analysis.
\1\ Estimated average estimated payment per case for the 12-month period of July 1, 2006 through June 30, 2007.
\2\ Estimated average estimated payment per case for the 12-month period of July 1, 2007 through June 30, 2008.
\3\ Percent change in estimated payments per discharge from the 2007 LTCH PPS rate year to the 2008 LTCH PPS rate year for the changes to the Federal
  rate. (Note, as discussed in section XV.B.4. of this regulatory impact analysis, because about 34 percent of all LTCH cases are projected to receive a
  payment under the existing SSO policy that is based either on the estimated cost of the case or the ``IPPS comparable amount'' (rather than the
  Federal rate), the percent change in estimated payments per discharge due to the changes to the Federal rate for most of the categories of LTCHs, 0.6
  percent, is slightly less than the update to the Federal rate of 0.71 percent.)
\4\ Percent change in estimated payments per discharge from the 2007 LTCH PPS rate year to the 2008 LTCH PPS rate year for changes to the area wage
  adjustment policy at Sec.   412.525(c) (as discussed in section V.D.1. of the preamble of this final rule).
\5\ Percent change in estimated payments per discharge from the 2007 LTCH PPS rate year to the 2008 LTCH PPS rate year for the revision of the existing
  SSO policy at Sec.   412.529 (presented in section V.A.1.a. of the preamble of this final rule).
\6\ Percent change in estimated payments per discharge from the 2007 LTCH PPS rate year (as established in the RY 2007 LTCH PPS final rule (71 FR 27798
  through 27939)) to the 2008 LTCH PPS rate year (as discussed in the preamble of this final rule) for all of the payment rate and policy provisions
  presented in the preamble of this final rule. Note, this column, which shows the percent change in estimated payments per discharge for all changes,
  may not exactly equal the sum of the percent changes in estimated payments per discharge for changes to the Federal rate (column 7), for area wage
  adjustment changes (column 8) and the approach discussed for the SSO policy (column 9) due to the effect of estimated changes in aggregate HCO
  payments, as well as other interactive effects that cannot be isolated.

4. Results
    Based on the most recent available data (as described previously 
for 377 LTCHs), we have prepared the following summary of the impact 
(as shown in Table 11) of the LTCH PPS payment rate and payment rate 
policy changes presented in this final rule. (As noted above, the 
impact of other policy changes presented in this final rule, which do 
not directly affect the LTCH PPS per discharge payment rate, such as 
the expansion of the existing payment provision for co-located LTCHs to 
certain situations not presently covered by existing Sec.  412.534 for 
subclause (I) LTCHs, are not included as part of the impact analysis 
shown in Table 11. However, the impact of those other policies are 
discussed separately in section XV.C. of this regulatory impact 
analysis.)
    The impact analysis in Table 11 shows that estimated payments per 
discharge are expected to decrease approximately 3.8 percent, on 
average, for all LTCHs from the 2007 LTCH PPS rate year as compared to 
the 2008 LTCH PPS rate year as a result of the payment rate and policy 
changes presented in this final rule. We note that although we are 
proposing a 0.71 percent increase to the Federal rate for RY 2008, the 
impact analysis shown in Table 11 (column 6), only shows a 0.6 percent 
increase in estimated payments per discharge from RY 2007 to RY 2008, 
for most categories of LTCHs, as a result of the changes to the Federal 
rate. The reason that this

[[Page 26987]]

column shows an estimated 0.6 percent increase rather than an estimated 
0.7 percent increase (based on the 0.71 percent update to the Federal 
rate) is because about 34 percent of all LTCH cases are projected to 
receive a payment under the existing SSO policy. Under either the 
existing SSO policy or revision of the SSO policy discussed in section 
V.A.2. of this final rule, the majority of SSO cases would receive an 
adjusted LTCH PPS payment in RY 2008 that would be based either on the 
estimated cost of the case or the ``IPPS comparable amount'' (that is, 
either under the ``blend amount'' at existing Sec.  412.529(c)(2)(iv) 
or the amount discussed in our approach to address our concerns with 
the existing SSO policy) rather than a LTCH PPS payment based on the 
Federal rate. Therefore, because over 30 percent of all LTCH PPS cases 
would receive a payment that is not based on the Federal rate, the 
percent change in estimated payments per discharge due to the changes 
to the Federal rate for most categories of LTCHs shown in Table 11 is 
projected to be slightly less (0.6 percent) than the 0.71 percent 
update to the Federal rate. Furthermore, although we are proposing a 
0.71 percent increase to the Federal rate for RY 2008, the projected 
percent decrease in estimated payments per discharge from the 2007 LTCH 
PPS rate year to the 2008 LTCH PPS rate year shown in Table 11 is due 
to changes to the area wage adjustment (discussed in section IV.D.1. of 
this final rule), in conjunction with the revision of the SSO policy 
(discussed in section V.A.2. of this final rule) and the increase to 
the HCO fixed-loss amount (as discussed in section IV.D.3.c. of this 
final rule).
    Specifically, as we discussed in greater detail in section IV.D.1. 
of the preamble of this final rule, we are updating the wage index 
values for RY 2008 in accordance with the progression of the 5-year 
phase-in of the wage index adjustment. We are also increasing the 
labor-related share from 75.665 percent to 75.788 percent under the 
LTCH PPS beginning in RY 2008. Because this change to the labor-related 
share would increase the portion of the Federal rate that is adjusted 
by the wage index to account for differences in local cost variation 
(in accordance with Sec.  412.525(c)), LTCHs located in areas with a RY 
2008 wage index value that is greater than 1.0 would experience an 
increase in estimated payments per discharge as a result of the 
increase in the labor-related share. Conversely, LTCHs located in areas 
with a RY 2008 wage index value that is less than 1.0 are expected to 
experience a decrease in estimated payments per discharge as a result 
of the increase in the labor-related share since a larger portion of 
the Federal rate would be adjusted by the wage index to account for 
differences in local cost variation (in accordance with Sec.  
412.525(c)). However, the effect of the progression of the 5-year 
phase-in of the wage index adjustment results in a relatively more 
significant decrease in estimated payments for LTCHs located in areas 
with a RY 2008 wage index value that is less than 1.0, than the effect 
on payments due to the increase in the labor-related share. 
Consequently, the changes to the wage index adjustment presented in 
this final rule for LTCHs located in areas with a RY 2008 wage index 
value that is less than 1.0 are expected to also contribute to the 
projected decrease in estimated payments per discharge from RY 2007 as 
compared to RY 2008.
    In addition, under the revision to the SSO policy, those LTCH SSO 
cases with a covered LOS that is less than or equal to the IPPS ALOS 
plus one standard deviation for the same DRG would receive a lower 
adjusted LTCH PPS payment than under the current SSO policy. We believe 
that the LTCH cases meeting the criteria stated above are similar to 
the same type of cases treated in an acute care hospital and paid for 
under the IPPS since one standard deviation is a statistical test which 
measures the certainty of the average of a set of measurements for the 
purpose of this data analysis. Accordingly, we believe the revision of 
the SSO policy is appropriate, given that many of these SSO cases that 
are ``similar to IPPS cases'' most likely do not receive a full course 
of a LTCH-level of treatment in such a short period of time since, in 
general, LTCHs are intended to treat longer stay patients. Furthermore, 
since by far the majority of SSO cases were admitted to the LTCH 
directly from an acute-care hospital, they are likely to still be in 
need of acute-level care at the time of admission to the LTCH. We 
believe that this may indicate that the LTCH admission is a premature 
and inappropriate discharge from the acute-care hospital and an 
inappropriate admission to the LTCH. We believe that the revision of 
the SSO policy will result in appropriate payments for short-stay cases 
treated at LTCHs as discussed in greater detail in section V.A.2. of 
this final rule.
    Furthermore, as we discussed in greater detail in section IV.D.3.c. 
of the preamble of this final rule, given the regulatory requirement at 
Sec.  412.525(a) that estimated outlier payments not exceed 8 percent 
of estimated total LTCH PPS payments, this decrease in estimated LTCH 
PPS payments for RY 2008 resulting primarily from the changes to the 
SSO policy and the changes to the area wage adjustment would require an 
increase in the HCO fixed-loss amount to maintain estimated outlier 
payments of no more than 8 percent of the estimated total LTCH PPS 
payments (resulting from the payment rate and policy changes presented 
in this rule). Thus, the increase in the outlier fixed-loss amount also 
contributes to the projected decrease in estimated payments per 
discharge from the 2007 LTCH PPS rate year to the 2008 LTCH PPS rate 
year. For example, many LTCHs are expected to receive a decrease in HCO 
payments. As a result of the increase to the fixed-loss amount from the 
2007 LTCH PPS rate year ($14,887) to the 2008 LTCH PPS rate year 
($22,954), fewer cases would qualify as outlier cases (that is, the 
estimated cost of the case exceeds the outlier threshold). Since many 
LTCHs are expected to receive fewer outlier payments, total estimated 
payments per discharge are expected to decrease from RY 2007 to RY 
2008.
a. Location
    Based on the most recent available data, the majority of LTCHs are 
in urban areas. Approximately 6 percent of the LTCHs are identified as 
being located in a rural area, and approximately 4 percent of all LTCH 
cases are treated in these rural hospitals. The impact analysis 
presented in Table 11 shows that the percent decrease in estimated 
payments per discharge for the 2007 LTCH PPS rate year compared to the 
2008 LTCH PPS rate year for rural LTCHs would be 6.2 percent for all 
changes, and would be 3.7 percent for urban LTCHs for all changes.
    The projected percent decrease in estimated payments to rural LTCHs 
is greater than that for urban LTCHs because rural LTCHs are expected 
to experience a larger decrease in estimated payments due to the 
changes to the area wage adjustment because the wage index for all 
rural LTCHs is less than 1.0, as explained above in this section. 
Furthermore, the wage indices of all 23 rural LTCHs in our database 
have decreased from RY 2007 to RY 2008.
    Large urban LTCHs are projected to experience a 3.2 percent 
decrease in estimated payments per discharge from the 2007 LTCH PPS 
rate year compared to the 2008 LTCH PPS rate year, while other urban 
LTCHs are projected to experience a 4.7 percent decrease in estimated 
payments per discharge from the 2007 LTCH PPS rate year compared

[[Page 26988]]

to the 2008 LTCH PPS rate year, as shown in Table 11. Other urban LTCHs 
are projected to experience a higher than average decrease in estimated 
payments per discharge because of the changes to the area wage 
adjustment. This is because the majority of other urban LTCHs (over 90 
percent) are located in urban areas that have a wage index value of 
less than 1.0, and therefore, would experience a higher than average 
decrease in estimated payments per discharge as a result of the changes 
to the wage index adjustment, as explained above.
    Large urban LTCHs are projected to experience a lower than average 
decrease in estimated payments per discharge for all changes because of 
the changes to the area wage adjustment because the majority of large 
urban LTCHs are located in urban areas that have a wage index value of 
greater than 1.0, as explained above in this section.
    Additionally, all rural and both large and other urban hospitals 
are projected to experience a lower than average decrease in estimated 
payments per discharge for all changes because of the increased HCO 
fixed-loss amount as discussed previously.
b. Participation Date
    LTCHs are grouped by participation date into four categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; (3) 
between October 1993 and September 2002; and (4) after October 2002. 
Based on the most recent available data, the majority (approximately 54 
percent) of the LTCH cases are in hospitals that began participating 
between October 1993 and September 2002, and are projected to 
experience a 3.8 percent decrease in estimated payments per discharge 
from the 2007 LTCH PPS rate year compared to the 2008 LTCH PPS rate 
year, as shown in Table 11.
    Approximately 12 percent of LTCH PPS cases are in LTCHs that began 
participating in Medicare between October 1983 and September 1993, and 
those LTCHs are projected to experience a 3.4 percent decrease in 
estimated payments per discharge from the 2007 LTCH PPS rate year 
compared to the 2008 LTCH PPS rate year, as shown in Table 11. We are 
projecting that LTCHs that began participating in Medicare between 
October 1983 and September 1993 would experience a lower than average 
decrease in estimated payments for RY 2008 primarily because we are 
projecting that these LTCHs are expected to experience a lower than 
average decrease (0.8 percent) in estimated payments per discharge due 
to the changes to the area wage adjustment. This is because many of the 
LTCHs that began participating in Medicare between October 1983 and 
September 1993 are located in areas where the RY 2008 wage index value 
would be greater than the RY 2007 wage index value, and because several 
of these LTCHs are located in areas that have a wage index value of 
greater than 1.0, (as explained above).
    LTCHs that began participating before October 1983 are projected to 
experience a 2.5 percent decrease in estimated payments per discharge 
from the 2007 LTCH PPS rate year compared to the 2008 LTCH PPS rate 
year (see Table 11). We are projecting that LTCHs that began 
participating in Medicare before October 1983 would experience a 
decrease in estimated payments for RY 2008 as compared to RY 2007 
primarily because we are projecting that LTCHs in this participation 
date category would experience a decrease in estimated payments in RY 
2008 as compared to RY 2007 due to the changes to the fixed-loss 
amount. In addition, LTCHs that began participating in Medicare before 
October 1983 are expected to experience a lower than average decrease 
in estimated payments due to the revision of the SSO policy.
    Approximately 29 percent of LTCHs began participating in Medicare 
after October 2002 (that is, the beginning of the LTCH PPS, which was 
implemented for cost reporting periods beginning on or after October 1, 
2002), and those LTCHs are projected to experience a 4.5 percent 
decrease in estimated payments per discharge from the 2007 LTCH PPS 
rate year compared to the 2008 LTCH PPS rate year (see Table 11). We 
are projecting that LTCHs that began participating in Medicare after 
October 2002 will experience a higher than average decrease in 
estimated payments for RY 2008 primarily because we are projecting that 
these LTCHs would experience a larger than average decrease (1.5 
percent) in estimated payments per discharge due to the changes to the 
area wage adjustment. This is because the majority of the LTCHs that 
began participating in Medicare after October 2002 are located in areas 
where the RY 2008 wage index value would be less than the RY 2007 wage 
index value, and because the majority (over 96 percent) of these LTCHs 
are located in areas that would have a RY 2008 wage index value of less 
than 1.0, (as discussed above in this section).
c. Ownership Control
    Other than LTCHs whose ownership control type is unknown, LTCHs are 
grouped into three categories based on ownership control type: 
voluntary; proprietary; and government. Based on the most recent 
available data, approximately 4 percent of LTCHs are identified as 
government-owned and operated. We expect that for these government-
owned and operated LTCHs, estimated 2008 LTCH PPS rate year payments 
per discharge would decrease 4.5 percent in comparison to the 2007 LTCH 
PPS rate year, as shown in Table 11. We are projecting that government-
run LTCHs would experience a higher than average decrease in estimated 
payments in RY 2008 as compared to RY 2007 due to the effect of the 
changes to the area wage adjustment. This is because all but 3 of the 
13 government-run LTCHs in our database are located in areas where the 
wage index value for RY 2008 is less than 1.0, as explained above.
    Similarly, we project that estimated 2008 LTCH PPS rate year 
payments per discharge for voluntary LTCHs, which account for 
approximately 22 percent of LTCHs, would decrease 4 percent in 
comparison to estimated 2007 LTCH PPS rate year payments (see Table 
11). We are projecting that voluntary LTCHs would experience a slightly 
higher than average decrease in estimated payments in RY 2008 as 
compared to RY 2007 due to the changes to the wage index adjustment 
since over 60 percent (51 LTCHs) of the voluntary LTCHs are located in 
areas where the wage index value is less than 1.0 (as discussed above).
    The majority (approximately 67 percent) of LTCHs are identified as 
proprietary. We project that 2008 LTCH PPS rate year estimated payments 
per discharge for these proprietary LTCHs would decrease 3.7 percent in 
comparison to the 2007 LTCH PPS rate year (see Table 11).
d. Census Region
    Estimated payments per discharge for the 2008 LTCH PPS rate year 
are projected to decrease for LTCHs located in all regions in 
comparison to the 2007 LTCH PPS rate year although five out of the nine 
regions are projected to have a lower than average or average decrease 
in payments as compared to the average decrease for all providers. The 
percent decrease in estimated payments per discharge from the 2007 LTCH 
PPS rate year to the 2008 LTCH PPS rate year for most regions is 
largely attributable to the increase in the HCO fixed-loss amount (as 
explained above).
    Of the 9 census regions, we project that the decrease in 2008 LTCH 
PPS rate year estimated payments per discharge in comparison to the 
2007 LTCH PPS rate year would have the largest impact

[[Page 26989]]

on LTCHs in the East South Central and West South Central regions (5.3 
percent and 4.8 percent, respectively; see Table 11). LTCHs located in 
both the East South Central and West South Central regions are expected 
to experience a higher than average decrease in estimated payments due 
to the changes in the area wage adjustment (2.3 percent for the East 
South Central region, and 1.7 percent for the West South Central 
region, as shown in Table 11). This is because over 80 percent of all 
LTCHs located in the East South Central region and the West South 
Central regions are located in areas with a wage index value that is 
less than 1.0 (as described above). In addition, these LTCHs are also 
expected to experience a higher than average decrease in estimated 
payments per discharge due to the revision of the SSO policy since many 
of the LTCHs in these two regions have a larger than average percentage 
of SSO cases (based on FY 2006 LTCH claims data).
e. Bed Size
    LTCHs were grouped into seven categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; greater than 
200 beds; and unknown bed size.
    We are projecting a decrease in estimated 2008 LTCH PPS rate year 
payments per discharge in comparison to the 2007 LTCH PPS rate year for 
all bed size categories. As noted above, the projected percent decrease 
in estimated payments per discharge from the 2007 LTCH PPS rate year to 
the 2008 LTCH PPS rate year is largely attributable to the changes in 
the area wage adjustment, and the increase in the outlier fixed-loss 
amount (as explained above).
    Of the six different bed size categories, the two categories with 
the lowest bed count (0-24 beds and 25-49 beds) are projected to have 
higher than average decreases in payment. Estimated payments per 
discharge for the 2008 LTCH PPS rate year for LTCHs with 0-24 beds are 
projected to decrease the most in comparison to the 2007 LTCH PPS rate 
year (4.7 percent; see Table 11), followed by LTCHs with 25-49 beds 
(4.3 percent; see Table 11). This higher than average decrease in 
estimated payments per discharge for LTCHs with less than 49 beds (that 
is, LTCHs in the 0-24 bed size category and LTCHs in the 25-49 bed size 
category) is largely due to the changes to the area wage adjustment and 
the increase in the HCO fixed-loss amount (as explained above). 
Specifically, the majority of LTCHs with 49 beds or less are located in 
areas where the RY 2008 wage index value is less than the RY 2007 wage 
index value. In addition, the majority (over 84 percent) of LTCHs with 
49 beds or less are located in areas where the RY 2008 wage index is 
less than 1.0. We project that LTCHs with greater than 200 beds would 
have a less than average decrease in estimated 2008 LTCH PPS rate year 
payments per discharge in comparison to the 2007 LTCH PPS rate year 
(2.5 percent; see Table 11). This smaller decrease in estimated 
payments per discharge for LTCHs with greater than 200 beds is 
primarily due to the changes to the area wage adjustment. This is 
because the majority of these LTCHs are located in areas where the RY 
2008 wage index value is greater than the RY 2007 wage index value, and 
because 12 of the 13 LTCHs with greater than 200 beds are located in an 
area where the RY 2008 wage index value is greater than 1.0 (as 
described above).
5. Effect on the Medicare Program
    Based on actuarial projections, an estimate of Medicare spending 
(total estimated Medicare program payments) for LTCH services over the 
next 5 years based on current LTCH PPS policy (as established in 
previous LTCH PPS final rules) is shown in Table 4 in section IV.D.5. 
of the preamble of this final rule. As noted, we project that the 
provisions of this final rule, would result in a decrease in estimated 
aggregate LTCH PPS payments in RY 2008 of about $156 million (or about 
3.8 percent) for the 377 LTCHs in our database, as explained in greater 
detail above in section XV.A. of this regulatory impact analysis.
    Consistent with the statutory requirement for BN, as we discussed 
in the August 30, 2002 final rule that implemented the LTCH PPS, in 
developing the LTCH PPS, we intended that estimated aggregate payments 
under the LTCH PPS in FY 2003 be projected to equal the estimated 
aggregate payments that would have been made if the LTCH PPS were not 
implemented. Our methodology for estimating payments for purposes of 
the BN calculations for determining the FY 2003 standard Federal rate 
uses the best available data and necessarily reflects assumptions. As 
we collect data from LTCHs, we will monitor payments and evaluate the 
ultimate accuracy of the assumptions used in the BN calculations (that 
is, inflation factors, intensity of services provided, or behavioral 
response to the implementation of the LTCH PPS). As discussed in 
section IV.D.6. of this final rule, we still do not have sufficient new 
cost report and claims data generated under the LTCH PPS to enable us 
to conduct a comprehensive reevaluation of our FY 2003 BN calculation 
at this time.
    Section 123 of the BBRA and section 307 of the BIPA provide the 
Secretary with extremely broad authority in developing the LTCH PPS, 
including the authority for appropriate adjustments. In accordance with 
this broad authority, we may discuss in a future proposed rule a 
possible one-time prospective adjustment to the LTCH PPS rates under 
Sec.  412.523(d)(3) on or before July 1, 2008, so that the effect of 
any significant differences between actual payments and estimated 
payments for the first year of the LTCH PPS is not perpetuated in the 
LTCH PPS payment rates for future years.
6. Effect on Medicare Beneficiaries
    Under the LTCH PPS, hospitals receive payment based on the average 
resources consumed by patients for each diagnosis. We do not expect any 
changes in the quality of care or access to services for Medicare 
beneficiaries under the LTCH PPS, but we expect that paying 
prospectively for LTCH services would enhance the efficiency of the 
Medicare program.

C. Impact of Other Policy Changes

1. Effects of Policy Expansion of the Special Payment Provisions for 
LTCH HwHs and LTCH Satellites to Certain Situations Not Presently 
Covered by Existing Sec.  412.534 for Subclause (I) LTCHs
    In section V.B. of the preamble to this final rule, we have revised 
Sec.  412.534 and added Sec.  412.536 to extend the existing payment 
provision for co-located LTCHs (HwHs and satellites of LTCHs) to 
certain situations not presently covered by existing Sec.  412.534 for 
subclause (I) LTCHs. Under the existing policy, which was finalized for 
FY 2005, a payment adjustment is applied to those discharges from co-
located LTCHs that were admitted from host hospitals that are in excess 
of a specified threshold unless those patients had reached HCO status 
at the referring hospital. Following a 4-year phase-in of this payment 
adjustment, for cost reporting periods beginning during FY 2008, the 
threshold is 25 percent or an applicable percentage established under 
the regulation that takes into account the particular circumstances of 
rural, urban single, or MSA dominant hospitals. Specifically, at 
existing Sec.  412.534, we have provided that under the LTCH PPS, 
Medicare will pay the lesser of an amount otherwise payable under 
subpart O of 42 CFR part 412 or a LTCH PPS payment amount

[[Page 26990]]

equivalent to what would have been paid under the IPPS for those 
discharges that were not HCOs from the referring hospital and that 
exceed 25 percent (or the applicable percentage) of the LTCH or LTCH 
satellite's Medicare discharges for any cost reporting period (69 FR 
49191 through 49213). We originally established this payment adjustment 
because our data suggested that in many cases, hospitals were 
prematurely shifting patients to co-located LTCHs, and therefore, that 
we were generating a Medicare payment to the first hospital (generally 
an acute care hospital paid under the IPPS) and also an additional 
Medicare payment under the LTCH PPS to an LTCH for what was, in 
essence, one episode of care. Consequently, we believed that in such 
circumstances co-located LTCHs were functioning as step-down units of 
their host hospitals, a configuration which is not permitted under 
section 1886(d)(1)(B) of the Act, which provides for the establishment 
of rehabilitation and psychiatric units of acute care hospitals but 
does not allow LTCH units.
    As detailed in section V.B. of the preamble of this final rule, our 
data suggests that many of our concerns regarding patient shifting 
between co-located providers also pertain to those LTCHs that are not 
co-located with other hospitals. The RY 2005 LTCH discharges from the 
MedPAR files indicate that about 73 percent of the then 200 free-
standing LTCHs admitted 25 percent or less of their Medicare discharges 
from an individual acute care hospital; for 82 of those freestanding 
LTCHs, the percentage was between 25 and 50 percent; for 33 of the 
freestanding LTCHs, it was between 50 and 75 percent. For 6 percent of 
those free-standing LTCHs, it was between 75 and 100 percent of their 
Medicare discharges were admitted from one acute care hospital. In 
addition, the RY 2005 LTCH discharges from the MedPAR files indicate 
that for over 63 percent of all LTCHs, more than 25 percent of their 
discharges are for patients admitted from an individual acute care 
hospital. Based on this data, as discussed in section V.B. of this 
final rule, we have decided to expand this above described payment 
adjustment at existing Sec.  412.534 to apply equally to certain 
situations not presently covered by existing Sec.  412.534 for 
subclause (I) LTCHs beginning with cost reporting periods starting in 
RY 2008. Under this policy, if any subclause (I) LTCH's or satellite 
facility's discharges that had been admitted from any referring 
hospital that is not co-located with the LTCH or LTCH satellite (under 
Sec.  412.536) or from a co-located host (under the revision to Sec.  
412.534) exceed 25 percent (or the applicable percentage) for the 
LTCH's cost reporting period, an adjusted payment would be made at the 
lesser of the otherwise payable amount under the LTCH PPS or the LTCH 
PPS payment amount that would be equivalent to what Medicare would 
otherwise pay under the IPPS. Grandfathered LTCH HwHs and LTCH 
satellites will also be subject to the 25 percent (or applicable 
percentage) threshold payment adjustment for Medicare discharges 
admitted from their co-located host, under Sec.  412.534(g) and will 
additionally be governed by Sec.  412.536 for discharges admitted from 
non-co-located referring hospitals.
    It is our intent that the revisions that we are finalizing would 
discourage inappropriate patient shifting to LTCHs before the referring 
hospital delivers a full episode of patient care. To the extent that 
LTCHs change their behaviors because this policy reduces the financial 
incentives for certain situations not presently covered by existing 
Sec.  412.534 to admit patients prematurely discharged from other 
hospitals, we believe that there would be savings to the Medicare 
program. Specifically, as under the existing policy for co-located 
LTCHs at existing Sec.  412.534, the payment adjustment would not apply 
to either those subclause (I) LTCH discharges admitted from referring 
hospitals not co-located with the LTCH or LTCH satellite (under Sec.  
412.536) or those subclause (I)LTCH HwH or satellite discharges 
admitted from co-located host hospitals (under the revision to Sec.  
412.534) that have already reached HCO status.
    At this time, based on the most recent LTCH claims data available 
and assuming no change in LTCH behavior if this policy were 
implemented, we estimate that the extension of the 25 percent (or 
applicable percentage) threshold at existing Sec.  412.534 to certain 
situations not presently covered by existing Sec.  412.534 subclause 
(I) LTCHs would not result in savings to the Medicare program in RY 
2008 due to our adoption of a 3 year transition to this policy. 
However, as that policy is fully implemented at 25 percent (or the 
applicable level) there will be a significant impact in LTCH payments. 
As discussed above in this section, we believe that this policy would 
discourage inappropriate patient shifting to LTCHs before the non-co-
located referring hospital or co-located host delivered a full episode 
of patient care and because we believe that this policy would result in 
appropriate Medicare payments under the LTCH PPS, and therefore, to the 
extent that LTCHs alter their admission protocols, we do not believe 
that there would be an adverse financial impact on LTCHs, nor would 
there be an adverse impact on Medicare beneficiary's access to care.
2. Effects of Policy Change Relating to Payment for Direct Graduate 
Medical Education (GME)
    In section XII. of the preamble of this final rule, with respect to 
the rules that hospitals must meet to count residents training in 
nonhospital settings for indirect medical education (IME) and direct 
GME payment purposes, we finalized our proposal to revise Sec.  
413.75(b) revising the definition of ``all or substantially all of the 
costs for the training program in the nonhospital setting.'' We also 
finalized our proposal to revise Sec.  412.105(f)(1)(ii)(C) for IME and 
add Sec.  413.78(f) to reflect the revised definition of ``all or 
substantially all.'' The revised definition is effective for cost 
reporting periods beginning on or after July 1, 2007 and states that 
``all or substantially all of the costs for the training program in the 
nonhospital setting'' means at least 90 percent of the total of the 
costs of the residents' salaries and fringe benefits (including travel 
and lodging where applicable) and the portion of the cost of teaching 
physicians' salaries attributable to direct GME. This differs from the 
prior definition of ``all or substantially all of the costs for the 
training program in the nonhospital setting,'' which required that, to 
count FTE residents training in a nonhospital setting, a hospital was 
required to pay for 100 percent of the residents' salaries and fringe 
benefits, as well as the portion of the actual cost of the teaching 
physician's salary and fringe benefits attributable to direct GME 
activities at the nonhospital site. In addition, under the revised 
definition of ``all or substantially all'' of the costs, in response to 
hospitals' concerns regarding the difficulty of obtaining actual salary 
data from teaching physicians to document the actual cost of the 
teaching physicians' time spent on GME activities, we are finalizing 
our proposal to allow hospitals to use certain proxy information, such 
as national average physician compensation amounts, to calculate the 
cost of the teaching physicians' time spent in GME activities at the 
nonhospital site.
    We believe that much of the administrative burden on hospitals 
related to calculating and documenting the amount they need to pay for 
``all or substantially all'' of the costs of residency training at the 
nonhospital

[[Page 26991]]

site will be significantly reduced, if not eliminated, under our final 
rule. Had we not made the changes and continued to require that 
hospitals provide extensive documentation that they are paying for the 
costs of the training program in the nonhospital setting, we understand 
the industry had expressed concern that hospitals may significantly 
reduce the amount of training occurring in nonhospital settings and 
caused residency training to be transferred to hospitals. We further 
note that the Congress intended to encourage the shift of training to 
nonhospital settings and we believe this policy change can facilitate 
further shifts to nonhospital settings. Since we are not finalizing a 
change that will impact the aggregate amount of residency training that 
will occur, and Medicare will continue to pay for residency training 
occurring in hospitals, overall Medicare payments for residency 
training as a result of this finalized policy will remain constant.

D. Accounting Statement

    As discussed in section XV.A.1. of this regulatory impact analysis, 
the impact analysis of this final rule results in a decrease in 
estimated aggregate payments of $156 million (or about 3.8 percent) for 
the 377 LTCHs in our database. Therefore, as required by OMB Circular 
A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 12, we have prepared an accounting statement showing 
the classification of the expenditures associated with the provisions 
of this final rule. Table 12 provides our best estimate of the decrease 
in Medicare payments under the LTCH PPS as a result of the provisions 
presented in this final rule based on the data for the 377 LTCHs in our 
database. All expenditures are classified as transfers to Medicare 
providers (that is, LTCHs).

      Table 12.--Accounting Statement: Classification of Estimated
Expenditures, From the 2007 LTCH PPS Rate Year to the 2008 LTCH PPS Rate
                                  Year
                              [In Millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  Negative transfer--estimated
                                             decrease in expenditures:
                                             $156.
From Whom To Whom?                          Federal Government to LTCH
                                             Medicare Providers.
------------------------------------------------------------------------

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

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

0
For the reasons set forth in the preamble, the Centers for Medicare & 
Medicaid Services amends 42 CFR chapter IV as set forth below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

0
1. The authority citation for part 412 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395hh) and section 124 of Pub. L. 106-113 (113 
Stat. 1501A-332).

Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital-Related Costs

0
2. Section 412.22 is amended by adding paragraphs (h)(3)(i) and (ii) to 
read as follows:


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

* * * * *
    (h) * * *
    (3) * * *
    (i) Any hospital structured as a satellite facility on September 
30, 1999, and excluded from the prospective payment systems on that 
date, to the extent the hospital continues operating under the same 
terms and conditions, including the number of beds and square footage 
considered, for the purposes of Medicare participation and payment, to 
be part of the hospital, in effect on September 30, 1999; or
    (ii) Any hospital excluded from the prospective payment systems 
under Sec.  412.23(e)(2)(ii).
* * * * *

Subpart G--Special Treatment of Certain Facilities Under the 
Prospective Payment System for Inpatient Operating Costs

0
3. Section 412.105 is amended by revising paragraph (f)(1)(ii)(C) to 
read as follows:


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

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

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

0
4. Section 412.517 is amended by--
0
A. Redesignating the introductory text and paragraphs (a), (b), (c), 
and (d) as paragraphs (a) introductory text, (a)(1), (a)(2), (a)(3), 
and (a)(4), respectively.
0
B. Adding new paragraph (b).
    The addition reads as follows:


Sec.  412.517  Revision of LTC-DRG group classifications and weighting 
factors.

* * * * *
    (b) Beginning in FY 2008, the annual changes to the LTC-DRG 
classifications and recalibration of the weighting factors described in 
paragraph (a) of this section are made in a budget neutral manner such 
that estimated aggregate LTCH PPS payments are not affected.


0
5. Section 412.523 is amended by adding new paragraph (c)(3)(iv) to 
read as follows:


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

* * * * *
    (c) * * *
    (3) * * *
    (iv) For long-term care hospital prospective payment system rate 
year beginning July 1, 2007 and ending June 30, 2008. The standard 
Federal rate for long-term care hospital prospective payment system 
rate year beginning July 1, 2007 and ending June 30, 2008 is the 
standard Federal rate for the previous long-term care hospital 
prospective payment system rate year updated by 0.71 percent. The 
standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *

0
6. Section 412.529 is amended by--
0
A. Revising paragraph (a).
0
B. Revising the introductory text for paragraph (c)(2).
0
C. Redesignating paragraph (c)(3) as paragraph (c)(4).

[[Page 26992]]

0
D. Adding new paragraph (c)(3).
    The revision and addition reads as follows:


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

    (a) Short-stay outlier defined. ``Short-stay outlier'' means a 
discharge with a covered length of stay in a long-term care hospital 
that is up to and including five-sixths of the geometric average length 
of stay for each LTC-DRG.
* * * * *
    (c) * * *
    (2) Except as provided in paragraph (c)(3)(i) of this section, for 
discharges occurring on or after July 1, 2006, from long-term care 
hospitals described under Sec.  412.23(e)(2)(i), the LTCH prospective 
payment system adjusted payment amount for a short-stay outlier case is 
the least of the following amounts:
    (i) * * *
    (ii) * * *
    (iii) * * *
    (iv) * * *
    (3) For discharges specified in paragraph (c)(3)(i) of this 
section, occurring on or after July 1, 2007, from long-term care 
hospitals described under Sec.  412.23(e)(2)(i), the LTCH prospective 
payment system adjusted payment amount for a short-stay outlier case is 
adjusted as follows:
    (i) If the covered length of stay of the case assigned to a 
particular LTC-DRG is less than or equal to one standard deviation from 
the geometric ALOS of the same DRG under the inpatient prospective 
payment system (the IPPS-comparable threshold), the LTCH prospective 
payment system adjusted payment amount for such a case is the least of 
the following amounts:
    (A) 120 percent of the LTC-DRG specific per diem amount determined 
under paragraph (d)(1) of this section;
    (B) 100 percent of the estimated cost of the case determined under 
paragraph (d)(2) of this section;
    (C) The Federal prospective payment for the LTC-DRG as determined 
under paragraph (d)(3) of this section; or
    (D) An amount payable under subpart O comparable to the hospital 
inpatient prospective payment system per diem amount determined under 
paragraph (d)(4) of this section.
    (ii) If the covered length of stay of the case assigned to a 
particular LTC-DRG is greater than one standard deviation from the 
geometric ALOS of the same DRG under the inpatient prospective payment 
system (the IPPS-comparable threshold), the LTCH prospective payment 
system adjusted payment amount for such a case is determined under 
paragraph (c)(2) of this section.
* * * * *

0
7. Section 412.534 is amended by--
0
A. Revising paragraphs (a), (b), (c)(1), (c)(2), (d)(1), and (e)(1).
0
B. Revising the introductory text for paragraph (g).
0
C. Adding paragraph (h).
    The revision and addition read as follows:


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

    (a) Scope. Except as provided in paragraph (h), the policies set 
forth in this section apply to discharges occurring in cost reporting 
periods beginning on or after October 1, 2004 from long-term care 
hospitals as described in Sec.  412.23(e)(2)(i) meeting the criteria in 
Sec.  412.22(e)(2), or satellite facilities of long-term care hospitals 
that meet the criteria in Sec.  412.22(h).
    (b) Patients admitted from hospitals not located in the same 
building or on the same campus as the long-term care hospital or long-
term care hospital satellite. Payments to the long-term care hospital 
for patients admitted to the long-term care hospital or to a satellite 
of the long-term care hospital from another hospital that is not the 
co-located hospital are made under the rules in this subpart with no 
adjustment under this section. For cost reporting periods beginning on 
or after July 1, 2007, payments to the long-term care hospital for 
discharges of Medicare patients admitted to the LTCH hospital or LTCH 
satellite facility of the long-term care hospital from another hospital 
that is not the co-located hospital are subject to the provisions in 
Sec.  412.536.
    (c) * * *
    (1) Except as provided in paragraphs (g) and (h) of this section, 
for any cost reporting period beginning on or after October 1, 2004 in 
which the long-term care hospital or its satellite facility has a 
discharged Medicare inpatient population of whom no more than 25 
percent were admitted to the hospital or its satellite facility from 
the co-located hospital, payments are made under the rules at Sec.  
412.500 through Sec.  412.541 in this subpart with no adjustment under 
this section.
    (2) Except as provided in paragraph (d), (e), (g), or (h) of this 
section, for any cost reporting period beginning on or after October 1, 
2004 in which the long-term care hospital or satellite facility has a 
discharged Medicare inpatient population of whom more than 25 percent 
were admitted to the hospital or satellite facility from the co-located 
hospital, payments for the patients who are admitted from the co-
located hospital and who cause the long-term care hospital or satellite 
facility to exceed the 25 percent threshold for discharged patients who 
have been admitted from the co-located hospital are the lesser of the 
amount otherwise payable under this subpart or the amount payable under 
this subpart that is equivalent, as set forth in paragraph (f) of this 
section, to the amount that would be determined under the rules at 
Subpart A, Sec.  412.1(a). Payments for the remainder of the long-term 
care hospital's or satellite facility's patients are made under the 
rules in this subpart at Sec.  412.500 through Sec.  412.541 with no 
adjustment under this section.
* * * * *
    (d) * * *
    (1) Subject to paragraphs (g) and (h) of this section, in the case 
of a long-term care hospital or satellite facility that is located in a 
rural area as defined in Sec.  412.64(b)(1)(ii)(C) and is co-located 
with another hospital for any cost reporting period beginning on or 
after October 1, 2004 in which the long-term care hospital or satellite 
facility has a discharged Medicare inpatient population of whom more 
than 50 percent were admitted to the long-term care hospital or 
satellite facility from the co-located hospital, payments for the 
patients who are admitted from the co-located hospital and who cause 
the long-term care hospital or satellite facility to exceed the 50 
percent threshold for discharged patients who were admitted from the 
co-located hospital are the lesser of the amount otherwise payable 
under this subpart or the amount payable under this subpart that is 
equivalent, as set forth in paragraph (f) of this section, to the 
amount that were otherwise payable under subpart A, Sec.  412.1(a). 
Payments for the remainder of the long-term care hospital's or 
satellite facility's patients are made under the rules in this subpart 
at Sec.  412.500 through Sec.  412.541 with no adjustment under this 
section.
* * * * *
    (e) Special treatment of urban single or MSA dominant hospitals. 
(1) Subject to paragraphs (g) and (h) of this section, in the case of a 
long-term care hospital or satellite facility that is co-located with 
the only other hospital in the MSA or with a MSA dominant hospital as 
defined in paragraph (e)(4) of this section, for any cost reporting 
period beginning on or after October 1, 2004 in which the long-term 
care hospital or satellite facility has a discharged Medicare inpatient 
population of whom more than the percentage calculated under paragraph 
(e)(2) of this section

[[Page 26993]]

were admitted to the hospital from the co-located hospital, payments 
for the patients who are admitted from the co-located hospital and who 
cause the long-term care hospital to exceed the applicable threshold 
for discharged patients who have been admitted from the co-located 
hospital are the lesser of the amount otherwise payable under this 
subpart or the amount under this subpart that is equivalent, as set 
forth in paragraph (f) of this section, to the amount that otherwise 
would be determined under Subpart A, Sec.  412.1(a). Payments for the 
remainder of the long-term care hospital's or satellite facility's 
patients are made under the rules in this subpart with no adjustment 
under this section.
* * * * *
    (g) Transition period for long-term care hospitals and satellite 
facilities paid under this subpart. Except as specified in paragraph 
(h)(2), in the case of a long-term care hospital or a satellite 
facility that is paid under the provisions of this subpart on October 
1, 2004 or of a hospital that is paid under the provisions of this 
subpart and whose qualifying period under Sec.  412.23(e) began on or 
before October 1, 2004, the amount paid is calculated as specified 
below:
* * * * *
    (h) Effective date of policies in this section for certain co-
located LTCH hospitals and satellites of LTCHs.
    (1) The policies set forth in this section apply to Medicare 
patient discharges that were admitted from a hospital located in the 
same building or on the same campus as a long-term care hospital 
described in Sec.  412.23(e)(2)(i) that meets the criteria in Sec.  
412.22(f) and a satellite facility of a long-term care hospital as 
described at Sec.  412.22(h)(3)(i) for discharges occurring in cost 
reporting periods beginning on or after July 1, 2007.
    (2) In the case of a long-term care hospital or satellite of a 
long-term care hospital that is described under paragraph (h)(1), the 
thresholds applied at (c), (d), and (e) will not be less than the 
percentages specified below:
    (i) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2008, the lesser of 75 percent of the total number 
of Medicare discharges that were admitted to the long-term care 
hospital or satellite from its co-located hospital during the cost 
reporting period or the percentage of Medicare discharges that had been 
admitted to the long-term care hospital or satellite from that co-
located hospital during the long-term care hospital's or satellite's RY 
2005 cost reporting period.
    (ii) For cost reporting periods beginning on or after July 1, 2008 
and before July 1, 2009, the lesser of 50 percent of the total number 
of Medicare discharges that were admitted to the LTCH or the satellite 
of an LTCH from its co-located hospital or the percentage of Medicare 
discharges that had been admitted from that co-located hospital during 
the long-term care hospital's or satellite's RY 2005 cost reporting 
period.
    (iii) For cost reporting periods beginning on or after July 1, 
2009, 25 percent of the total number of Medicare discharges that were 
admitted to the long-term care hospital or satellite from its co-
located hospital during the cost reporting period.
    (3) In determining the percentage of Medicare discharges admitted 
from the co-located hospital under this paragraph, patients on whose 
behalf a Medicare high cost outlier payment was made at the co-located 
referring hospital are not counted toward this threshold.
    (4) For cost reporting periods beginning on or after July 1, 2007, 
payments to long term care hospitals described in Sec.  412.23(e)(2)(i) 
that meet the criteria in Sec.  412.22(f) and satellite facilities of 
long-term care hospitals described at Sec.  412.22(h)(3)(i) are subject 
to the provisions of Sec.  412.536 for discharges of Medicare patients 
who are admitted from a hospital not located in the same building or on 
the same campus as the LTCH or LTCH satellite facility.


0
8. Section 412.536 is added to read as follows:


Sec.  412.536  Special payment provisions for long-term care hospitals 
and satellites of long-term care hospitals that discharged Medicare 
patients admitted from a hospital not located in the same building or 
on the same campus as the long-term care hospital or satellite of the 
long-term care hospital.

    (a) Scope. For cost reporting periods beginning on or after July 1, 
2007, the policies set forth in this section apply to discharges from 
long-term care hospitals as described in Sec.  412.23(e)(2)(i) and 
satellite facilities of long-term care hospitals described in Sec.  
412.22(h), including satellite facilities of long-term care hospitals 
described in (h)(3)(i) but excluding satellite facilities described in 
(h)(3)(ii).
    (b) For cost reporting periods beginning on or after July 1, 2007, 
payments for discharges of Medicare patients admitted from a hospital 
not located in the same building or on the same campus as the long-term 
care hospital or long-term care hospital satellite facility will be 
made under either paragraph (b)(1) or paragraph (b)(2) of this section.
    (1) Except as provided in paragraphs (c), (d) and subject to 
paragraph (f) of this section, for any cost reporting period beginning 
on or after July 1, 2007 in which a long-term care hospital or a long-
term care hospital satellite facility has a discharged Medicare 
inpatient population of whom no more than 25 percent were admitted to 
the long-term care hospital or the satellite facility from any 
individual hospital not co-located with the long-term care hospital or 
with the satellite of a long-term care hospital, payments for the 
Medicare discharges admitted from that hospital are made under the 
rules at Sec.  412.500 through Sec.  412.541 in this subpart with no 
adjustment under this section.
    (2) Except as provided in paragraph (c) and (d) and subject to 
paragraph (f) of this section, for any cost reporting period beginning 
on or after July 1, 2007 in which a long-term care hospital or long-
term care hospital satellite facility has a discharged Medicare 
inpatient population of whom more than 25 percent were admitted to the 
long-term care hospital or satellite facility from any individual 
hospital not co-located with the long-term care hospital or with the 
satellite of a long-term care hospital, payment for the Medicare 
discharges who cause the long-term care hospital or satellite facility 
to exceed the 25 percent threshold for discharged patients who have 
been admitted from that referring hospital is the lesser of the amount 
otherwise payable under this subpart or the amount payable under this 
subpart that is equivalent, as set forth in paragraph (e) of this 
section, to the amount that would be determined under the rules at 
subpart A, Sec.  412.1(a). Payments for the remainder of the long-term 
care hospital's or satellite facility's patients admitted from that 
referring hospital are made under the rules in this subpart at Sec.  
412.500 through Sec.  412.541 with no adjustment under this section.
    (3) In determining the percentage of Medicare discharges admitted 
to the long-term care hospital or long-term care hospital satellite 
facility from any referring hospital not co-located with the long-term 
care hospital or with the satellite of a long-term care hospital, under 
paragraphs (b)(1) and (b)(2) of this section, patients on whose behalf 
a Medicare high cost outlier payment was made to the referring hospital 
are not counted towards the 25 percent threshold from that referring 
hospital.
    (c) Special treatment of rural hospitals. (1) Subject to paragraph 
(f) of this section, in the case of a long-term care hospital or long-
term care hospital satellite facility that is located in a rural

[[Page 26994]]

area as defined in Sec.  412.64(b)(1)(ii)(C) that has a discharged 
Medicare inpatient population of whom more than 50 percent were 
admitted to the long-term care hospital or long-term care hospital 
satellite facility from a hospital not co-located with the long-term 
care hospital or with the satellite of a long-term car hospital, 
payment for the Medicare discharges who are admitted from that hospital 
and who cause the long-term care hospital or satellite facility to 
exceed the 50 percent threshold for Medicare discharges is determined 
at the lesser of the amount otherwise payable under this subpart or the 
amount payable under this subpart that is equivalent, as set forth in 
paragraph (e) of this section, to the amount that is otherwise payable 
under subpart A, Sec.  412.1(a). Payments for the remainder of the 
long-term care hospital's or long-term care hospital satellite 
facility's Medicare discharges admitted from that referring hospital 
are made under the rules in this subpart at Sec.  412.500 through Sec.  
412.541 with no adjustment under this section.
    (2) In determining the percentage of Medicare discharges admitted 
from the referring hospital under paragraph (c)(1) of this section, 
patients on whose behalf a Medicare high cost outlier payment was made 
at the referring hospital are not counted toward the 50 percent 
threshold.
    (d) Special treatment of urban single or MSA dominant hospitals. 
(1) Subject to paragraph (f) of this section, in the case of a long-
term care hospital or long-term care hospital satellite facility that 
admits Medicare patients from the only other hospital in the MSA or 
from a referring MSA dominant hospital as defined in paragraph (d)(4) 
of this section, that are not co-located with the long-term care 
hospital or with the satellite of a long-term care hospital for any 
cost reporting period beginning on or after July 1, 2007, in which the 
long-term care hospital or satellite facility has a discharged Medicare 
inpatient population of whom more than the percentage calculated under 
paragraph (d)(2) of this section were admitted to the hospital from the 
single or MSA-dominant referring hospital, payment for the Medicare 
discharges who are admitted from the referring hospital and who cause 
the long-term care hospital or long-term care hospital satellite 
facility to exceed the applicable threshold for Medicare discharges who 
have been admitted from the referring hospital is the lesser of the 
amount otherwise payable under this subpart or the amount under this 
subpart that is equivalent, as set forth in paragraph (e) of this 
section, to the amount that otherwise would be determined under Subpart 
A, Sec.  412.1(a). Payments for the remainder of the long-term care 
hospital's or satellite facility's Medicare discharges admitted from 
that referring hospital are made under the rules in this subpart at 
Sec.  412.500 through Sec.  412.541 with no adjustment under this 
section.
    (2) For purposes of paragraph (d)(1) of this section, the 
percentage threshold is equal to the percentage of total Medicare 
discharges in the Metropolitan Statistical Area (MSA) in which the 
hospital is located that are from the referring hospital, but in no 
case is less than 25 percent or more than 50 percent.
    (3) In determining the percentage of patients admitted from the 
referring hospital under paragraph (d)(1) of this section, patients on 
whose behalf a Medicare outlier payment was made at the referring 
hospital are not counted toward the applicable threshold.
    (4) For purposes of this paragraph, an ``MSA-dominant hospital'' is 
a hospital that has discharged more than 25 percent of the total 
hospital Medicare discharges in the MSA in which the hospital is 
located.
    (e) Calculation of adjusted payment--(1) Calculation of adjusted 
long-term care hospital prospective payment system amount. CMS 
calculates an amount payable under subpart O equivalent to an amount 
that would otherwise be paid under the hospital inpatient prospective 
payment system at Subpart A, Sec.  412.1(a). The amount is based on the 
sum of the applicable hospital inpatient prospective payment system 
operating standardized amount and capital Federal rate in effect at the 
time of the long-term care hospital discharge.
    (2) Operating inpatient prospective payment system standardized 
amount. The hospital inpatient prospective payment system operating 
standardized amount--
    (i) Is adjusted for the applicable hospital inpatient prospective 
payment system DRG weighting factors;
    (ii) Is adjusted for different area wage levels based on the 
geographic classifications set forth at Sec.  412.64(b)(1)(ii)(A) 
through (C) and the applicable hospital inpatient prospective payment 
system labor-related share, using the applicable hospital inpatient 
prospective payment system wage index value for non-reclassified 
hospitals. For long-term care hospitals located in Alaska and Hawaii, 
this amount is also adjusted by the applicable hospital inpatient 
prospective payment system cost of living adjustment factors;
    (iii) Includes, where applicable, adjustments for indirect medical 
education costs and for the costs of serving a disproportionate share 
of low-income patients.
    (3) Hospital inpatient prospective payment system capital Federal 
rate. The hospital inpatient prospective payment system capital Federal 
rate--
    (i) Is adjusted for the applicable hospital inpatient prospective 
payment system DRG weighting factors;
    (ii) Is adjusted by the applicable geographic adjustment factors, 
including local cost variation based on the applicable geographic 
classifications set forth at Sec.  412.64(b)(1)(ii)(A) through (C) and 
the applicable full hospital inpatient prospective payment system wage 
index value for non-reclassified hospitals, applicable large urban 
location and cost of living adjustment factors for long-term care 
hospitals for Alaska and Hawaii, if applicable;
    (iii) Includes, where applicable, capital inpatient prospective 
payment system adjustments for indirect medical education costs and the 
costs of serving a disproportionate share of low-income patients.
    (4) High cost outlier. An additional payment for high cost outlier 
cases is based on the applicable fixed loss amount established for the 
hospital inpatient prospective payment system.
    (f) Transition period for long-term care hospitals and satellites 
paid under this section. In the case of a long-term care hospital or 
satellite of a long-term care hospital that is paid under the 
provisions of this section, the thresholds applied under paragraphs 
(b), (c) and (d) of this section will not be less than the percentages 
specified below:
    (1) For cost reporting periods beginning on or after July 1, 2007 
and before July 1, 2008, the lesser of 75 percent of the total number 
of Medicare discharges that were admitted to the long-term care 
hospital or satellite facility of a long-term care hospital from all 
referring hospitals not co-located with the long-term care hospital or 
with the satellite facility of a long-term care hospital during the 
cost reporting period or the percentage of Medicare discharges that had 
been admitted to the long-term care hospital or satellite of a long-
term care hospital from that referring hospital during the long-term 
care hospital's or satellite's RY 2005 cost reporting period.
    (2) For cost reporting periods beginning on or after July 1, 2008 
and before July 1, 2009, the lesser of 50 percent of the total number 
of Medicare discharges that were admitted to the long-term care 
hospital or to the satellite facility of a long-term care hospital from

[[Page 26995]]

all referring hospitals not co-located with the long-term care hospital 
or with the satellite facility of a long-term care hospital during the 
cost reporting period or the percentage of Medicare discharges that had 
been admitted from that referring hospital during the long-term care 
hospital's or satellite's RY 2005 cost reporting period.
    (3) For cost reporting periods beginning on or after July 1, 2009, 
25 percent of the total number of Medicare discharges that were 
admitted to the long-term care hospital or to the satellite facility of 
a long-term care hospital from all referring hospitals not co-located 
with the long-term care hospital or with the satellite facility of a 
long-term care hospital to the long-term care hospital during the cost 
reporting period.
    (4) In determining the percentage of Medicare discharges admitted 
from the referring hospital under this paragraph, patients on whose 
behalf a Medicare high cost outlier payment was made at the referring 
hospital are not counted toward this threshold.

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

0
9. The authority citation for part 413 continues to read as follows:

    Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and 
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act 
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n), 
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of Pub. 
L. 106-133 (113 Stat. 1501A-332).

Subpart F--Specific Categories of Costs

0
10. Section 413.75(b) is amended by revising the definition ``all or 
substantially all of the costs for the training program in the 
nonhospital setting'' to read as follows:


Sec.  413.75  Direct GME payments: General requirements.

* * * * *
    (b) * * *
* * * * *
    All or substantially all of the costs for the training program in 
the nonhospital setting means--
    (1) Effective on or after January 1, 1999 and for cost reporting 
periods beginning before July 1, 2007, 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); and
    (2) Effective for cost reporting periods beginning on or after July 
1, 2007, at least 90 percent of the total of the costs of the 
residents' salaries and fringe benefits (including travel and lodging 
where applicable) and the portion of the cost of teaching physicians' 
salaries attributable to nonpatient care direct GME activities.
* * * * *

0
11. Section 413.78 is amended by--
0
A. Revising the introductory text of paragraph (e).
0
B. Adding new paragraph (f).
    The revision and addition read as follows:


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

* * * * *
    (e) For portions of cost reporting periods occurring on or after 
October 1, 2004, and for cost reporting periods beginning before July 
1, 2007, 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:
* * * * *
    (f) For cost reporting periods beginning on or after July 1, 2007, 
the time residents spend in non-provider 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 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 
for the training program in the nonhospital setting(s) (in accordance 
with the definition under Sec.  413.75(b)).
    (3) The hospital must comply with one of the following:
    (i) The hospital must pay for all or substantially all of the costs 
for the training program in a nonhospital setting(s) attributable to 
training that occurs during a month by the end of the third month 
following the month in which the training in the nonhospital site 
occurred; or
    (ii) There is a written agreement in place between the hospital and 
the nonhospital site before the training begins that states that the 
hospital will incur at least 90 percent of the total of the costs of 
the resident's salary and fringe benefits (and travel and lodging where 
applicable) while the resident is training in the nonhospital site and 
the portion of the cost of the teaching physician's salary attributable 
to nonpatient care direct GME activities. The written agreement must 
specify the total cost of the training program at the nonhospital site, 
and the amount the hospital will incur (at least 90 percent of the 
total), and must indicate the portion of the amount the hospital will 
incur that reflects residents' salaries and fringe benefits (and travel 
and lodging where applicable), and the portion of this amount that 
reflects teaching physician compensation. Hospitals may modify the 
amounts specified in the written agreement by the end of the academic 
year (that is, June 30) to reflect that at least 90 percent of the 
costs of the training program in the nonhospital site has been 
incurred.
    (4) The hospital is subject to the principles of community support 
and redistribution of costs as specified in Sec.  413.81.

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

    Dated: April 24, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.

    Approved: April 30, 2007.
Michael O. Leavitt,
Secretary.

    The following addenda will not appear in the Code of Federal 
Regulations.

Addendum

    Addendum A contains the tables referred to throughout the preamble 
to this final rule. The tables presented below are as follows:
    Table 1: Long-Term Care Hospital Wage Index for Urban Areas for 
Discharges Occurring from July 1, 2007 through June 30, 2008.
    Table 2: Long-Term Care Hospital Wage Index for Rural Areas for 
Discharges Occurring from July 1, 2007 through June 30, 2008.
    Table 3: FY 2007 LTC-DRG Relative Weights, Geometric Average Length 
of Stay, and Five-sixths of the Geometric Average Length of Stay (for 
Short-Stay Outlier Cases) (effective for discharges occurring on or 
after October 1, 2006 through September 30, 2007), and the IPPS Average 
Length of Stay plus one Standard Deviation (for the Short-Stay Outlier 
policy). (Note: The first four

[[Page 26996]]

columns of this table are the same information provided in Table 11 of 
the FY 2007 IPPS final rule (71 FR 48321 through 48331), which has been 
reprinted here for convenience. The fifth column of this table was 
added to provide information on the revision to the short-stay outlier 
policy, discussed in section VI.A.2. of the preamble of this final 
rule.)

    Table 1.--Long-Term Care Hospital Wage Index for Urban Areas for
    Discharges Occurring From July 1, 2007 Through June 30, 2008 \1\
------------------------------------------------------------------------
                                                                 4/5ths
      CBSA code          Urban area (constituent    Full wage     wage
                                counties)           index \2\  index \3\
------------------------------------------------------------------------
10180................  Abilene, TX................     0.8000     0.8400
                        Callahan County, TX.......
                        Jones County, TX..........
                        Taylor County, TX.........
10380................  Aguadilla-Isabela-San           0.3915     0.5132
                        Sebasti[aacute]n, PR.
                        Aguada Municipio, PR......
                        Aguadilla Municipio, PR...
                        A[ntilde]asco Municipio,
                        PR.
                        Isabela Municipio, PR.....
                        Lares Municipio, PR.......
                        Moca Municipio, PR........
                        Rinc[oacute]n Municipio,
                        PR.
                        San Sebasti[aacute]n
                        Municipio, PR.
10420................  Akron, OH..................     0.8654     0.8923
                        Portage County, OH........
                        Summit County, OH.........
10500................  Albany, GA.................     0.8991     0.9193
                        Baker County, GA..........
                        Dougherty County, GA......
                        Lee County, GA............
                        Terrell County, GA........
                        Worth County, GA..........
10580................  Albany-Schenectady-Troy, NY     0.8720     0.8976
                        Albany County, NY.........
                        Rensselaer County, NY.....
                        Saratoga County, NY.......
                        Schenectady County, NY....
                        Schoharie County, NY......
10740................  Albuquerque, NM............     0.9458     0.9566
                        Bernalillo County, NM.....
                        Sandoval County, NM.......
                        Torrance County, NM.......
                        Valencia County, NM.......
10780................  Alexandria, LA.............     0.8006     0.8405
                        Grant Parish, LA..........
                        Rapides Parish, LA........
10900................  Allentown-Bethlehem-Easton,     0.9947     0.9958
                        PA-NJ.
                        Warren County, NJ.........
                        Carbon County, PA.........
                        Lehigh County, PA.........
                        Northampton County, PA....
11020................  Altoona, PA................     0.8812     0.9050
                        Blair County, PA..........
11100................  Amarillo, TX...............     0.9169     0.9335
                        Armstrong County, TX......
                        Carson County, TX.........
                        Potter County, TX.........
                        Randall County, TX........
11180................  Ames, IA...................     0.9760     0.9808
                        Story County, IA..........
11260................  Anchorage, AK..............     1.2023     1.1618
                        Anchorage Municipality, AK
                        Matanuska-Susitna Borough,
                        AK.
11300................  Anderson, IN...............     0.8681     0.8945
                        Madison County, IN........
11340................  Anderson, SC...............     0.9017     0.9214
                        Anderson County, SC.......
11460................  Ann Arbor, MI..............     1.0826     1.0661
                        Washtenaw County, MI......
11500................  Anniston-Oxford, AL........     0.7770     0.8216
                        Calhoun County, AL........
11540................  Appleton, WI...............     0.9455     0.9564
                        Calumet County, WI........
                        Outagamie County, WI......

[[Page 26997]]

 
11700................  Asheville, NC..............     0.9216     0.9373
                        Buncombe County, NC.......
                        Haywood County, NC........
                        Henderson County, NC......
                        Madison County, NC........
12020................  Athens-Clarke County, GA...     0.9856     0.9885
                        Clarke County, GA.........
                        Madison County, GA........
                        Oconee County, GA.........
                        Oglethorpe County, GA.....
12060................  Atlanta-Sandy Springs-          0.9762     0.9810
                        Marietta, GA.
                        Barrow County, GA.........
                        Bartow County, GA.........
                        Butts County, GA..........
                        Carroll County, GA........
                        Cherokee County, GA.......
                        Clayton County, GA........
                        Cobb County, GA...........
                        Coweta County, GA.........
                        Dawson County, GA.........
                        DeKalb County, GA.........
                        Douglas County, GA........
                        Fayette County, GA........
                        Forsyth County, GA........
                        Fulton County, GA.........
                        Gwinnett County, GA.......
                        Haralson County, GA.......
                        Heard County, GA..........
                        Henry County, GA..........
                        Jasper County, GA.........
                        Lamar County, GA..........
                        Meriwether County, GA.....
                        Newton County, GA.........
                        Paulding County, GA.......
                        Pickens County, GA........
                        Pike County, GA...........
                        Rockdale County, GA.......
                        Spalding County, GA.......
                        Walton County, GA.........
12100................  Atlantic City, NJ..........     1.1831     1.1465
                        Atlantic County, NJ.......
12220................  Auburn-Opelika, AL.........     0.8096     0.8477
                        Lee County, AL............
12260................  Augusta-Richmond County, GA-    0.9667     0.9734
                        SC.
                        Burke County, GA..........
                        Columbia County, GA.......
                        McDuffie County, GA.......
                        Richmond County, GA.......
                        Aiken County, SC..........
                        Edgefield County, SC......
12420................  Austin-Round Rock, TX......     0.9344     0.9475
                        Bastrop County, TX........
                        Caldwell County, TX.......
                        Hays County, TX...........
                        Travis County, TX.........
                        Williamson County, TX.....
12540................  Bakersfield, CA............     1.0725     1.0580
                        Kern County, CA...........
12580................  Baltimore-Towson, MD.......     1.0088     1.0070
                        Anne Arundel County, MD...
                        Baltimore County, MD......
                        Carroll County, MD........
                        Harford County, MD........
                        Howard County, MD.........
                        Queen Anne's County, MD...
                        Baltimore City, MD........
12620................  Bangor, ME.................     0.9711     0.9769
                        Penobscot County, ME......
12700................  Barnstable Town, MA........     1.2539     1.2031

[[Page 26998]]

 
                        Barnstable County, MA.....
12940................  Baton Rouge, LA............     0.8084     0.8467
                        Ascension Parish, LA......
                        East Baton Rouge Parish,
                        LA.
                        East Feliciana Parish, LA.
                        Iberville Parish, LA......
                        Livingston Parish, LA.....
                        Pointe Coupee Parish, LA..
                        St. Helena Parish, LA.....
                        West Baton Rouge Parish,
                        LA.
                        West Feliciana Parish, LA.
12980................  Battle Creek, MI...........     0.9762     0.9810
                        Calhoun County, MI........
13020................  Bay City, MI...............     0.9251     0.9401
                        Bay County, MI............
13140................  Beaumont-Port Arthur, TX...     0.8595     0.8876
                        Hardin County, TX.........
                        Jefferson County, TX......
                        Orange County, TX.........
13380................  Bellingham, WA.............     1.1104     1.0883
                        Whatcom County, WA........
13460................  Bend, OR...................     1.0743     1.0594
                        Deschutes County, OR......
13644................  Bethesda-Gaithersburg-          1.0903     1.0722
                        Frederick, MD.
                        Frederick County, MD......
                        Montgomery County, MD.....
13740................  Billings, MT...............     0.8712     0.8970
                        Carbon County, MT.........
                        Yellowstone County, MT....
13780................  Binghamton, NY.............     0.8786     0.9029
                        Broome County, NY.........
                        Tioga County, NY..........
13820................  Birmingham-Hoover, AL......     0.8894     0.9115
                        Bibb County, AL...........
                        Blount County, AL.........
                        Chilton County, AL........
                        Jefferson County, AL......
                        St. Clair County, AL......
                        Shelby County, AL.........
                        Walker County, AL.........
13900................  Bismarck, ND...............     0.7240     0.7792
                        Burleigh County, ND.......
                        Morton County, ND.........
13980................  Blacksburg-Christiansburg-      0.8213     0.8570
                        Radford, VA.
                        Giles County, VA..........
                        Montgomery County, VA.....
                        Pulaski County, VA........
                        Radford City, VA..........
14020................  Bloomington, IN............     0.8533     0.8826
                        Greene County, IN.........
                        Monroe County, IN.........
                        Owen County, IN...........
14060................  Bloomington-Normal, IL.....     0.8944     0.9155
                        McLean County, IL.........
14260................  Boise City-Nampa, ID.......     0.9401     0.9521
                        Ada County, ID............
                        Boise County, ID..........
                        Canyon County, ID.........
                        Gem County, ID............
                        Owyhee County, ID.........
14484................  Boston-Quincy, MA..........     1.1679     1.1343
                        Norfolk County, MA........
                        Plymouth County, MA.......
                        Suffolk County, MA........
14500................  Boulder, CO................     1.0350     1.0280
                        Boulder County, CO........
14540................  Bowling Green, KY..........     0.8148     0.8518
                        Edmonson County, KY.......
                        Warren County, KY.........

[[Page 26999]]

 
14740................  Bremerton-Silverdale, WA...     1.0913     1.0730
                        Kitsap County, WA.........
14860................  Bridgeport-Stamford-            1.2659     1.2127
                        Norwalk, CT.
                        Fairfield County, CT......
15180................  Brownsville-Harlingen, TX..     0.9430     0.9544
                        Cameron County, TX........
15260................  Brunswick, GA..............     1.0164     1.0131
                        Brantley County, GA.......
                        Glynn County, GA..........
                        McIntosh County, GA.......
15380................  Buffalo-Niagara Falls, NY..     0.9424     0.9539
                        Erie County, NY...........
                        Niagara County, NY........
15500................  Burlington, NC.............     0.8674     0.8939
                        Alamance County, NC.......
15540................  Burlington-South                0.9474     0.9579
                        Burlington, VT.
                        Chittenden County, VT.....
                        Franklin County, VT.......
                        Grand Isle County, VT.....
15764................  Cambridge-Newton-               1.0970     1.0776
                        Framingham, MA.
                        Middlesex County, MA......
15804................  Camden, NJ.................     1.0392     1.0314
                        Burlington County, NJ.....
                        Camden County, NJ.........
                        Gloucester County, NJ.....
15940................  Canton-Massillon, OH.......     0.9031     0.9225
                        Carroll County, OH........
                        Stark County, OH..........
15980................  Cape Coral-Fort Myers, FL..     0.9342     0.9474
                        Lee County, FL............
16180................  Carson City, NV............     1.0025     1.0020
                        Carson City, NV...........
16220................  Casper, WY.................     0.9145     0.9316
                        Natrona County, WY........
16300................  Cedar Rapids, IA...........     0.8888     0.9110
                        Benton County, IA.........
                        Jones County, IA..........
                        Linn County, IA...........
16580................  Champaign-Urbana, IL.......     0.9644     0.9715
                        Champaign County, IL......
                        Ford County, IL...........
                        Piatt County, IL..........
16620................  Charleston, WV.............     0.8542     0.8834
                        Boone County, WV..........
                        Clay County, WV...........
                        Kanawha County, WV........
                        Lincoln County, WV........
                        Putnam County, WV.........
16700................  Charleston-North                0.9145     0.9316
                        Charleston, SC.
                        Berkeley County, SC.......
                        Charleston County, SC.....
                        Dorchester County, SC.....
16740................  Charlotte-Gastonia-Concord,     0.9554     0.9643
                        NC-SC.
                        Anson County, NC..........
                        Cabarrus County, NC.......
                        Gaston County, NC.........
                        Mecklenburg County, NC....
                        Union County, NC..........
                        York County, SC...........
16820................  Charlottesville, VA........     1.0125     1.0100
                        Albemarle County, VA......
                        Fluvanna County, VA.......
                        Greene County, VA.........
                        Nelson County, VA.........
                        Charlottesville City, VA..
16860................  Chattanooga, TN-GA.........     0.8948     0.9158
                        Catoosa County, GA........
                        Dade County, GA...........
                        Walker County, GA.........

[[Page 27000]]

 
                        Hamilton County, TN.......
                        Marion County, TN.........
                        Sequatchie County, TN.....
16940................  Cheyenne, WY...............     0.9060     0.9248
                        Laramie County, WY........
16974................  Chicago-Naperville-Joliet,      1.0751     1.0601
                        IL.
                        Cook County, IL...........
                        DeKalb County, IL.........
                        DuPage County, IL.........
                        Grundy County, IL.........
                        Kane County, IL...........
                        Kendall County, IL........
                        McHenry County, IL........
                        Will County, IL...........
17020................  Chico, CA..................     1.1053     1.0842
                        Butte County, CA..........
17140................  Cincinnati-Middletown, OH-      0.9601     0.9681
                        KY-IN.
                        Dearborn County, IN.......
                        Franklin County, IN.......
                        Ohio County, IN...........
                        Boone County, KY..........
                        Bracken County, KY........
                        Campbell County, KY.......
                        Gallatin County, KY.......
                        Grant County, KY..........
                        Kenton County, KY.........
                        Pendleton County, KY......
                        Brown County, OH..........
                        Butler County, OH.........
                        Clermont County, OH.......
                        Hamilton County, OH.......
                        Warren County, OH.........
17300................  Clarksville, TN-KY.........     0.8436     0.8749
                        Christian County, KY......
                        Trigg County, KY..........
                        Montgomery County, TN.....
                        Stewart County, TN........
17420................  Cleveland, TN..............     0.8109     0.8487
                        Bradley County, TN........
                        Polk County, TN...........
17460................  Cleveland-Elyria-Mentor, OH     0.9400     0.9520
                        Cuyahoga County, OH.......
                        Geauga County, OH.........
                        Lake County, OH...........
                        Lorain County, OH.........
                        Medina County, OH.........
17660................  Coeur d'Alene, ID..........     0.9344     0.9475
                        Kootenai County, ID.......
17780................  College Station-Bryan, TX..     0.9045     0.9236
                        Brazos County, TX.........
                        Burleson County, TX.......
                        Robertson County, TX......
17820................  Colorado Springs, CO.......     0.9701     0.9761
                        El Paso County, CO........
                        Teller County, CO.........
17860................  Columbia, MO...............     0.8542     0.8834
                        Boone County, MO..........
                        Howard County, MO.........
17900................  Columbia, SC...............     0.8933     0.9146
                        Calhoun County, SC........
                        Fairfield County, SC......
                        Kershaw County, SC........
                        Lexington County, SC......
                        Richland County, SC.......
                        Saluda County, SC.........
17980................  Columbus, GA-AL............     0.8239     0.8591
                        Russell County, AL........
                        Chattahoochee County, GA..
                        Harris County, GA.........

[[Page 27001]]

 
                        Marion County, GA.........
                        Muscogee County, GA.......
18020................  Columbus, IN...............     0.9318     0.9454
                        Bartholomew County, IN....
18140................  Columbus, OH...............     1.0107     1.0086
                        Delaware County, OH.......
                        Fairfield County, OH......
                        Franklin County, OH.......
                        Licking County, OH........
                        Madison County, OH........
                        Morrow County, OH.........
                        Pickaway County, OH.......
                        Union County, OH..........
18580................  Corpus Christi, TX.........     0.8564     0.8851
                        Aransas County, TX........
                        Nueces County, TX.........
                        San Patricio County, TX...
18700................  Corvallis, OR..............     1.1546     1.1237
                        Benton County, OR.........
19060................  Cumberland, MD-WV..........     0.8446     0.8757
                        Allegany County, MD.......
                        Mineral County, WV........
19124................  Dallas-Plano-Irving, TX....     1.0075     1.0060
                        Collin County, TX.........
                        Dallas County, TX.........
                        Delta County, TX..........
                        Denton County, TX.........
                        Ellis County, TX..........
                        Hunt County, TX...........
                        Kaufman County, TX........
                        Rockwall County, TX.......
19140................  Dalton, GA.................     0.9093     0.9274
                        Murray County, GA.........
                        Whitfield County, GA......
19180................  Danville, IL...............     0.9266     0.9413
                        Vermilion County, IL......
19260................  Danville, VA...............     0.8451     0.8761
                        Pittsylvania County, VA...
                        Danville City, VA.........
19340................  Davenport-Moline-Rock           0.8846     0.9077
                        Island, IA-IL.
                        Henry County, IL..........
                        Mercer County, IL.........
                        Rock Island County, IL....
                        Scott County, IA..........
19380................  Dayton, OH.................     0.9037     0.9230
                        Greene County, OH.........
                        Miami County, OH..........
                        Montgomery County, OH.....
                        Preble County, OH.........
19460................  Decatur, AL................     0.8159     0.8527
                        Lawrence County, AL.......
                        Morgan County, AL.........
19500................  Decatur, IL................     0.8172     0.8538
                        Macon County, IL..........
19660................  Deltona-Daytona Beach-          0.9263     0.9410
                        Ormond Beach, FL.
                        Volusia County, FL........
19740................  Denver-Aurora, CO..........     1.0930     1.0744
                        Adams County, CO..........
                        Arapahoe County, CO.......
                        Broomfield County, CO.....
                        Clear Creek County, CO....
                        Denver County, CO.........
                        Douglas County, CO........
                        Elbert County, CO.........
                        Gilpin County, CO.........
                        Jefferson County, CO......
                        Park County, CO...........
19780................  Des Moines,-West Des            0.9214     0.9371
                        Moines, IA.
                        Dallas County, IA.........

[[Page 27002]]

 
                        Guthrie County, IA........
                        Madison County, IA........
                        Polk County, IA...........
                        Warren County, IA.........
19804................  Detroit-Livonia-Dearborn,       1.0281     1.0225
                        MI.
                        Wayne County, MI..........
20020................  Dothan, AL.................     0.7381     0.7905
                        Geneva County, AL.........
                        Henry County, AL..........
                        Houston County, AL........
20100................  Dover, DE..................     0.9847     0.9878
                        Kent County, DE...........
20220................  Dubuque, IA................     0.9133     0.9306
                        Dubuque County, IA........
20260................  Duluth, MN-WI..............     1.0042     1.0034
                        Carlton County, MN........
                        St. Louis County, MN......
                        Douglas County, WI........
20500................  Durham, NC.................     0.9826     0.9861
                        Chatham County, NC........
                        Durham County, NC.........
                        Orange County, NC.........
                        Person County, NC.........
20740................  Eau Claire, WI.............     0.9630     0.9704
                        Chippewa County, WI.......
                        Eau Claire County, WI.....
20764................  Edison, NJ.................     1.1190     1.0952
                        Middlesex County, NJ......
                        Monmouth County, NJ.......
                        Ocean County, NJ..........
                        Somerset County, NJ.......
20940................  El Centro, CA..............     0.9076     0.9261
                        Imperial County, CA.......
21060................  Elizabethtown, KY..........     0.8697     0.8958
                        Hardin County, KY.........
                        Larue County, KY..........
21140................  Elkhart-Goshen, IN.........     0.9426     0.9541
                        Elkhart County, IN........
21300................  Elmira, NY.................     0.8240     0.8592
                        Chemung County, NY........
21340................  El Paso, TX................     0.9053     0.9242
                        El Paso County, TX........
21500................  Erie, PA...................     0.8827     0.9062
                        Erie County, PA...........
21604................  Essex County, MA...........     1.0418     1.0334
                        Essex County, MA..........
21660................  Eugene-Springfield, OR.....     1.0876     1.0701
                        Lane County, OR...........
21780................  Evansville, IN-KY..........     0.9071     0.9257
                        Gibson County, IN.........
                        Posey County, IN..........
                        Vanderburgh County, IN....
                        Warrick County, IN........
                        Henderson County, KY......
                        Webster County, KY........
21820................  Fairbanks, AK..............     1.1059     1.0847
                        Fairbanks North Star
                        Borough, AK.
21940................  Fajardo, PR................     0.4036     0.5229
                        Ceiba Municipio, PR.......
                        Fajardo Municipio, PR.....
                        Luquillo Municipio, PR....
22020................  Fargo, ND-MN...............     0.8250     0.8600
                        Cass County, ND...........
                        Clay County, MN...........
22140................  Farmington, NM.............     0.8589     0.8871
                        San Juan County, NM.......
22180................  Fayetteville, NC...........     0.8945     0.9156
                        Cumberland County, NC.....
                        Hoke County, NC...........

[[Page 27003]]

 
22220................  Fayetteville-Springdale-        0.8865     0.9092
                        Rogers, AR-MO.
                        Benton County, AR.........
                        Madison County, AR........
                        Washington County, AR.....
                        McDonald County, MO.......
22380................  Flagstaff, AZ..............     1.1601     1.1281
                        Coconino County, AZ.......
22420................  Flint, MI..................     1.0969     1.0775
                        Genesee County, MI........
22500................  Florence, SC...............     0.8388     0.8710
                        Darlington County, SC.....
                        Florence County, SC.......
22520................  Florence-Muscle Shoals, AL.     0.7843     0.8274
                        Colbert County, AL........
                        Lauderdale County, AL.....
22540................  Fond du Lac, WI............     1.0063     1.0050
                        Fond du Lac County, WI....
22660................  Fort Collins-Loveland, CO..     0.9544     0.9635
                        Larimer County, CO........
22744................  Fort Lauderdale-Pompano         1.0133     1.0106
                        Beach-Deerfield Beach, FL.
                        Broward County, FL........
22900................  Fort Smith, AR-OK..........     0.7731     0.8185
                        Crawford County, AR.......
                        Franklin County, AR.......
                        Sebastian County, AR......
                        Le Flore County, OK.......
                        Sequoyah County, OK.......
23020................  Fort Walton Beach-Crestview-    0.8643     0.8914
                        Destin, FL.
                        Okaloosa County, FL.......
23060................  Fort Wayne, IN.............     0.9517     0.9614
                        Allen County, IN..........
                        Wells County, IN..........
                        Whitley County, IN........
23104................  Fort Worth-Arlington, TX...     0.9569     0.9655
                        Johnson County, TX........
                        Parker County, TX.........
                        Tarrant County, TX........
                        Wise County, TX...........
23420................  Fresno, CA.................     1.0943     1.0754
                        Fresno County, CA.........
23460................  Gadsden, AL................     0.8066     0.8453
                        Etowah County, AL.........
23540................  Gainesville, FL............     0.9277     0.9422
                        Alachua County, FL........
                        Gilchrist County, FL......
23580................  Gainesville, GA............     0.8958     0.9166
                        Hall County, GA...........
23844................  Gary, IN...................     0.9334     0.9467
                        Jasper County, IN.........
                        Lake County, IN...........
                        Newton County, IN.........
                        Porter County, IN.........
24020................  Glens Falls, NY............     0.8324     0.8659
                        Warren County, NY.........
                        Washington County, NY.....
24140................  Goldsboro, NC..............     0.9171     0.9337
                        Wayne County, NC..........
24220................  Grand Forks, ND-MN.........     0.7949     0.8359
                        Polk County, MN...........
                        Grand Forks County, ND....
24300................  Grand Junction, CO.........     0.9668     0.9734
                        Mesa County, CO...........
24340................  Grand Rapids-Wyoming, MI...     0.9455     0.9564
                        Barry County, MI..........
                        Ionia County, MI..........
                        Kent County, MI...........
                        Newaygo County, MI........
24500................  Great Falls, MT............     0.8598     0.8878
                        Cascade County, MT........

[[Page 27004]]

 
24540................  Greeley, CO................     0.9602     0.9682
                        Weld County, CO...........
24580................  Green Bay, WI..............     0.9787     0.9830
                        Brown County, WI..........
                        Kewaunee County, WI.......
                        Oconto County, WI.........
24660................  Greensboro-High Point, NC..     0.8866     0.9093
                        Guilford County, NC.......
                        Randolph County, NC.......
                        Rockingham County, NC.....
24780................  Greenville, NC.............     0.9432     0.9546
                        Greene County, NC.........
                        Pitt County, NC...........
24860................  Greenville, SC.............     0.9804     0.9843
                        Greenville County, SC.....
                        Laurens County, SC........
                        Pickens County, SC........
25020................  Guayama, PR................     0.3235     0.4588
                        Arroyo Municipio, PR......
                        Guayama Municipio, PR.....
                        Patillas Municipio, PR....
25060................  Gulfport-Biloxi, MS........     0.8915     0.9132
                        Hancock County, MS........
                        Harrison County, MS.......
                        Stone County, MS..........
25180................  Hagerstown-Martinsburg, MD-     0.9038     0.9230
                        WV.
                        Washington County, MD.....
                        Berkeley County, WV.......
                        Morgan County, WV.........
25260................  Hanford-Corcoran, CA.......     1.0282     1.0226
                        Kings County, CA..........
25420................  Harrisburg-Carlisle, PA....     0.9402     0.9522
                        Cumberland County, PA.....
                        Dauphin County, PA........
                        Perry County, PA..........
25500................  Harrisonburg, VA...........     0.9073     0.9258
                        Rockingham County, VA.....
                        Harrisonburg City, VA.....
25540................  Hartford-West Hartford-East     1.0894     1.0715
                        Hartford, CT.
                        Hartford County, CT.......
                        Litchfield County, CT.....
                        Middlesex County, CT......
                        Tolland County, CT........
25620................  Hattiesburg, MS............     0.7430     0.7944
                        Forrest County, MS........
                        Lamar County, MS..........
                        Perry County, MS..........
25860................  Hickory-Lenoir-Morganton,       0.9010     0.9208
                        NC.
                        Alexander County, NC......
                        Burke County, NC..........
                        Caldwell County, NC.......
                        Catawba County, NC........
26100................  Holland-Grand Haven, MI....     0.9163     0.9330
                        Ottawa County, MI.........
26180................  Honolulu, HI...............     1.1096     1.0877
                        Honolulu County, HI.......
26300................  Hot Springs, AR............     0.8782     0.9026
                        Garland County, AR........
26380................  Houma-Bayou Cane-Thibodaux,     0.8082     0.8466
                        LA.
                        Lafourche Parish, LA......
                        Terrebonne Parish, LA.....
26420................  Houston-Sugar Land-Baytown,     1.0008     1.0006
                        TX.
                        Austin County, TX.........
                        Brazoria County, TX.......
                        Chambers County, TX.......
                        Fort Bend County, TX......
                        Galveston County, TX......
                        Harris County, TX.........
                        Liberty County, TX........

[[Page 27005]]

 
                        Montgomery County, TX.....
                        San Jacinto County, TX....
                        Waller County, TX.........
26580................  Huntington-Ashland, WV-KY-      0.8997     0.9198
                        OH.
                        Boyd County, KY...........
                        Greenup County, KY........
                        Lawrence County, OH.......
                        Cabell County, WV.........
                        Wayne County, WV..........
26620................  Huntsville, AL.............     0.9007     0.9206
                        Limestone County, AL......
                        Madison County, AL........
26820................  Idaho Falls, ID............     0.9088     0.9270
                        Bonneville County, ID.....
                        Jefferson County, ID......
26900................  Indianapolis-Carmel, IN....     0.9895     0.9916
                        Boone County, IN..........
                        Brown County, IN..........
                        Hamilton County, IN.......
                        Hancock County, IN........
                        Hendricks County, IN......
                        Johnson County, IN........
                        Marion County, IN.........
                        Morgan County, IN.........
                        Putnam County, IN.........
                        Shelby County, IN.........
26980................  Iowa City, IA..............     0.9714     0.9771
                        Johnson County, IA........
                        Washington County, IA.....
27060................  Ithaca, NY.................     0.9928     0.9942
                        Tompkins County, NY.......
27100................  Jackson, MI................     0.9560     0.9648
                        Jackson County, MI........
27140................  Jackson, MS................     0.8271     0.8617
                        Copiah County, MS.........
                        Hinds County, MS..........
                        Madison County, MS........
                        Rankin County, MS.........
                        Simpson County, MS........
27180................  Jackson, TN................     0.8853     0.9082
                        Chester County, TN........
                        Madison County, TN........
27260................  Jacksonville, FL...........     0.9165     0.9332
                        Baker County, FL..........
                        Clay County, FL...........
                        Duval County, FL..........
                        Nassau County, FL.........
                        St. Johns County, FL......
27340................  Jacksonville, NC...........     0.8231     0.8585
                        Onslow County, NC.........
27500................  Janesville, WI.............     0.9655     0.9724
                        Rock County, WI...........
27620................  Jefferson City, MO.........     0.8332     0.8666
                        Callaway County, MO.......
                        Cole County, MO...........
                        Moniteau County, MO.......
                        Osage County, MO..........
27740................  Johnson City, TN...........     0.8043     0.8434
                        Carter County, TN.........
                        Unicoi County, TN.........
                        Washington County, TN.....
27780................  Johnstown, PA..............     0.8620     0.8896
                        Cambria County, PA........
27860................  Jonesboro, AR..............     0.7662     0.8130
                        Craighead County, AR......
                        Poinsett County, AR.......
27900................  Joplin, MO.................     0.8605     0.8884
                        Jasper County, MO.........
                        Newton County, MO.........

[[Page 27006]]

 
28020................  Kalamazoo-Portage, MI......     1.0704     1.0563
                        Kalamazoo County, MI......
                        Van Buren County, MI......
28100................  Kankakee-Bradley, IL.......     1.0083     1.0066
                        Kankakee County, IL.......
28140................  Kansas City, MO-KS.........     0.9495     0.9596
                        Franklin County, KS.......
                        Johnson County, KS........
                        Leavenworth County, KS....
                        Linn County, KS...........
                        Miami County, KS..........
                        Wyandotte County, KS......
                        Bates County, MO..........
                        Caldwell County, MO.......
                        Cass County, MO...........
                        Clay County, MO...........
                        Clinton County, MO........
                        Jackson County, MO........
                        Lafayette County, MO......
                        Platte County, MO.........
                        Ray County, MO............
28420................  Kennewick-Richland-Pasco,       1.0343     1.0274
                        WA.
                        Benton County, WA.........
                        Franklin County, WA.......
28660................  Killeen-Temple-Fort Hood,       0.8901     0.9121
                        TX.
                        Bell County, TX...........
                        Coryell County, TX........
                        Lampasas County, TX.......
28700................  Kingsport-Bristol-Bristol,      0.7985     0.8388
                        TN-VA.
                        Hawkins County, TN........
                        Sullivan County, TN.......
                        Bristol City, VA..........
                        Scott County, VA..........
                        Washington County, VA.....
28740................  Kingston, NY...............     0.9367     0.9494
                        Ulster County, NY.........
28940................  Knoxville, TN..............     0.8249     0.8599
                        Anderson County, TN.......
                        Blount County, TN.........
                        Knox County, TN...........
                        Loudon County, TN.........
                        Union County, TN..........
29020................  Kokomo, IN.................     0.9669     0.9735
                        Howard County, IN.........
                        Tipton County, IN.........
29100................  La Crosse, WI-MN...........     0.9426     0.9541
                        Houston County, MN........
                        La Crosse County, WI......
29140................  Lafayette, IN..............     0.8931     0.9145
                        Benton County, IN.........
                        Carroll County, IN........
                        Tippecanoe County, IN.....
29180................  Lafayette, LA..............     0.8289     0.8631
                        Lafayette Parish, LA......
                        St. Martin Parish, LA.....
29340................  Lake Charles, LA...........     0.7914     0.8331
                        Calcasieu Parish, LA......
                        Cameron Parish, LA........
29404................  Lake County-Kenosha County,     1.0570     1.0456
                        IL-WI.
                        Lake County, IL...........
                        Kenosha County, WI........
29460................  Lakeland, FL...............     0.8879     0.9103
                        Polk County, FL...........
29540................  Lancaster, PA..............     0.9589     0.9671
                        Lancaster County, PA......
29620................  Lansing-East Lansing, MI...     1.0088     1.0070
                        Clinton County, MI........
                        Eaton County, MI..........
                        Ingham County, MI.........

[[Page 27007]]

 
29700................  Laredo, TX.................     0.7811     0.8249
                        Webb County, TX...........
29740................  Las Cruces, NM.............     0.9273     0.9418
                        Dona Ana County, NM.......
29820................  Las Vegas-Paradise, NV.....     1.1430     1.1144
                        Clark County, NV..........
29940................  Lawrence, KS...............     0.8365     0.8692
                        Douglas County, KS........
30020................  Lawton, OK.................     0.8065     0.8452
                        Comanche County, OK.......
30140................  Lebanon, PA................     0.8679     0.8943
                        Lebanon County, PA........
30300................  Lewiston, ID-WA............     0.9853     0.9882
                        Nez Perce County, ID......
                        Asotin County, WA.........
30340................  Lewiston-Auburn, ME........     0.9126     0.9301
                        Androscoggin County, ME...
30460................  Lexington-Fayette, KY......     0.9181     0.9345
                        Bourbon County, KY........
                        Clark County, KY..........
                        Fayette County, KY........
                        Jessamine County, KY......
                        Scott County, KY..........
                        Woodford County, KY.......
30620................  Lima, OH...................     0.9042     0.9234
                        Allen County, OH..........
30700................  Lincoln, NE................     1.0092     1.0074
                        Lancaster County, NE......
                        Seward County, NE.........
30780................  Little Rock-North Little        0.8890     0.9112
                        Rock, AR.
                        Faulkner County, AR.......
                        Grant County, AR..........
                        Lonoke County, AR.........
                        Perry County, AR..........
                        Pulaski County, AR........
                        Saline County, AR.........
30860................  Logan, UT-ID...............     0.9022     0.9218
                        Franklin County, ID.......
                        Cache County, UT..........
30980................  Longview, TX...............     0.8788     0.9030
                        Gregg County, TX..........
                        Rusk County, TX...........
                        Upshur County, TX.........
31020................  Longview, WA...............     1.0011     1.0009
                        Cowlitz County, WA........
31084................  Los Angeles-Long Beach-         1.1760     1.1408
                        Glendale, CA.
                        Los Angeles County, CA....
31140................  Louisville-Jefferson            0.9118     0.9294
                        County, KY-IN.
                        Clark County, IN..........
                        Floyd County, IN..........
                        Harrison County, IN.......
                        Washington County, IN.....
                        Bullitt County, KY........
                        Henry County, KY..........
                        Jefferson County, KY......
                        Meade County, KY..........
                        Nelson County, KY.........
                        Oldham County, KY.........
                        Shelby County, KY.........
                        Spencer County, KY........
                        Trimble County, KY........
31180................  Lubbock, TX................     0.8613     0.8890
                        Crosby County, TX.........
                        Lubbock County, TX........
31340................  Lynchburg, VA..............     0.8694     0.8955
                        Amherst County, VA........
                        Appomattox County, VA.....
                        Bedford County, VA........
                        Campbell County, VA.......

[[Page 27008]]

 
                        Bedford City, VA..........
                        Lynchburg City, VA........
31420................  Macon, GA..................     0.9519     0.9615
                        Bibb County, GA...........
                        Crawford County, GA.......
                        Jones County, GA..........
                        Monroe County, GA.........
                        Twiggs County, GA.........
31460................  Madera, CA.................     0.8154     0.8523
                        Madera County, CA.........
31540................  Madison, WI................     1.0840     1.0672
                        Columbia County, WI.......
                        Dane County, WI...........
                        Iowa County, WI...........
31700................  Manchester-Nashua, NH......     1.0243     1.0194
                        Hillsborough County, NH...
                        Merrimack County, NH......
31900................  Mansfield, OH..............     0.9271     0.9417
                        Richland County, OH.......
32420................  Mayag[uuml]ez, PR..........     0.3848     0.5078
                        Hormigueros Municipio, PR.
                        Mayag[uuml]ez Municipio,
                        PR.
32580................  McAllen-Edinburg-Mission,       0.8773     0.9018
                        TX.
                        Hidalgo County, TX........
32780................  Medford, OR................     1.0818     1.0654
                        Jackson County, OR........
32820................  Memphis, TN-MS-AR..........     0.9373     0.9498
                        Crittenden County, AR.....
                        DeSoto County, MS.........
                        Marshall County, MS.......
                        Tate County, MS...........
                        Tunica County, MS.........
                        Fayette County, TN........
                        Shelby County, TN.........
                        Tipton County, TN.........
32900................  Merced, CA.................     1.1471     1.1177
                        Merced County, CA.........
33124................  Miami-Miami Beach-Kendall,      0.9812     0.9850
                        FL.
                        Miami-Dade County, FL.....
33140................  Michigan City-La Porte, IN.     0.9118     0.9294
                        LaPorte County, IN........
33260................  Midland, TX................     0.9786     0.9829
                        Midland County, TX........
33340................  Milwaukee-Waukesha-West         1.0218     1.0174
                        Allis, WI.
                        Milwaukee County, WI......
                        Ozaukee County, WI........
                        Washington County, WI.....
                        Waukesha County, WI.......
33460................  Minneapolis-St. Paul-           1.0946     1.0757
                        Bloomington, MN-WI.
                        Anoka County, MN..........
                        Carver County, MN.........
                        Chisago County, MN........
                        Dakota County, MN.........
                        Hennepin County, MN.......
                        Isanti County, MN.........
                        Ramsey County, MN.........
                        Scott County, MN..........
                        Sherburne County, MN......
                        Washington County, MN.....
                        Wright County, MN.........
                        Pierce County, WI.........
                        St. Croix County, WI......
33540................  Missoula, MT...............     0.8928     0.9142
                        Missoula County, MT.......
33660................  Mobile, AL.................     0.7913     0.8330
                        Mobile County, AL.........
33700................  Modesto, CA................     1.1729     1.1383
                        Stanislaus County, CA.....
33740................  Monroe, LA.................     0.7997     0.8398

[[Page 27009]]

 
                        Ouachita Parish, LA.......
                        Union Parish, LA..........
33780................  Monroe, MI.................     0.9707     0.9766
                        Monroe County, MI.........
33860................  Montgomery, AL.............     0.8009     0.8407
                        Autauga County, AL........
                        Elmore County, AL.........
                        Lowndes County, AL........
                        Montgomery County, AL.....
34060................  Morgantown, WV.............     0.8423     0.8738
                        Monongalia County, WV.....
                        Preston County, WV........
34100................  Morristown, TN.............     0.7933     0.8346
                        Grainger County, TN.......
                        Hamblen County, TN........
                        Jefferson County, TN......
34580................  Mount Vernon-Anacortes, WA.     1.0517     1.0414
                        Skagit County, WA.........
34620................  Muncie, IN.................     0.8562     0.8850
                        Delaware County, IN.......
34740................  Muskegon-Norton Shores, MI.     0.9941     0.9953
                        Muskegon County, MI.......
34820................  Myrtle Beach-Conway-North       0.8810     0.9048
                        Myrtle Beach, SC.
                        Horry County, SC..........
34900................  Napa, CA...................     1.3374     1.2699
                        Napa County, CA...........
34940................  Naples-Marco Island, FL....     0.9941     0.9953
                        Collier County, FL........
34980................  Nashville-Davidson--            0.9847     0.9878
                        Murfreesboro, TN.
                        Cannon County, TN.........
                        Cheatham County, TN.......
                        Davidson County, TN.......
                        Dickson County, TN........
                        Hickman County, TN........
                        Macon County, TN..........
                        Robertson County, TN......
                        Rutherford County, TN.....
                        Smith County, TN..........
                        Sumner County, TN.........
                        Trousdale County, TN......
                        Williamson County, TN.....
                        Wilson County, TN.........
35004................  Nassau-Suffolk, NY.........     1.2662     1.2130
                        Nassau County, NY.........
                        Suffolk County, NY........
35084................  Newark-Union, NJ-PA........     1.1892     1.1514
                        Essex County, NJ..........
                        Hunterdon County, NJ......
                        Morris County, NJ.........
                        Sussex County, NJ.........
                        Union County, NJ..........
                        Pike County, PA...........
35300................  New Haven-Milford, CT......     1.1953     1.1562
                        New Haven County, CT......
35380................  New Orleans-Metairie-           0.8831     0.9065
                        Kenner, LA.
                        Jefferson Parish, LA......
                        Orleans Parish, LA........
                        Plaquemines Parish, LA....
                        St. Bernard Parish, LA....
                        St. Charles Parish, LA....
                        St. John the Baptist
                        Parish, LA.
                        St. Tammany Parish, LA....
35644................  New York-White Plains-          1.3177     1.2542
                        Wayne, NY-NJ.
                        Bergen County, NJ.........
                        Hudson County, NJ.........
                        Passaic County, NJ........
                        Bronx County, NY..........
                        Kings County, NY..........
                        New York County, NY.......

[[Page 27010]]

 
                        Putnam County, NY.........
                        Queens County, NY.........
                        Richmond County, NY.......
                        Rockland County, NY.......
                        Westchester County, NY....
35660................  Niles-Benton Harbor, MI....     0.8915     0.9132
                        Berrien County, MI........
35980................  Norwich-New London, CT.....     1.1932     1.1546
                        New London County, CT.....
36084................  Oakland-Fremont-Hayward, CA     1.5819     1.4655
                        Alameda County, CA........
                        Contra Costa County, CA...
36100................  Ocala, FL..................     0.8867     0.9094
                        Marion County, FL.........
36140................  Ocean City, NJ.............     1.0472     1.0378
                        Cape May County, NJ.......
36220................  Odessa, TX.................     1.0073     1.0058
                        Ector County, TX..........
36260................  Ogden-Clearfield, UT.......     0.8995     0.9196
                        Davis County, UT..........
                        Morgan County, UT.........
                        Weber County, UT..........
36420................  Oklahoma City, OK..........     0.8843     0.9074
                        Canadian County, OK.......
                        Cleveland County, OK......
                        Grady County, OK..........
                        Lincoln County, OK........
                        Logan County, OK..........
                        McClain County, OK........
                        Oklahoma County, OK.......
36500................  Olympia, WA................     1.1081     1.0865
                        Thurston County, WA.......
36540................  Omaha-Council Bluffs, NE-IA     0.9450     0.9560
                        Harrison County, IA.......
                        Mills County, IA..........
                        Pottawattamie County, IA..
                        Cass County, NE...........
                        Douglas County, NE........
                        Sarpy County, NE..........
                        Saunders County, NE.......
                        Washington County, NE.....
36740................  Orlando-Kissimmee, FL......     0.9452     0.9562
                        Lake County, FL...........
                        Orange County, FL.........
                        Osceola County, FL........
                        Seminole County, FL.......
36780................  Oshkosh-Neenah, WI.........     0.9315     0.9452
                        Winnebago County, WI......
36980................  Owensboro, KY..............     0.8748     0.8998
                        Daviess County, KY........
                        Hancock County, KY........
                        McLean County, KY.........
37100................  Oxnard-Thousand Oaks-           1.1546     1.1237
                        Ventura, CA.
                        Ventura County, CA........
37340................  Palm Bay-Melbourne-             0.9443     0.9554
                        Titusville, FL.
                        Brevard County, FL........
37460................  Panama City-Lynn Haven, FL.     0.8027     0.8422
                        Bay County, FL............
37620................  Parkersburg-Marietta-           0.7977     0.8382
                        Vienna, WV-OH.
                        Washington County, OH.....
                        Pleasants County, WV......
                        Wirt County, WV...........
                        Wood County, WV...........
37700................  Pascagoula, MS.............     0.8215     0.8572
                        George County, MS.........
                        Jackson County, MS........
37860................  Pensacola-Ferry Pass-Brent,     0.8000     0.8400
                        FL.
                        Escambia County, FL.......
                        Santa Rosa County, FL.....

[[Page 27011]]

 
37900................  Peoria, IL.................     0.8982     0.9186
                        Marshall County, IL.......
                        Peoria County, IL.........
                        Stark County, IL..........
                        Tazewell County, IL.......
                        Woodford County, IL.......
37964................  Philadelphia, PA...........     1.0996     1.0797
                        Bucks County, PA..........
                        Chester County, PA........
                        Delaware County, PA.......
                        Montgomery County, PA.....
                        Philadelphia County, PA...
38060................  Phoenix-Mesa-Scottsdale, AZ     1.0287     1.0230
                        Maricopa County, AZ.......
                        Pinal County, AZ..........
38220................  Pine Bluff, AR.............     0.8383     0.8706
                        Cleveland County, AR......
                        Jefferson County, AR......
                        Lincoln County, AR........
38300................  Pittsburgh, PA.............     0.8674     0.8939
                        Allegheny County, PA......
                        Armstrong County, PA......
                        Beaver County, PA.........
                        Butler County, PA.........
                        Fayette County, PA........
                        Washington County, PA.....
                        Westmoreland County, PA...
38340................  Pittsfield, MA.............     1.0266     1.0213
                        Berkshire County, MA......
38540................  Pocatello, ID..............     0.9400     0.9520
                        Bannock County, ID........
                        Power County, ID..........
38660................  Ponce, PR..................     0.4842     0.5874
                        Juana D[iacute]az
                        Municipio, PR.
                        Ponce Municipio, PR.......
                        Villalba Municipio, PR....
38860................  Portland-South Portland-        0.9908     0.9926
                        Biddeford, ME.
                        Cumberland County, ME.....
                        Sagadahoc County, ME......
                        York County, ME...........
38900................  Portland-Vancouver-             1.1416     1.1133
                        Beaverton, OR-WA.
                        Clackamas County, OR......
                        Columbia County, OR.......
                        Multnomah County, OR......
                        Washington County, OR.....
                        Yamhill County, OR........
                        Clark County, WA..........
                        Skamania County, WA.......
38940................  Port St. Lucie-Fort Pierce,     0.9833     0.9866
                        FL.
                        Martin County, FL.........
                        St. Lucie County, FL......
39100................  Poughkeepsie-Newburgh-          1.0911     1.0729
                        Middletown, NY.
                        Dutchess County, NY.......
                        Orange County, NY.........
39140................  Prescott, AZ...............     0.9836     0.9869
                        Yavapai County, AZ........
39300................  Providence-New Bedford-Fall     1.0783     1.0626
                        River, RI-MA.
                        Bristol County, MA........
                        Bristol County, RI........
                        Kent County, RI...........
                        Newport County, RI........
                        Providence County, RI.....
                        Washington County, RI.....
39340................  Provo-Orem, UT.............     0.9537     0.9630
                        Juab County, UT...........
                        Utah County, UT...........
39380................  Pueblo, CO.................     0.8753     0.9002
                        Pueblo County, CO.........
39460................  Punta Gorda, FL............     0.9405     0.9524

[[Page 27012]]

 
                        Charlotte County, FL......
39540................  Racine, WI.................     0.9356     0.9485
                        Racine County, WI.........
39580................  Raleigh-Cary, NC...........     0.9864     0.9891
                        Franklin County, NC.......
                        Johnston County, NC.......
                        Wake County, NC...........
39660................  Rapid City, SD.............     0.8833     0.9066
                        Meade County, SD..........
                        Pennington County, SD.....
39740................  Reading, PA................     0.9622     0.9698
                        Berks County, PA..........
39820................  Redding, CA................     1.3198     1.2558
                        Shasta County, CA.........
39900................  Reno-Sparks, NV............     1.1963     1.1570
                        Storey County, NV.........
                        Washoe County, NV.........
40060................  Richmond, VA...............     0.9177     0.9342
                        Amelia County, VA.........
                        Caroline County, VA.......
                        Charles City County, VA...
                        Chesterfield County, VA...
                        Cumberland County, VA.....
                        Dinwiddie County, VA......
                        Goochland County, VA......
                        Hanover County, VA........
                        Henrico County, VA........
                        King and Queen County, VA.
                        King William County, VA...
                        Louisa County, VA.........
                        New Kent County, VA.......
                        Powhatan County, VA.......
                        Prince George County, VA..
                        Sussex County, VA.........
                        Colonial Heights City, VA.
                        Hopewell City, VA.........
                        Petersburg City, VA.......
                        Richmond City, VA.........
40140................  Riverside-San Bernardino-       1.0904     1.0723
                        Ontario, CA.
                        Riverside County, CA......
                        San Bernardino County, CA.
40220................  Roanoke, VA................     0.8647     0.8918
                        Botetourt County, VA......
                        Craig County, VA..........
                        Franklin County, VA.......
                        Roanoke County, VA........
                        Roanoke City, VA..........
                        Salem City, VA............
40340................  Rochester, MN..............     1.1408     1.1126
                        Dodge County, MN..........
                        Olmsted County, MN........
                        Wabasha County, MN........
40380................  Rochester, NY..............     0.8994     0.9195
                        Livingston County, NY.....
                        Monroe County, NY.........
                        Ontario County, NY........
                        Orleans County, NY........
                        Wayne County, NY..........
40420................  Rockford, IL...............     0.9989     0.9991
                        Boone County, IL..........
                        Winnebago County, IL......
40484................  Rockingham County-Strafford     1.0159     1.0127
                        County, NH.
                        Rockingham County, NH.....
                        Strafford County, NH......
40580................  Rocky Mount, NC............     0.8854     0.9083
                        Edgecombe County, NC......
                        Nash County, NC...........
40660................  Rome, GA...................     0.9193     0.9354
                        Floyd County, GA..........

[[Page 27013]]

 
40900................  Sacramento--Arden-Arcade--      1.3372     1.2698
                        Roseville, CA.
                        El Dorado County, CA......
                        Placer County, CA.........
                        Sacramento County, CA.....
                        Yolo County, CA...........
40980................  Saginaw-Saginaw Township        0.8874     0.9099
                        North, MI.
                        Saginaw County, MI........
41060................  St. Cloud, MN..............     1.0362     1.0290
                        Benton County, MN.........
                        Stearns County, MN........
41100................  St. George, UT.............     0.9265     0.9412
                        Washington County, UT.....
41140................  St. Joseph, MO-KS..........     1.0118     1.0094
                        Doniphan County, KS.......
                        Andrew County, MO.........
                        Buchanan County, MO.......
                        DeKalb County, MO.........
41180................  St. Louis, MO-IL...........     0.9005     0.9204
                        Bond County, IL...........
                        Calhoun County, IL........
                        Clinton County, IL........
                        Jersey County, IL.........
                        Macoupin County, IL.......
                        Madison County, IL........
                        Monroe County, IL.........
                        St. Clair County, IL......
                        Crawford County, MO.......
                        Franklin County, MO.......
                        Jefferson County, MO......
                        Lincoln County, MO........
                        St. Charles County, MO....
                        St. Louis County, MO......
                        Warren County, MO.........
                        Washington County, MO.....
                        St. Louis City, MO........
41420................  Salem, OR..................     1.0438     1.0350
                        Marion County, OR.........
                        Polk County, OR...........
41500................  Salinas, CA................     1.4337     1.3470
                        Monterey County, CA.......
41540................  Salisbury, MD..............     0.8953     0.9162
                        Somerset County, MD.......
                        Wicomico County, MD.......
41620................  Salt Lake City, UT.........     0.9402     0.9522
                        Salt Lake County, UT......
                        Summit County, UT.........
                        Tooele County, UT.........
41660................  San Angelo, TX.............     0.8362     0.8690
                        Irion County, TX..........
                        Tom Green County, TX......
41700................  San Antonio, TX............     0.8844     0.9075
                        Atascosa County, TX.......
                        Bandera County, TX........
                        Bexar County, TX..........
                        Comal County, TX..........
                        Guadalupe County, TX......
                        Kendall County, TX........
                        Medina County, TX.........
                        Wilson County, TX.........
41740................  San Diego-Carlsbad-San          1.1354     1.1083
                        Marcos, CA.
                        San Diego County, CA......
41780................  Sandusky, OH...............     0.9302     0.9442
                        Erie County, OH...........
41884................  San Francisco-San Mateo-        1.5165     1.4132
                        Redwood City, CA.
                        Marin County, CA..........
                        San Francisco County, CA..
                        San Mateo County, CA......
41900................  San Germ[aacute]n-Cabo          0.4885     0.5908
                        Rojo, PR.
                        Cabo Rojo Municipio, PR...

[[Page 27014]]

 
                        Lajas Municipio, PR.......
                        Sabana Grande Municipio,
                        PR.
                        San Germ[aacute]n
                        Municipio, PR.
41940................  San Jose-Sunnyvale-Santa        1.5543     1.4434
                        Clara, CA.
                        San Benito County, CA.....
                        Santa Clara County, CA....
41980................  San Juan-Caguas-Guaynabo,       0.4452     0.5562
                        PR.
                        Aguas Buenas Municipio, PR
                        Aibonito Municipio, PR....
                        Arecibo Municipio, PR.....
                        Barceloneta Municipio, PR.
                        Barranquitas Municipio, PR
                        Bayam[oacute]n Municipio,
                        PR.
                        Caguas Municipio, PR......
                        Camuy Municipio, PR.......
                        Can[oacute]vanas
                        Municipio, PR.
                        Carolina Municipio, PR....
                        Cata[ntilde]o Municipio,
                        PR.
                        Cayey Municipio, PR.......
                        Ciales Municipio, PR......
                        Cidra Municipio, PR.......
                        Comer[iacute]o Municipio,
                        PR.
                        Corozal Municipio, PR.....
                        Dorado Municipio, PR......
                        Florida Municipio, PR.....
                        Guaynabo Municipio, PR....
                        Gurabo Municipio, PR......
                        Hatillo Municipio, PR.....
                        Humacao Municipio, PR.....
                        Juncos Municipio, PR......
                        Las Piedras Municipio, PR.
                        Lo[iacute]za Municipio, PR
                        Manat[iacute] Municipio,
                        PR.
                        Maunabo Municipio, PR.....
                        Morovis Municipio, PR.....
                        Naguabo Municipio, PR.....
                        Naranjito Municipio, PR...
                        Orocovis Municipio, PR....
                        Quebradillas Municipio, PR
                        R[iacute]o Grande
                        Municipio, PR.
                        San Juan Municipio, PR....
                        San Lorenzo Municipio, PR.
                        Toa Alta Municipio, PR....
                        Toa Baja Municipio, PR....
                        Trujillo Alto Municipio,
                        PR.
                        Vega Alta Municipio, PR...
                        Vega Baja Municipio, PR...
                        Yabucoa Municipio, PR.....
42020................  San Luis Obispo-Paso            1.1598     1.1278
                        Robles, CA.
                        San Luis Obispo County, CA
42044................  Santa Ana-Anaheim-Irvine,       1.1473     1.1178
                        CA.
                        Orange County, CA.........
42060................  Santa Barbara-Santa Maria,      1.1091     1.0873
                        CA.
                        Santa Barbara County, CA..
42100................  Santa Cruz-Watsonville, CA.     1.5457     1.4366
                        Santa Cruz County, CA.....
42140................  Santa Fe, NM...............     1.0824     1.0659
                        Santa Fe County, NM.......
42220................  Santa Rosa-Petaluma, CA....     1.4464     1.3571
                        Sonoma County, CA.........
42260................  Sarasota-Bradenton-Venice,      0.9868     0.9894
                        FL.
                        Manatee County, FL........
                        Sarasota County, FL.......
42340................  Savannah, GA...............     0.9351     0.9481
                        Bryan County, GA..........
                        Chatham County, GA........
                        Effingham County, GA......
42540................  Scranton--Wilkes-Barre, PA.     0.8347     0.8678
                        Lackawanna County, PA.....

[[Page 27015]]

 
                        Luzerne County, PA........
                        Wyoming County, PA........
42644................  Seattle-Bellevue-Everett,       1.1434     1.1147
                        WA.
                        King County, WA...........
                        Snohomish County, WA......
42680................  Sebastian-Vero Beach, FL...     0.9573     0.9658
                        Indian River County, FL...
43100................  Sheboygan, WI..............     0.9026     0.9221
                        Sheboygan County, WI......
43300................  Sherman-Denison, TX........     0.8502     0.8802
                        Grayson County, TX........
43340................  Shreveport-Bossier City, LA     0.8865     0.9092
                        Bossier Parish, LA........
                        Caddo Parish, LA..........
                        De Soto Parish, LA........
43580................  Sioux City, IA-NE-SD.......     0.9200     0.9360
                        Woodbury County, IA.......
                        Dakota County, NE.........
                        Dixon County, NE..........
                        Union County, SD..........
43620................  Sioux Falls, SD............     0.9559     0.9647
                        Lincoln County, SD........
                        McCook County, SD.........
                        Minnehaha County, SD......
                        Turner County, SD.........
43780................  South Bend-Mishawaka, IN-MI     0.9842     0.9874
                        St. Joseph County, IN.....
                        Cass County, MI...........
43900................  Spartanburg, SC............     0.9174     0.9339
                        Spartanburg County, SC....
44060................  Spokane, WA................     1.0447     1.0358
                        Spokane County, WA........
44100................  Springfield, IL............     0.8890     0.9112
                        Menard County, IL.........
                        Sangamon County, IL.......
44140................  Springfield, MA............     1.0079     1.0063
                        Franklin County, MA.......
                        Hampden County, MA........
                        Hampshire County, MA......
44180................  Springfield, MO............     0.8469     0.8775
                        Christian County, MO......
                        Dallas County, MO.........
                        Greene County, MO.........
                        Polk County, MO...........
                        Webster County, MO........
44220................  Springfield, OH............     0.8593     0.8874
                        Clark County, OH..........
44300................  State College, PA..........     0.8784     0.9027
                        Centre County, PA.........
44700................  Stockton, CA...............     1.1442     1.1154
                        San Joaquin County, CA....
44940................  Sumter, SC.................     0.8083     0.8466
                        Sumter County, SC.........
45060................  Syracuse, NY...............     0.9691     0.9753
                        Madison County, NY........
                        Onondaga County, NY.......
                        Oswego County, NY.........
45104................  Tacoma, WA.................     1.0789     1.0631
                        Pierce County, WA.........
45220................  Tallahassee, FL............     0.8942     0.9154
                        Gadsden County, FL........
                        Jefferson County, FL......
                        Leon County, FL...........
                        Wakulla County, FL........
45300................  Tampa-St. Petersburg-           0.9144     0.9315
                        Clearwater, FL.
                        Hernando County, FL.......
                        Hillsborough County, FL...
                        Pasco County, FL..........
                        Pinellas County, FL.......

[[Page 27016]]

 
45460................  Terre Haute, IN............     0.8765     0.9012
                        Clay County, IN...........
                        Sullivan County, IN.......
                        Vermillion County, IN.....
                        Vigo County, IN...........
45500................  Texarkana, TX-Texarkana, AR     0.8104     0.8483
                        Miller County, AR.........
                        Bowie County, TX..........
45780................  Toledo, OH.................     0.9586     0.9669
                        Fulton County, OH.........
                        Lucas County, OH..........
                        Ottawa County, OH.........
                        Wood County, OH...........
45820................  Topeka, KS.................     0.8730     0.8984
                        Jackson County, KS........
                        Jefferson County, KS......
                        Osage County, KS..........
                        Shawnee County, KS........
                        Wabaunsee County, KS......
45940................  Trenton-Ewing, NJ..........     1.0835     1.0668
                        Mercer County, NJ.........
46060................  Tucson, AZ.................     0.9202     0.9362
                        Pima County, AZ...........
46140................  Tulsa, OK..................     0.8103     0.8482
                        Creek County, OK..........
                        Okmulgee County, OK.......
                        Osage County, OK..........
                        Pawnee County, OK.........
                        Rogers County, OK.........
                        Tulsa County, OK..........
                        Wagoner County, OK........
46220................  Tuscaloosa, AL.............     0.8542     0.8834
                        Greene County, AL.........
                        Hale County, AL...........
                        Tuscaloosa County, AL.....
46340................  Tyler, TX..................     0.8811     0.9049
                        Smith County, TX..........
46540................  Utica-Rome, NY.............     0.8396     0.8717
                        Herkimer County, NY.......
                        Oneida County, NY.........
46660................  Valdosta, GA...............     0.8369     0.8695
                        Brooks County, GA.........
                        Echols County, GA.........
                        Lanier County, GA.........
                        Lowndes County, GA........
46700................  Vallejo-Fairfield, CA......     1.5137     1.4110
                        Solano County, CA.........
47020................  Victoria, TX...............     0.8560     0.8848
                        Calhoun County, TX........
                        Goliad County, TX.........
                        Victoria County, TX.......
47220................  Vineland-Millville-             0.9832     0.9866
                        Bridgeton, NJ.
                        Cumberland County, NJ.....
47260................  Virginia Beach-Norfolk-         0.8790     0.9032
                        Newport News, VA-NC.
                        Currituck County, NC......
                        Gloucester County, VA.....
                        Isle of Wight County, VA..
                        James City County, VA.....
                        Mathews County, VA........
                        Surry County, VA..........
                        York County, VA...........
                        Chesapeake City, VA.......
                        Hampton City, VA..........
                        Newport News City, VA.....
                        Norfolk City, VA..........
                        Poquoson City, VA.........
                        Portsmouth City, VA.......
                        Suffolk City, VA..........
                        Virginia Beach City, VA...

[[Page 27017]]

 
                        Williamsburg City, VA.....
47300................  Visalia-Porterville, CA....     0.9968     0.9974
                        Tulare County, CA.........
47380................  Waco, TX...................     0.8633     0.8906
                        McLennan County, TX.......
47580................  Warner Robins, GA..........     0.8380     0.8704
                        Houston County, GA........
47644................  Warren-Troy-Farmington          1.0054     1.0043
                        Hills, MI.
                        Lapeer County, MI.........
                        Livingston County, MI.....
                        Macomb County, MI.........
                        Oakland County, MI........
                        St. Clair County, MI......
47894................  Washington-Arlington-           1.1054     1.0843
                        Alexandria, DC-VA-MD-WV.
                        District of Columbia, DC..
                        Calvert County, MD........
                        Charles County, MD........
                        Prince George's County, MD
                        Arlington County, VA......
                        Clarke County, VA.........
                        Fairfax County, VA........
                        Fauquier County, VA.......
                        Loudoun County, VA........
                        Prince William County, VA.
                        Spotsylvania County, VA...
                        Stafford County, VA.......
                        Warren County, VA.........
                        Alexandria City, VA.......
                        Fairfax City, VA..........
                        Falls Church City, VA.....
                        Fredericksburg City, VA...
                        Manassas City, VA.........
                        Manassas Park City, VA....
                        Jefferson County, WV......
47940................  Waterloo-Cedar Falls, IA...     0.8408     0.8726
                        Black Hawk County, IA.....
                        Bremer County, IA.........
                        Grundy County, IA.........
48140................  Wausau, WI.................     0.9722     0.9778
                        Marathon County, WI.......
48260................  Weirton-Steubenville, WV-OH     0.8063     0.8450
                        Jefferson County, OH......
                        Brooke County, WV.........
                        Hancock County, WV........
48300................  Wenatchee, WA..............     1.0346     1.0277
                        Chelan County, WA.........
                        Douglas County, WA........
48424................  West Palm Beach-Boca Raton-     0.9649     0.9719
                        Boynton Beach, FL.
                        Palm Beach County, FL.....
48540................  Wheeling, WV-OH............     0.7010     0.7608
                        Belmont County, OH........
                        Marshall County, WV.......
                        Ohio County, WV...........
48620................  Wichita, KS................     0.9063     0.9250
                        Butler County, KS.........
                        Harvey County, KS.........
                        Sedgwick County, KS.......
                        Sumner County, KS.........
48660................  Wichita Falls, TX..........     0.8311     0.8649
                        Archer County, TX.........
                        Clay County, TX...........
                        Wichita County, TX........
48700................  Williamsport, PA...........     0.8139     0.8511
                        Lycoming County, PA.......
48864................  Wilmington, DE-MD-NJ.......     1.0684     1.0547
                        New Castle County, DE.....
                        Cecil County, MD..........
                        Salem County, NJ..........
48900................  Wilmington, NC.............     0.9835     0.9868

[[Page 27018]]

 
                        Brunswick County, NC......
                        New Hanover County, NC....
                        Pender County, NC.........
49020................  Winchester, VA-WV..........     1.0091     1.0073
                        Frederick County, VA......
                        Winchester City, VA.......
                        Hampshire County, WV......
49180................  Winston-Salem, NC..........     0.9276     0.9421
                        Davie County, NC..........
                        Forsyth County, NC........
                        Stokes County, NC.........
                        Yadkin County, NC.........
49340................  Worcester, MA..............     1.0722     1.0578
                        Worcester County, MA......
49420................  Yakima, WA.................     0.9847     0.9878
                        Yakima County, WA.........
49500................  Yauco, PR..................     0.3854     0.5083
                        Gu[aacute]nica Municipio,
                        PR.
                        Guayanilla Municipio, PR..
                        Pe[ntilde]uelas Municipio,
                        PR.
                        Yauco Municipio, PR.......
49620................  York-Hanover, PA...........     0.9397     0.9518
                        York County, PA...........
49660................  Youngstown-Warren-Boardman,     0.8802     0.9042
                        OH-PA.
                        Mahoning County, OH.......
                        Trumbull County, OH.......
                        Mercer County, PA.........
49700................  Yuba City, CA..............     1.0730     1.0584
                        Sutter County, CA.........
                        Yuba County, CA...........
49740................  Yuma, AZ...................     0.9109     0.9287
                        Yuma County, AZ ..........
------------------------------------------------------------------------
\1\ As discussed in section IV.D.1.d. of the preamble of this final
  rule, because there will no longer be any LTCHs in their cost
  reporting periods that began during FYs 2003, 2004 or 2005 (the first
  3 years of the 5-year wage index phase-in, respectively), we are no
  longer showing the 1/5th, 2/5ths and 3/5ths wage index value. For
  further details on the 5-year phase-in of the wage index, see section
  IV.D.1.of this final rule.
\2\ The wage index values are calculated using the same wage data used
  to compute the wage index used by acute care hospitals under the IPPS
  for Federal FY 2007 (that is, fiscal year 2003 audited acute care
  hospital inpatient wage data without regard to reclassification under
  section 1886(d)(8) or section 1886(d)(10) of the Act).
\3\ Four-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2005 through
  September 30, 2006 (Federal FY 2006). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2006 and located in
  Chicago, Illinois (CBSA 16974), the 4/5ths wage index value is
  computed as ((4*1.0751) + 1))/5 = 1.0601. For further details on the 5-
  year phase-in of the wage index, see section IV.D.1. of this final
  rule.


    Table 2.--Long-Term Care Hospital Wage Index for Rural Areas for
    Discharges Occurring From July 1, 2007 Through June 30, 2008 \1\
------------------------------------------------------------------------
                                                                 4/5ths
      CBSA code               Nonurban area         Full wage     wage
                                                    index \2\  index \3\
------------------------------------------------------------------------
01...................  Alabama....................     0.7591     0.8073
02...................  Alaska.....................     1.0661     1.0529
03...................  Arizona....................     0.8908     0.9126
04...................  Arkansas...................     0.7307     0.7846
05...................  California.................     1.1454     1.1163
06...................  Colorado...................     0.9325     0.9460
07...................  Connecticut................     1.1709     1.1367
08...................  Delaware...................     0.9705     0.9764
10...................  Florida....................     0.8594     0.8875
11...................  Georgia....................     0.7593     0.8074
12...................  Hawaii.....................     1.0448     1.0358
13...................  Idaho......................     0.8120     0.8496
14...................  Illinois...................     0.8320     0.8656
15...................  Indiana....................     0.8538     0.8830
16...................  Iowa.......................     0.8681     0.8945
17...................  Kansas.....................     0.7998     0.8398
18...................  Kentucky...................     0.7768     0.8214
19...................  Louisiana..................     0.7438     0.7950
20...................  Maine......................     0.8443     0.8754

[[Page 27019]]

 
21...................  Maryland...................     0.8926     0.9141
22...................  Massachusetts \4\..........  .........  .........
23...................  Michigan...................     0.9062     0.9250
24...................  Minnesota..................     0.9153     0.9322
25...................  Mississippi................     0.7738     0.8190
26...................  Missouri...................     0.7927     0.8342
27...................  Montana....................     0.8590     0.8872
28...................  Nebraska...................     0.8677     0.8942
29...................  Nevada.....................     0.8944     0.9155
30...................  New Hampshire..............     1.0853     1.0682
31...................  New Jersey \4\.............  .........  .........
32...................  New Mexico.................     0.8332     0.8666
33...................  New York...................     0.8232     0.8586
34...................  North Carolina.............     0.8588     0.8870
35...................  North Dakota...............     0.7215     0.7772
36...................  Ohio.......................     0.8658     0.8926
37...................  Oklahoma...................     0.7629     0.8103
38...................  Oregon.....................     0.9753     0.9802
39...................  Pennsylvania...............     0.8320     0.8656
40...................  Puerto Rico \4\............  .........  .........
41...................  Rhode Island \4\...........  .........  .........
42...................  South Carolina.............     0.8566     0.8853
43...................  South Dakota...............     0.8480     0.8784
44...................  Tennessee..................     0.7827     0.8262
45...................  Texas......................     0.7965     0.8372
46...................  Utah.......................     0.8140     0.8512
47...................  Vermont....................     0.9744     0.9795
49...................  Virginia...................     0.7940     0.8352
50...................  Washington.................     1.0263     1.0210
51...................  West Virginia..............     0.7607     0.8086
52...................  Wisconsin..................     0.9553     0.9642
53...................  Wyoming....................     0.9295    0.9436
------------------------------------------------------------------------
\1\ As discussed in section IV.D.1.d. of the preamble of this final
  rule, because there are no longer any LTCHs in their cost reporting
  periods that began during FYs 2003, 2004 or 2005 (the first 3 years of
  the 5-year wage index phase-in, respectively), we are no longer
  showing the 1/5th, 2/5ths and 3/5ths wage index value. For further
  details on the 5-year phase-in of the wage index, see section IV.D.1.
  of this final rule.
\2\ The wage index values are calculated using the same wage data used
  to compute the wage index used by acute care hospitals under the IPPS
  for Federal FY 2007 (that is, fiscal year 2003 audited acute care
  hospital inpatient wage data without regard to reclassification under
  section 1886(d)(8) or section 1886(d)(10) of the Act).
\3\ Four-fifths of the full wage index value, applicable for a LTCH's
  cost reporting period beginning on or after October 1, 2005 through
  September 30, 2006 (Federal FY 2006). That is, for a LTCH's cost
  reporting period that begins during Federal FY 2006 and located in
  rural Illinois, the 4/5ths wage index value is computed as ((4*0.8320)
  + 1))/5 = 0.8656. For further details on the 5-year phase-in of the
  wage index, see section IV.D.1. of this final rule.
\4\ All counties within the State are classified as urban.


   Table 3: FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, Five-Sixths of the Geometric
             Average Length of Stay and the IPPS Average Length of Stay Plus One Standard Deviation
----------------------------------------------------------------------------------------------------------------
                                                                                                         IPPS
                                                                                           5/6ths of    average
                                                                                Geometric     the      length of
           LTC-DRG                          Description               Relative   average   geometric   stay plus
                                                                       weight   length of   average       one
                                                                                   stay    length of   standard
                                                                                              stay    deviation*
----------------------------------------------------------------------------------------------------------------
1............................  \5\ CRANIOTOMY AGE >17 W CC.........     1.6835       37.1       30.9        16.1
2............................  \6\ CRANIOTOMY AGE >17 W/O CC.......     1.6835       37.1       30.9         7.1
3............................  \6\ CRANIOTOMY AGE 0-17.............     1.6835       37.1       30.9        20.1
6............................  \6\ CARPAL TUNNEL RELEASE...........     0.4175       17.0       14.2         4.8
7............................  PERIPH & CRANIAL NERVE & OTHER NERV      1.2052       36.1       30.1        15.8
                                SYST PROC W CC.
8............................  \2\ PERIPH & CRANIAL NERVE & OTHER       0.5594       21.0       17.5         4.2
                                NERV SYST PROC W/O CC.
9............................  SPINAL DISORDERS & INJURIES.........     1.0424       34.0       28.3         9.7
10...........................  NERVOUS SYSTEM NEOPLASMS W CC.......     0.6971       22.1       18.4         9.6
11...........................  \2\ NERVOUS SYSTEM NEOPLASMS W/O CC.     0.5594       21.0       17.5         5.7
12...........................  DEGENERATIVE NERVOUS SYSTEM              0.6788       25.1       20.9         8.4
                                DISORDERS.
13...........................  MULTIPLE SCLEROSIS & CEREBELLAR          0.6003       23.1       19.3         7.4
                                ATAXIA.
14...........................  INTRACRANIAL HEMORRHAGE OR CEREBRAL      0.6772       24.9       20.8         8.6
                                INFARCTION.
15...........................  NONSPECIFIC CVA & PRECEREBRAL            0.7705       26.1       21.8         6.4
                                OCCLUSION W/O INFARCT.
16...........................  NONSPECIFIC CEREBROVASCULAR              0.6978       23.1       19.3        10.1
                                DISORDERS W CC.
17...........................  \2\ NONSPECIFIC CEREBROVASCULAR          0.5594       21.0       17.5         4.7
                                DISORDERS W/O CC.

[[Page 27020]]

 
18...........................  CRANIAL & PERIPHERAL NERVE DISORDERS     0.7503       25.4       21.2         8.2
                                W CC.
19...........................  CRANIAL & PERIPHERAL NERVE DISORDERS     0.4512       19.5       16.3         5.3
                                W/O CC.
21...........................  \3\ VIRAL MENINGITIS................     0.7819       23.9       19.9         9.9
22...........................  \3\ HYPERTENSIVE ENCEPHALOPATHY.....     0.7819       23.9       19.9         7.9
23...........................  NONTRAUMATIC STUPOR & COMA..........     1.0118       29.4       24.5         6.1
26...........................  \6\ SEIZURE & HEADACHE AGE 0-17.....     0.5594       21.0       17.5         6.2
27...........................  TRAUMATIC STUPOR & COMA, COMA >1 HR.     0.9978       30.6       25.5         7.6
28...........................  TRAUMATIC STUPOR & COMA, COMA <1 HR      0.7983       25.8       21.5         9.1
                                AGE >17 W CC.
29...........................  \1\ TRAUMATIC STUPOR & COMA, COMA <1     0.4175       17.0       14.2         5.0
                                HR AGE >17 W/O CC.
30**.........................  \6\ TRAUMATIC STUPOR & COMA, COMA <1     0.4175       17.0       14.2         2.0
                                HR AGE 0-17.
31...........................  \1\ CONCUSSION AGE >17 W CC.........     0.4175       17.0       14.2         6.2
32...........................  \6\ CONCUSSION AGE >17 W/O CC.......     0.4175       17.0       14.2         3.4
33**.........................  \6\ CONCUSSION AGE 0-17.............     0.4175       17.0       14.2         1.6
34...........................  OTHER DISORDERS OF NERVOUS SYSTEM W      0.7029       23.4       19.5         7.4
                                CC.
35...........................  OTHER DISORDERS OF NERVOUS SYSTEM W/     0.5080       21.1       17.6         4.7
                                O CC.
36...........................  \6\ RETINAL PROCEDURES..............     0.5594       21.0       17.5         2.7
37...........................  \6\ ORBITAL PROCEDURES..............     0.5594       21.0       17.5         6.6
38...........................  \6\ PRIMARY IRIS PROCEDURES.........     0.5594       21.0       17.5         4.3
39...........................  \6\ LENS PROCEDURES WITH OR WITHOUT      0.5594       21.0       17.5         3.1
                                VITRECTOMY.
40...........................  \6\ EXTRAOCULAR PROCEDURES EXCEPT        0.5594       21.0       17.5         6.7
                                ORBIT AGE >17.
41**.........................  \6\ EXTRAOCULAR PROCEDURES EXCEPT        0.5594       21.0       17.5         1.6
                                ORBIT AGE 0-17.
42...........................  \6\ INTRAOCULAR PROCEDURES EXCEPT        0.5594       21.0       17.5         3.7
                                RETINA, IRIS & LENS.
43...........................  \6\ HYPHEMA.........................     0.4175       17.0       14.2         4.6
44...........................  \3\ ACUTE MAJOR EYE INFECTIONS......     0.7819       23.9       19.9         7.4
45...........................  \1\ NEUROLOGICAL EYE DISORDERS......     0.4175       17.0       14.2         4.6
46...........................  \2\ OTHER DISORDERS OF THE EYE AGE       0.5594       21.0       17.5         6.6
                                >17 W CC.
47...........................  \6\ OTHER DISORDERS OF THE EYE AGE       0.4175       17.0       14.2         4.7
                                >17 W/O CC.
48**.........................  \6\ OTHER DISORDERS OF THE EYE AGE 0-    0.4175       17.0       14.2         2.9
                                17.
49...........................  \6\ MAJOR HEAD & NECK PROCEDURES....     1.1625       29.5       24.6         7.1
50...........................  \6\ SIALOADENECTOMY.................     1.1625       29.5       24.6         2.6
51...........................  \6\ SALIVARY GLAND PROCEDURES EXCEPT     1.1625       29.5       24.6         4.0
                                SIALOADENECTOMY.
52...........................  \6\ CLEFT LIP & PALATE REPAIR.......     1.1625       29.5       24.6         2.1
53...........................  \6\ SINUS & MASTOID PROCEDURES AGE       1.1625       29.5       24.6         6.2
                                >17.
54**.........................  \6\ SINUS & MASTOID PROCEDURES AGE 0-    1.1625       29.5       24.6         3.2
                                17.
55...........................  \4\ MISCELLANEOUS EAR, NOSE, MOUTH &     1.1625       29.5       24.6         4.3
                                THROAT PROCEDURES.
56...........................  \6\ RHINOPLASTY.....................     1.1625       29.5       24.6         4.1
57...........................  \6\ T&A PROC, EXCEPT TONSILLECTOMY &/    0.4175       17.0       14.2         4.9
                                OR ADENOIDECTOMY ONLY, AGE >17.
58**.........................  \6\ T&A PROC, EXCEPT TONSILLECTOMY &/    0.4175       17.0       14.2         1.5
                                OR ADENOIDECTOMY ONLY, AGE 0-17.
59...........................  \6\ TONSILLECTOMY &/OR ADENOIDECTOMY     0.4175       17.0       14.2         3.6
                                ONLY, AGE >17.
60...........................  \6\ TONSILLECTOMY &/OR ADENOIDECTOMY     0.4175       17.0       14.2         2.7
                                ONLY, AGE 0-17.
61...........................  \6\ MYRINGOTOMY W TUBE INSERTION AGE     0.4175       17.0       14.2        10.2
                                >17.
62...........................  \6\ MYRINGOTOMY W TUBE INSERTION AGE     0.4175       17.0       14.2         2.3
                                0-17.
63...........................  \4\ OTHER EAR, NOSE, MOUTH & THROAT      1.1625       29.5       24.6         7.2
                                O.R. PROCEDURES.
64...........................  EAR, NOSE, MOUTH & THROAT MALIGNANCY     1.1797       26.2       21.8        10.2
65...........................  \1\ DYSEQUILIBRIUM..................     0.4175       17.0       14.2         4.2
66...........................  \6\ EPISTAXIS.......................     0.4175       17.0       14.2         4.8
67...........................  \3\ EPIGLOTTITIS....................     0.7819       23.9       19.9         5.8
68...........................  OTITIS MEDIA & URI AGE &>17 W CC....     0.6211       20.3       16.9         5.9
69...........................  \1\ OTITIS MEDIA & URI AGE &>17 W/O      0.4175       17.0       14.2         4.5
                                CC.
70...........................  \6\ OTITIS MEDIA & URI AGE 0-17.....     0.4175       17.0       14.2         3.6
71...........................  \6\ LARYNGOTRACHEITIS...............     0.5594       21.0       17.5         6.7
72...........................  \3\ NASAL TRAUMA & DEFORMITY........     0.7819       23.9       19.9         5.2
73...........................  OTHER EAR, NOSE, MOUTH & THROAT          0.7745       22.9       19.1         6.9
                                DIAGNOSES AGE >17.
74...........................  \6\ OTHER EAR, NOSE, MOUTH & THROAT      0.4175       17.0       14.2         3.9
                                DIAGNOSES AGE 0-17.
75...........................  MAJOR CHEST PROCEDURES..............     1.9944       33.5       27.9        15.4
76...........................  OTHER RESP SYSTEM O.R. PROCEDURES W      2.3982       42.5       35.4        17.2
                                CC.
77...........................  \2\ OTHER RESP SYSTEM O.R.               0.5594       21.0       17.5         7.4
                                PROCEDURES W/O CC.
78...........................  PULMONARY EMBOLISM..................     0.6746       22.6       18.8         9.4
79...........................  RESPIRATORY INFECTIONS &                 0.8182       22.8       19.0        12.9
                                INFLAMMATIONS AGE >17 W CC.
80...........................  RESPIRATORY INFECTIONS &                 0.6485       20.9       17.4         8.3
                                INFLAMMATIONS AGE >17 W/O CC.
81...........................  \6\ RESPIRATORY INFECTIONS &             0.4175       17.0       14.2        10.1
                                INFLAMMATIONS AGE 0-17.
82...........................  RESPIRATORY NEOPLASMS...............     0.8242       21.4       17.8        11.0

[[Page 27021]]

 
83...........................  \1\ MAJOR CHEST TRAUMA W CC.........     0.4175       17.0       14.2         8.2
84...........................  \6\ MAJOR CHEST TRAUMA W/O CC.......     0.4175       17.0       14.2         4.8
85...........................  PLEURAL EFFUSION W CC...............     0.6956       21.4       17.8         9.9
86...........................  \6\ PLEURAL EFFUSION W/O CC.........     0.4175       17.0       14.2         5.5
87...........................  PULMONARY EDEMA & RESPIRATORY            1.0295       24.8       20.7        10.3
                                FAILURE.
88...........................  CHRONIC OBSTRUCTIVE PULMONARY            0.6411       19.3       16.1         7.5
                                DISEASE.
89...........................  SIMPLE PNEUMONIA & PLEURISY AGE >17      0.6802       20.6       17.2         8.6
                                W CC.
90...........................  SIMPLE PNEUMONIA & PLEURISY AGE >17      0.4958       17.8       14.8         5.6
                                W/O CC.
91...........................  \6\ SIMPLE PNEUMONIA & PLEURISY AGE      0.5594       21.0       17.5         5.3
                                0-17.
92...........................  INTERSTITIAL LUNG DISEASE W CC......     0.6638       19.6       16.3         9.4
93...........................  \1\ INTERSTITIAL LUNG DISEASE W/O CC     0.4175       17.0       14.2         5.9
94...........................  PNEUMOTHORAX W CC...................     0.6785       21.3       17.8         9.6
95...........................  \8\ PNEUMOTHORAX W/O CC.............     0.6785       21.3       17.8         5.3
96...........................  BRONCHITIS & ASTHMA AGE >17 W CC....     0.6230       18.9       15.8         6.7
97...........................  \8\ BRONCHITIS & ASTHMA AGE >17 W/O      0.6230       18.9       15.8         5.2
                                CC.
98...........................  \6\ BRONCHITIS & ASTHMA AGE 0-17....     0.5594       21.0       17.5         4.4
99...........................  RESPIRATORY SIGNS & SYMPTOMS W CC...     0.9381       24.6       20.5         4.8
100..........................   3RESPIRATORY SIGNS & SYMPTOMS W/O       0.7819       23.9       19.9         3.1
                                CC.
101..........................  OTHER RESPIRATORY SYSTEM DIAGNOSES W     0.8147       22.2       18.5         6.7
                                CC.
102..........................  \1\ OTHER RESPIRATORY SYSTEM             0.4175       17.0       14.2         3.9
                                DIAGNOSES W/O CC.
103***.......................  \7\ HEART TRANSPLANT OR IMPLANT OF       0.0000        0.0        0.0         0.0
                                HEART ASSIST SYSTEM.
104..........................  \6\ CARDIAC VALVE & OTHER MAJOR          1.1625       29.5       24.6        22.3
                                CARDIOTHORACIC PROC W CARDIAC CATH.
105..........................  \6\ CARDIAC VALVE & OTHER MAJOR          1.1625       29.5       24.6        15.0
                                CARDIOTHORACIC PROC W/O CARDIAC
                                CATH.
106..........................  \6\ CORONARY BYPASS W PTCA..........     1.1625       29.5       24.6        16.6
108..........................  \6\ OTHER CARDIOTHORACIC PROCEDURES.     1.1625       29.5       24.6        17.1
110..........................  \4\ MAJOR CARDIOVASCULAR PROCEDURES      1.1625       29.5       24.6        13.8
                                W CC.
111..........................  \6\ MAJOR CARDIOVASCULAR PROCEDURES      1.1625       29.5       24.6         4.9
                                W/O CC.
113..........................  AMPUTATION FOR CIRC SYSTEM DISORDERS     1.3942       36.1       30.1        20.5
                                EXCEPT UPPER LIMB & TOE.
114..........................  UPPER LIMB & TOE AMPUTATION FOR CIRC     1.2425       33.0       27.5        14.0
                                SYSTEM DISORDERS.
117..........................  \2\ CARDIAC PACEMAKER REVISION           0.5594       21.0       17.5         6.7
                                EXCEPT DEVICE REPLACEMENT.
118..........................  \3\ CARDIAC PACEMAKER DEVICE             0.7819       23.9       19.9         4.6
                                REPLACEMENT.
119..........................  \3\ VEIN LIGATION & STRIPPING.......     0.7819       23.9       19.9         8.8
120..........................  OTHER CIRCULATORY SYSTEM O.R.            1.0893       31.4       26.2        15.5
                                PROCEDURES.
121..........................  CIRCULATORY DISORDERS W AMI & MAJOR      0.7451       22.4       18.7        10.1
                                COMP, DISCHARGED ALIVE.
122..........................  \2\ CIRCULATORY DISORDERS W AMI W/O      0.5594       21.0       17.5         5.3
                                MAJOR COMP, DISCHARGED ALIVE.
123..........................  CIRCULATORY DISORDERS W AMI, EXPIRED     0.7858       17.0       14.2         7.6
124..........................  \4\ CIRCULATORY DISORDERS EXCEPT         1.1625       29.5       24.6         7.0
                                AMI, W CARD CATH & COMPLEX DIAG.
125..........................  \1\ CIRCULATORY DISORDERS EXCEPT         0.4175       17.0       14.2         4.1
                                AMI, W CARD CATH W/O COMPLEX DIAG.
126..........................  ACUTE & SUBACUTE ENDOCARDITIS.......     0.8867       26.3       21.9        17.5
127..........................  HEART FAILURE & SHOCK...............     0.6832       21.2       17.7         8.0
128..........................  \2\ DEEP VEIN THROMBOPHLEBITIS......     0.5594       21.0       17.5         8.0
129..........................  \1\ CARDIAC ARREST, UNEXPLAINED.....     0.4175       17.0       14.2         3.5
130..........................  PERIPHERAL VASCULAR DISORDERS W CC..     0.6484       22.8       19.0         8.6
131..........................  PERIPHERAL VASCULAR DISORDERS W/O CC     0.5267       21.0       17.5         5.9
132..........................  ATHEROSCLEROSIS W CC................     0.6621       20.7       17.3         4.3
133..........................  \2\ ATHEROSCLEROSIS W/O CC..........     0.5594       21.0       17.5         3.2
134..........................  HYPERTENSION........................     0.4909       21.7       18.1         4.8
135..........................  CARDIAC CONGENITAL & VALVULAR            0.8014       23.8       19.8         6.8
                                DISORDERS AGE >17 W CC.
136..........................  \1\ CARDIAC CONGENITAL & VALVULAR        0.4175       17.0       14.2         4.1
                                DISORDERS AGE >17 W/O CC.
137**........................  \6\ CARDIAC CONGENITAL & VALVULAR        0.4175       17.0       14.2         3.3
                                DISORDERS AGE 0-17.
138..........................  CARDIAC ARRHYTHMIA & CONDUCTION          0.6618       21.9       18.3         6.1
                                DISORDERS W CC.
139..........................  \2\ CARDIAC ARRHYTHMIA & CONDUCTION      0.5594       21.0       17.5         3.7
                                DISORDERS W/O CC.
140..........................  \1\ ANGINA PECTORIS.................     0.4175       17.0       14.2         3.6
141..........................  SYNCOPE & COLLAPSE W CC.............     0.5891       22.1       18.4         5.3
142..........................  \8\ SYNCOPE & COLLAPSE W/O CC.......     0.5891       22.1       18.4         3.8
143..........................  \1\ CHEST PAIN......................     0.4175       17.0       14.2         3.1
144..........................  OTHER CIRCULATORY SYSTEM DIAGNOSES W     0.7715       22.1       18.4         9.6
                                CC.
145..........................  OTHER CIRCULATORY SYSTEM DIAGNOSES W/    0.4292       17.0       14.2         3.9
                                O CC.
146..........................  \5\ RECTAL RESECTION W CC...........     1.6835       37.1       30.9        14.6

[[Page 27022]]

 
147..........................  \6\ RECTAL RESECTION W/O CC.........     0.7819       23.9       19.9         8.5
149..........................  \6\ MAJOR SMALL & LARGE BOWEL            0.7819       23.9       19.9         8.1
                                PROCEDURES W/O CC.
150..........................  \5\ PERITONEAL ADHESIOLYSIS W CC....     1.6835       37.1       30.9        17.3
151..........................  \6\ PERITONEAL ADHESIOLYSIS W/O CC..     0.4175       17.0       14.2         8.2
152..........................  \5\ MINOR SMALL & LARGE BOWEL            1.6835       37.1       30.9        12.0
                                PROCEDURES W CC.
153..........................  \6\ MINOR SMALL & LARGE BOWEL            1.6835       37.1       30.9         7.1
                                PROCEDURES W/O CC.
155..........................  \6\ STOMACH, ESOPHAGEAL & DUODENAL       1.6835       37.1       30.9         6.4
                                PROCEDURES AGE >17 W/O CC.
156..........................  \6\ STOMACH, ESOPHAGEAL & DUODENAL       1.6835       37.1       30.9        12.1
                                PROCEDURES AGE 0-17.
157..........................  \3\ ANAL & STOMAL PROCEDURES W CC...     0.7819       23.9       19.9         9.3
158..........................  \6\ ANAL & STOMAL PROCEDURES W/O CC.     0.7819       23.9       19.9         4.1
159..........................  \5\ HERNIA PROCEDURES EXCEPT             1.6835       37.1       30.9         8.2
                                INGUINAL & FEMORAL AGE >17 W CC.
160..........................  \1\ HERNIA PROCEDURES EXCEPT             0.4175       17.0       14.2         4.1
                                INGUINAL & FEMORAL AGE >17 W/O CC.
161..........................  \6\ INGUINAL & FEMORAL HERNIA            0.4175       17.0       14.2         7.3
                                PROCEDURES AGE >17 W CC.
162..........................  \6\ INGUINAL & FEMORAL HERNIA            0.4175       17.0       14.2         3.1
                                PROCEDURES AGE >17 W/O CC.
163..........................  \6\ HERNIA PROCEDURES AGE 0-17......     0.4175       17.0       14.2         4.0
164..........................  \6\ APPENDECTOMY W COMPLICATED           0.7819       23.9       19.9        11.9
                                PRINCIPAL DIAG W CC.
165..........................  \6\ APPENDECTOMY W COMPLICATED           0.7819       23.9       19.9         6.1
                                PRINCIPAL DIAG W/O CC.
166..........................  \6\ APPENDECTOMY W/O COMPLICATED         0.7819       23.9       19.9         6.8
                                PRINCIPAL DIAG W CC.
167..........................  \6\ APPENDECTOMY W/O COMPLICATED         0.7819       23.9       19.9         3.1
                                PRINCIPAL DIAG W/O CC.
168..........................  \5\ MOUTH PROCEDURES W CC...........     1.6835       37.1       30.9         7.7
169..........................  \6\ MOUTH PROCEDURES W/O CC.........     0.5594       21.0       17.5         3.5
170..........................  OTHER DIGESTIVE SYSTEM O.R.              1.6163       35.8       29.8        18.0
                                PROCEDURES W CC.
171..........................  \3\ OTHER DIGESTIVE SYSTEM O.R.          0.7819       23.9       19.9         6.7
                                PROCEDURES W/O CC.
172..........................  DIGESTIVE MALIGNANCY W CC...........     0.8497       21.8       18.2        11.1
173..........................  \2\ DIGESTIVE MALIGNANCY W/O CC.....     0.5594       21.0       17.5         5.6
174..........................  G.I. HEMORRHAGE W CC................     0.7149       22.9       19.1         7.2
175..........................  \2\ G.I. HEMORRHAGE W/O CC..........     0.5594       21.0       17.5         4.3
176..........................  COMPLICATED PEPTIC ULCER............     0.9514       24.8       20.7         8.0
177..........................  \2\ UNCOMPLICATED PEPTIC ULCER W CC.     0.5594       21.0       17.5         6.8
178..........................  \6\ UNCOMPLICATED PEPTIC ULCER W/O       0.4175       17.0       14.2         4.7
                                CC.
179..........................  INFLAMMATORY BOWEL DISEASE..........     0.8157       23.3       19.4         9.1
180..........................  G.I. OBSTRUCTION W CC...............     0.9126       22.8       19.0         8.3
181..........................  \1\ G.I. OBSTRUCTION W/O CC.........     0.4175       17.0       14.2         5.1
182..........................  ESOPHAGITIS, GASTROENT & MISC DIGEST     0.7866       21.8       18.2         6.4
                                DISORDERS AGE >17 W CC.
183..........................  \1\ ESOPHAGITIS, GASTROENT & MISC        0.4175       17.0       14.2         4.4
                                DIGEST DISORDERS AGE >17 W/O CC.
184..........................  \6\ ESOPHAGITIS, GASTROENT & MISC        0.4175       17.0       14.2         5.6
                                DIGEST DISORDERS AGE 0-17.
185..........................  DENTAL & ORAL DIS EXCEPT EXTRACTIONS     0.6634       23.2       19.3         7.2
                                & RESTORATIONS, AGE >17.
186..........................  \6\ DENTAL & ORAL DIS EXCEPT             0.5594       21.0       17.5         5.0
                                EXTRACTIONS & RESTORATIONS, AGE 0-
                                17.
187..........................  \6\ DENTAL EXTRACTIONS &                 0.5594       21.0       17.5         6.8
                                RESTORATIONS.
188..........................  OTHER DIGESTIVE SYSTEM DIAGNOSES AGE     0.9596       24.4       20.3         8.5
                                >17 W CC.
189..........................  \2\ OTHER DIGESTIVE SYSTEM DIAGNOSES     0.5594       21.0       17.5         4.6
                                AGE >17 W/O CC.
190..........................  \6\ OTHER DIGESTIVE SYSTEM DIAGNOSES     0.5594       21.0       17.5         5.1
                                AGE 0-17.
191..........................  \5\ PANCREAS, LIVER & SHUNT              1.6835       37.1       30.9        21.1
                                PROCEDURES W CC.
192..........................  \6\ PANCREAS, LIVER & SHUNT              1.6835       37.1       30.9         9.3
                                PROCEDURES W/O CC.
193..........................  \4\ BILIARY TRACT PROC EXCEPT ONLY       1.1625       29.5       24.6        19.7
                                CHOLECYST W OR W/O C.D.E. W CC.
194..........................  \6\ BILIARY TRACT PROC EXCEPT ONLY       1.1625       29.5       24.6         9.9
                                CHOLECYST W OR W/O C.D.E. W/O CC.
195..........................  \5\ CHOLECYSTECTOMY W C.D.E. W CC...     1.6835       37.1       30.9        16.2
196..........................  \6\ CHOLECYSTECTOMY W C.D.E. W/O CC.     1.1625       29.5       24.6         8.3
197..........................  \4\ CHOLECYSTECTOMY EXCEPT BY            1.1625       29.5       24.6        14.0
                                LAPAROSCOPE W/O C.D.E. W CC.
198..........................  \6\ CHOLECYSTECTOMY EXCEPT BY            1.1625       29.5       24.6         6.6
                                LAPAROSCOPE W/O C.D.E. W/O CC.
199..........................  \3\ HEPATOBILIARY DIAGNOSTIC             0.7819       23.9       19.9        15.2
                                PROCEDURE FOR MALIGNANCY.
200..........................  \5\ HEPATOBILIARY DIAGNOSTIC             1.6835       37.1       30.9        17.5
                                PROCEDURE FOR NON-MALIGNANCY.
201..........................  OTHER HEPATOBILIARY OR PANCREAS O.R.     1.5802       28.8       24.0        22.6
                                PROCEDURES.
202..........................  CIRRHOSIS & ALCOHOLIC HEPATITIS.....     0.6011       20.2       16.8         9.9
203..........................  MALIGNANCY OF HEPATOBILIARY SYSTEM       0.7466       19.6       16.3        10.6
                                OR PANCREAS.
204..........................  DISORDERS OF PANCREAS EXCEPT             0.8853       22.1       18.4         8.5
                                MALIGNANCY.
205..........................  DISORDERS OF LIVER EXCEPT                0.6933       23.1       19.3         9.4
                                MALIG,CIRR,ALC HEPA W CC.
206..........................  \8\ DISORDERS OF LIVER EXCEPT            0.6933       23.1       19.3         6.0
                                MALIG,CIRR,ALC HEPA W/O CC.
207..........................  DISORDERS OF THE BILIARY TRACT W CC.     0.7295       21.5       17.9         8.4
208..........................  \1\ DISORDERS OF THE BILIARY TRACT W/    0.4175       17.0       14.2         4.6
                                O CC.

[[Page 27023]]

 
210..........................  HIP & FEMUR PROCEDURES EXCEPT MAJOR      1.4826       41.9       34.9         9.5
                                JOINT AGE >17 W CC.
211..........................  \6\ HIP & FEMUR PROCEDURES EXCEPT        1.6835       37.1       30.9         6.3
                                MAJOR JOINT AGE >17 W/O CC.
212..........................  \6\ HIP & FEMUR PROCEDURES EXCEPT        1.6835       37.1       30.9         3.8
                                MAJOR JOINT AGE 0-17.
213..........................  AMPUTATION FOR MUSCULOSKELETAL           1.1871       33.5       27.9        15.2
                                SYSTEM & CONN TISSUE DISORDERS.
216..........................  BIOPSIES OF MUSCULOSKELETAL SYSTEM &     1.2147       37.6       31.3         8.8
                                CONNECTIVE TISSUE.
217..........................  WND DEBRID & SKN GRFT EXCEPT             1.2414       36.5       30.4        20.4
                                HAND,FOR MUSCSKELET & CONN TISS DIS.
218..........................  \5\ LOWER EXTREM & HUMER PROC EXCEPT     1.6835       37.1       30.9         8.4
                                HIP,FOOT,FEMUR AGE >17 W CC.
219..........................  \6\ LOWER EXTREM & HUMER PROC EXCEPT     1.6835       37.1       30.9         4.8
                                HIP,FOOT,FEMUR AGE >17 W/O CC.
220..........................  \6\ LOWER EXTREM & HUMER PROC EXCEPT     1.6835       37.1       30.9        10.5
                                HIP,FOOT,FEMUR AGE 0-17.
223..........................  \4\ MAJOR SHOULDER/ELBOW PROC, OR        1.1625       29.5       24.6         5.1
                                OTHER UPPER EXTREMITY PROC W CC.
224..........................  \1\ SHOULDER,ELBOW OR FOREARM            0.4175       17.0       14.2         2.8
                                PROC,EXC MAJOR JOINT PROC, W/O CC.
225..........................  FOOT PROCEDURES.....................     0.9550       30.6       25.5         8.7
226..........................  SOFT TISSUE PROCEDURES W CC.........     1.0626       34.3       28.6        10.6
227..........................  \3\ SOFT TISSUE PROCEDURES W/O CC...     0.7819       23.9       19.9         4.0
228..........................  \3\ MAJOR THUMB OR JOINT PROC,OR OTH     0.7819       23.9       19.9         6.7
                                HAND OR WRIST PROC W CC.
229..........................  \6\ HAND OR WRIST PROC, EXCEPT MAJOR     0.4175       17.0       14.2         3.8
                                JOINT PROC, W/O CC.
230..........................  \5\ LOCAL EXCISION & REMOVAL OF INT      1.6835       37.1       30.9         8.8
                                FIX DEVICES OF HIP & FEMUR.
232..........................  \5\ ARTHROSCOPY.....................     1.6835       37.1       30.9         4.1
233..........................  OTHER MUSCULOSKELET SYS & CONN TISS      1.1724       32.4       27.0        10.8
                                O.R. PROC W CC.
234..........................  \6\ OTHER MUSCULOSKELET SYS & CONN       0.4175       17.0       14.2         4.1
                                TISS O.R. PROC W/O CC.
235..........................  \3\ FRACTURES OF FEMUR..............     0.7819       23.9       19.9         7.4
236..........................  FRACTURES OF HIP & PELVIS...........     0.6802       28.9       24.1         6.8
237..........................  \1\ SPRAINS, STRAINS, & DISLOCATIONS     0.4175       17.0       14.2         5.9
                                OF HIP, PELVIS & THIGH.
238..........................  OSTEOMYELITIS.......................     0.8589       28.4       23.7        12.8
239..........................  PATHOLOGICAL FRACTURES &                 0.6031       20.6       17.2         9.6
                                MUSCULOSKELETAL & CONN TISS
                                MALIGNANCY.
240..........................  CONNECTIVE TISSUE DISORDERS W CC....     0.7134       22.4       18.7        10.3
241..........................  \1\ CONNECTIVE TISSUE DISORDERS W/O      0.4175       17.0       14.2         5.6
                                CC.
242..........................  SEPTIC ARTHRITIS....................     0.7700       26.2       21.8        10.2
243..........................  MEDICAL BACK PROBLEMS...............     0.6028       22.3       18.6         7.1
244..........................  BONE DISEASES & SPECIFIC                 0.5516       22.0       18.3         7.0
                                ARTHROPATHIES W CC.
245..........................  BONE DISEASES & SPECIFIC                 0.4463       19.4       16.2         4.8
                                ARTHROPATHIES W/O CC.
246..........................  \2\ NON-SPECIFIC ARTHROPATHIES......     0.5594       21.0       17.5         5.6
247..........................  SIGNS & SYMPTOMS OF MUSCULOSKELETAL      0.4582       17.6       14.7         5.1
                                SYSTEM & CONN TISSUE.
248..........................  TENDONITIS, MYOSITIS & BURSITIS.....     0.7328       23.2       19.3         7.5
249..........................  AFTERCARE, MUSCULOSKELETAL SYSTEM &      0.6370       24.0       20.0         6.2
                                CONNECTIVE TISSUE.
250..........................  \1\ FX, SPRN, STRN & DISL OF             0.4175       17.0       14.2         6.0
                                FOREARM, HAND, FOOT AGE >17 W CC.
251..........................  \6\ FX, SPRN, STRN & DISL OF             0.4175       17.0       14.2         4.3
                                FOREARM, HAND, FOOT AGE >17 W/O CC.
252**........................  \6\ FX, SPRN, STRN & DISL OF             0.5594       21.0       17.5         1.8
                                FOREARM, HAND, FOOT AGE 0-17.
253..........................  FX, SPRN, STRN & DISL OF                 0.5609       24.0       20.0         7.0
                                UPARM,LOWLEG EX FOOT AGE >17 W CC.
254..........................  \1\ FX, SPRN, STRN & DISL OF             0.4175       17.0       14.2         4.7
                                UPARM,LOWLEG EX FOOT AGE >17 W/O CC.
255**........................  \6\ FX, SPRN, STRN & DISL OF             0.5594       21.0       17.5         2.9
                                UPARM,LOWLEG EX FOOT AGE 0-17.
256..........................  OTHER MUSCULOSKELETAL SYSTEM &           0.7132       23.6       19.7         7.9
                                CONNECTIVE TISSUE DIAGNOSES.
257..........................  \5\ TOTAL MASTECTOMY FOR MALIGNANCY      1.6835       37.1       30.9         3.8
                                W CC.
258..........................  \6\ TOTAL MASTECTOMY FOR MALIGNANCY      0.7819       23.9       19.9         2.4
                                W/O CC.
259..........................  \3\ SUBTOTAL MASTECTOMY FOR              0.7819       23.9       19.9         4.1
                                MALIGNANCY W CC.
260..........................  \6\ SUBTOTAL MASTECTOMY FOR              0.7819       23.9       19.9         1.9
                                MALIGNANCY W/O CC.
261..........................  \2\ BREAST PROC FOR NON-MALIGNANCY       0.5594       21.0       17.5         3.2
                                EXCEPT BIOPSY & LOCAL EXCISION.
262..........................  \4\ BREAST BIOPSY & LOCAL EXCISION       1.1625       29.5       24.6         7.7
                                FOR NON-MALIGNANCY.
263..........................  SKIN GRAFT &/OR DEBRID FOR SKN ULCER     1.2748       38.0       31.7        16.9
                                OR CELLULITIS W CC.
264..........................  SKIN GRAFT &/OR DEBRID FOR SKN ULCER     0.8507       29.9       24.9         9.9
                                OR CELLULITIS W/O CC.
265..........................  SKIN GRAFT &/OR DEBRID EXCEPT FOR        1.1019       30.2       25.2        10.7
                                SKIN ULCER OR CELLULITIS W CC.
266..........................  \3\ SKIN GRAFT &/OR DEBRID EXCEPT        0.7819       23.9       19.9         4.7
                                FOR SKIN ULCER OR CELLULITIS W/O CC.
267..........................  \6\ PERIANAL & PILONIDAL PROCEDURES.     0.7819       23.9       19.9         6.8
268..........................  \4\ SKIN, SUBCUTANEOUS TISSUE &          1.1625       29.5       24.6         5.4
                                BREAST PLASTIC PROCEDURES.

[[Page 27024]]

 
269..........................  OTHER SKIN, SUBCUT TISS & BREAST         1.2075       34.7       28.9        13.4
                                PROC W CC.
270..........................  \3\ OTHER SKIN, SUBCUT TISS & BREAST     0.7819       23.9       19.9         5.7
                                PROC W/O CC.
271..........................  SKIN ULCERS.........................     0.8269       26.9       22.4        10.7
272..........................  MAJOR SKIN DISORDERS W CC...........     0.6584       23.0       19.2         9.3
273..........................  \1\ MAJOR SKIN DISORDERS W/O CC.....     0.4175       17.0       14.2         5.9
274..........................  MALIGNANT BREAST DISORDERS W CC.....     0.7231       21.8       18.2        10.1
275..........................  \6\ MALIGNANT BREAST DISORDERS W/O       0.7819       23.9       19.9         5.2
                                CC.
276..........................  \2\ NON-MALIGNANT BREAST DISORDERS..     0.5594       21.0       17.5         7.3
277..........................  CELLULITIS AGE >17 W CC.............     0.6089       20.9       17.4         8.4
278..........................  CELLULITIS AGE >17 W/O CC...........     0.4254       18.0       15.0         6.1
279..........................  \6\ CELLULITIS AGE 0-17.............     0.4175       17.0       14.2         5.8
280..........................  TRAUMA TO THE SKIN, SUBCUT TISS &        0.7148       24.1       20.1         6.3
                                BREAST AGE >17 W CC.
281..........................  \2\ TRAUMA TO THE SKIN, SUBCUT TISS      0.5594       21.0       17.5         4.3
                                & BREAST AGE >17 W/O CC.
282**........................  \6\ TRAUMA TO THE SKIN, SUBCUT TISS      0.5594       21.0       17.5         2.2
                                & BREAST AGE 0-17.
283..........................  MINOR SKIN DISORDERS W CC...........     0.6876       23.1       19.3         7.2
284..........................  \2\ MINOR SKIN DISORDERS W/O CC.....     0.5594       21.0       17.5         4.6
285..........................  AMPUTAT OF LOWER LIMB FOR                1.2418       31.6       26.3        16.0
                                ENDOCRINE,NUTRIT,& METABOL
                                DISORDERS.
286..........................  \6\ ADRENAL & PITUITARY PROCEDURES..     1.1625       29.5       24.6         8.0
287..........................  SKIN GRAFTS & WOUND DEBRID FOR           1.0402       33.0       27.5        15.2
                                ENDOC, NUTRIT & METAB DISORDERS.
288..........................  \4\ O.R. PROCEDURES FOR OBESITY.....     1.1625       29.5       24.6         5.4
289..........................  \6\ PARATHYROID PROCEDURES..........     1.1625       29.5       24.6         3.3
290..........................  \6\ THYROID PROCEDURES..............     1.1625       29.5       24.6         2.8
291..........................  \6\ THYROGLOSSAL PROCEDURES.........     1.1625       29.5       24.6         2.1
292..........................  OTHER ENDOCRINE, NUTRIT & METAB O.R.     1.1549       32.0       26.7        16.9
                                PROC W CC.
293..........................  \8\ OTHER ENDOCRINE, NUTRIT & METAB      1.1549       32.0       26.7         7.8
                                O.R. PROC W/O CC.
294..........................  DIABETES AGE >35....................     0.6958       23.9       19.9         6.7
295..........................  \2\ DIABETES AGE 0-35...............     0.5594       21.0       17.5         5.7
296..........................  NUTRITIONAL & MISC METABOLIC             0.7092       22.3       18.6         7.3
                                DISORDERS AGE >17 W CC.
297..........................  NUTRITIONAL & MISC METABOLIC             0.4596       19.3       16.1         4.6
                                DISORDERS AGE >17 W/O CC.
298..........................  \6\ NUTRITIONAL & MISC METABOLIC         0.4175       17.0       14.2         5.3
                                DISORDERS AGE 0-17.
299..........................  \3\ INBORN ERRORS OF METABOLISM.....     0.7819       23.9       19.9         8.2
300..........................  ENDOCRINE DISORDERS W CC............     0.7004       23.7       19.8         9.3
301..........................  \2\ ENDOCRINE DISORDERS W/O CC......     0.5594       21.0       17.5         5.2
302***.......................  \7\ KIDNEY TRANSPLANT...............     0.0000        0.0     0.00.0
303..........................  \6\ KIDNEY AND URETER PROCEDURES FOR     0.7819       23.9       19.9         9.7
                                NEOPLASM.
304..........................  \4\ KIDNEY AND URETER PROCEDURES FOR     1.1625       29.5       24.6        13.4
                                NON-NEOPLASM W CC.
305..........................  \6\ KIDNEY AND URETER PROCEDURES FOR     0.7819       23.9       19.9         4.7
                                NON-NEOPLASM W/O CC.
306..........................  \4\ PROSTATECTOMY W CC..............     1.1625       29.5       24.6         9.1
307..........................  \6\ PROSTATECTOMY W/O CC............     1.1625       29.5       24.6         2.9
308..........................  \4\ MINOR BLADDER PROCEDURES W CC...     1.1625       29.5       24.6         8.6
309..........................  \6\ MINOR BLADDER PROCEDURES W/O CC.     1.1625       29.5       24.6         2.4
310..........................  \4\ TRANSURETHRAL PROCEDURES W CC...     1.1625       29.5       24.6         7.2
311..........................  \6\ TRANSURETHRAL PROCEDURES W/O CC.     1.1625       29.5       24.6         2.7
312..........................  \3\ URETHRAL PROCEDURES, AGE >17 W       0.7819       23.9       19.9         8.0
                                CC.
313..........................  \6\ URETHRAL PROCEDURES, AGE >17 W/O     0.7819       23.9       19.9         3.6
                                CC.
314..........................  \6\ URETHRAL PROCEDURES, AGE 0-17...     0.7819       23.9       19.9       360.4
315..........................  OTHER KIDNEY & URINARY TRACT             1.4016       33.9       28.3        11.1
                                PROCEDURES.
316..........................  RENAL FAILURE.......................     0.8321       22.9       19.1         9.9
317..........................  ADMIT FOR RENAL DIALYSIS............     0.9102       24.4       20.3         5.4
318..........................  KIDNEY & URINARY TRACT NEOPLASMS W       0.7565       21.0       17.5         9.8
                                CC.
319..........................  \6\ KIDNEY & URINARY TRACT NEOPLASMS     0.7819       23.9       19.9         3.9
                                W/O CC.
320..........................  KIDNEY & URINARY TRACT INFECTIONS        0.6200       21.7       18.1         7.7
                                AGE >17 W CC.
321..........................  KIDNEY & URINARY TRACT INFECTIONS        0.4450       18.5       15.4         5.4
                                AGE >17 W/O CC.
322..........................  \6\ KIDNEY & URINARY TRACT               0.4175       17.0       14.2         5.2
                                INFECTIONS AGE 0-17.
323..........................  \1\ URINARY STONES W CC, &/OR ESW        0.4175       17.0       14.2         4.8
                                LITHOTRIPSY.
324..........................  \1\ URINARY STONES W/O CC...........     0.4175       17.0       14.2         2.7
325..........................  \2\ KIDNEY & URINARY TRACT SIGNS &       0.5594       21.0       17.5         5.8
                                SYMPTOMS AGE >17 W CC.
326..........................  \6\ KIDNEY & URINARY TRACT SIGNS &       0.4175       17.0       14.2         3.9
                                SYMPTOMS AGE >17 W/O CC.
327..........................  \6\ KIDNEY & URINARY TRACT SIGNS &       0.4175       17.0       14.2         2.8
                                SYMPTOMS AGE 0-17.
328..........................  \6\ URETHRAL STRICTURE AGE >17 W CC.     0.5594       21.0       17.5         5.4
329..........................  \6\ URETHRAL STRICTURE AGE >17 W/O       0.5594       21.0       17.5         2.4
                                CC.
330**........................  \6\ URETHRAL STRICTURE AGE 0-17.....     0.5594       21.0       17.5         1.6

[[Page 27025]]

 
331..........................  OTHER KIDNEY & URINARY TRACT             0.7773       22.5       18.8         8.7
                                DIAGNOSES AGE >17 W CC.
332..........................  \1\ OTHER KIDNEY & URINARY TRACT         0.4175       17.0       14.2         4.8
                                DIAGNOSES AGE >17 W/O CC.
333..........................  \6\ OTHER KIDNEY & URINARY TRACT         0.4175       17.0       14.2         8.4
                                DIAGNOSES AGE 0-17.
334..........................  \6\ MAJOR MALE PELVIC PROCEDURES W       0.4175       17.0       14.2         6.1
                                CC.
335..........................  \1\ MAJOR MALE PELVIC PROCEDURES W/O     0.4175       17.0       14.2         3.7
                                CC.
336..........................  \4\ TRANSURETHRAL PROSTATECTOMY W CC     1.1625       29.5       24.6         4.9
337..........................  \6\ TRANSURETHRAL PROSTATECTOMY W/O      1.1625       29.5       24.6         2.6
                                CC.
338..........................  \3\ TESTES PROCEDURES, FOR               0.7819       23.9       19.9         9.7
                                MALIGNANCY.
339..........................  \3\ TESTES PROCEDURES, NON-              0.7819       23.9       19.9         8.4
                                MALIGNANCY AGE >17.
340**........................  \6\ TESTES PROCEDURES, NON-              0.7819       23.9       19.9         2.4
                                MALIGNANCY AGE 0-17.
341..........................  \5\ PENIS PROCEDURES................     1.6835       37.1       30.9         4.4
342..........................  \6\ CIRCUMCISION AGE >17............     0.7819       23.9       19.9         4.6
343**........................  \6\ CIRCUMCISION AGE 0-17...........     0.7819       23.9       19.9         1.7
344..........................  \3\ OTHER MALE REPRODUCTIVE SYSTEM       0.7819       23.9       19.9         3.9
                                O.R. PROCEDURES FOR MALIGNANCY.
345..........................  \4\ OTHER MALE REPRODUCTIVE SYSTEM       1.1625       29.5       24.6         8.6
                                O.R. PROC EXCEPT FOR MALIGNANCY.
346..........................  \3\ MALIGNANCY, MALE REPRODUCTIVE        0.7819       23.9       19.9         9.6
                                SYSTEM, W CC.
347..........................  \1\ MALIGNANCY, MALE REPRODUCTIVE        0.4175       17.0       14.2         4.2
                                SYSTEM, W/O CC.
348..........................  \2\ BENIGN PROSTATIC HYPERTROPHY W       0.5594       21.0       17.5         6.3
                                CC.
349..........................  \6\ BENIGN PROSTATIC HYPERTROPHY W/O     0.7819       23.9       19.9         4.1
                                CC.
350..........................  INFLAMMATION OF THE MALE                 0.5606       21.0       17.5         7.0
                                REPRODUCTIVE SYSTEM.
351**........................  \6\ STERILIZATION, MALE.............     0.7819       23.9       19.9         1.3
352..........................  OTHER MALE REPRODUCTIVE SYSTEM           0.8209       27.5       22.9         6.7
                                DIAGNOSES.
353..........................  \6\ PELVIC EVISCERATION, RADICAL         1.1625       29.5       24.6         9.2
                                HYSTERECTOMY & RADICAL VULVECTOMY.
354..........................  \6\ UTERINE,ADNEXA PROC FOR NON-         1.1625       29.5       24.6         8.2
                                OVARIAN/ADNEXAL MALIG W CC.
355..........................  \6\ UTERINE,ADNEXA PROC FOR NON-         1.1625       29.5       24.6         4.2
                                OVARIAN/ADNEXAL MALIG W/O CC.
356..........................  \6\ FEMALE REPRODUCTIVE SYSTEM           1.1625       29.5       24.6         2.7
                                RECONSTRUCTIVE PROCEDURES.
357..........................  \6\ UTERINE & ADNEXA PROC FOR            1.1625       29.5       24.6        12.3
                                OVARIAN OR ADNEXAL MALIGNANCY.
358..........................  \6\ UTERINE & ADNEXA PROC FOR NON-       1.1625       29.5       24.6         5.7
                                MALIGNANCY W CC.
359..........................  \6\ UTERINE & ADNEXA PROC FOR NON-       1.1625       29.5       24.6         3.3
                                MALIGNANCY W/O CC.
360..........................  \6\ VAGINA, CERVIX & VULVA               1.1625       29.5       24.6         3.7
                                PROCEDURES.
361..........................  \6\ LAPAROSCOPY & INCISIONAL TUBAL       0.4175       17.0       14.2         4.5
                                INTERRUPTION.
362..........................  \6\ ENDOSCOPIC TUBAL INTERRUPTION...     0.4175       17.0       14.2         1.0
363..........................  \6\ D&C, CONIZATION & RADIO-IMPLANT,     0.4175       17.0       14.2         6.5
                                FOR MALIGNANCY.
364..........................  \6\ D&C, CONIZATION EXCEPT FOR           0.4175       17.0       14.2         6.1
                                MALIGNANCY.
365..........................  \4\ OTHER FEMALE REPRODUCTIVE SYSTEM     1.1625       29.5       24.6        13.0
                                O.R. PROCEDURES.
366..........................  MALIGNANCY, FEMALE REPRODUCTIVE          0.9106       21.6       18.0        10.2
                                SYSTEM W CC.
367..........................  \1\ MALIGNANCY, FEMALE REPRODUCTIVE      0.4175       17.0       14.2         4.6
                                SYSTEM W/O CC.
368..........................  INFECTIONS, FEMALE REPRODUCTIVE          0.7846       21.3       17.8        10.2
                                SYSTEM.
369..........................  \3\ MENSTRUAL & OTHER FEMALE             0.7819       23.9       19.9         5.1
                                REPRODUCTIVE SYSTEM DISORDERS.
370..........................  \6\ CESAREAN SECTION W CC...........     0.4175       17.0       14.2         7.0
371..........................  \6\ CESAREAN SECTION W/O CC.........     0.4175       17.0       14.2         4.5
372..........................  \6\ VAGINAL DELIVERY W COMPLICATING      0.4175       17.0       14.2         4.7
                                DIAGNOSES.
373..........................  \6\ VAGINAL DELIVERY W/O                 0.4175       17.0       14.2         3.0
                                COMPLICATING DIAGNOSES.
374..........................  \6\ VAGINAL DELIVERY W STERILIZATION     0.4175       17.0       14.2         4.1
                                &/OR D&C.
375..........................  \6\ VAGINAL DELIVERY W O.R. PROC         0.4175       17.0       14.2        11.0
                                EXCEPT STERIL &/OR D&C.
376..........................  \4\ POSTPARTUM & POST ABORTION           1.1625       29.5       24.6         5.1
                                DIAGNOSES W/O O.R. PROCEDURE.
377..........................  \6\ POSTPARTUM & POST ABORTION           0.4175       17.0       14.2         7.2
                                DIAGNOSES W O.R. PROCEDURE.
378..........................  \6\ ECTOPIC PREGNANCY...............     0.4175       17.0       14.2         3.2
379..........................  \6\ THREATENED ABORTION.............     0.4175       17.0       14.2         4.8
380..........................  \6\ ABORTION W/O D&C................     0.4175       17.0       14.2         2.9
381..........................  \6\ ABORTION W D&C, ASPIRATION           0.4175       17.0       14.2         3.6
                                CURETTAGE OR HYSTEROTOMY.
382..........................  \6\ FALSE LABOR.....................     0.4175       17.0       14.2         2.1
383..........................  \1\ OTHER ANTEPARTUM DIAGNOSES W         0.4175       17.0       14.2         5.6
                                MEDICAL COMPLICATIONS.
384..........................  \6\ OTHER ANTEPARTUM DIAGNOSES W/O       0.4175       17.0       14.2         3.6
                                MEDICAL COMPLICATIONS.
385**........................  \6\ NEONATES, DIED OR TRANSFERRED TO     0.4175       17.0       14.2         1.8
                                ANOTHER ACUTE CARE FACILITY.
386**........................  \6\ EXTREME IMMATURITY OR                0.4175       17.0       14.2        17.9
                                RESPIRATORY DISTRESS SYNDROME,
                                NEONATE.
387**........................  \6\ PREMATURITY W MAJOR PROBLEMS....     0.4175       17.0       14.2        13.3
388**........................  \6\ PREMATURITY W/O MAJOR PROBLEMS..     0.4175       17.0       14.2         8.6
389..........................  \6\ FULL TERM NEONATE W MAJOR            0.4175       17.0       14.2        17.6
                                PROBLEMS.

[[Page 27026]]

 
390**........................  \6\ NEONATE W OTHER SIGNIFICANT          0.4175       17.0       14.2         3.4
                                PROBLEMS.
391**........................  \6\ NORMAL NEWBORN..................     0.4175       17.0       14.2         3.1
392..........................  \6\ SPLENECTOMY AGE >17.............     1.1625       29.5       24.6        14.5
393**........................  \6\ SPLENECTOMY AGE 0-17............     1.1625       29.5       24.6         9.1
394..........................  \4\ OTHER O.R. PROCEDURES OF THE         1.1625       29.5       24.6        12.1
                                BLOOD AND BLOOD FORMING ORGANS.
395..........................  RED BLOOD CELL DISORDERS AGE >17....     0.6651       21.9       18.3         6.5
396..........................  \6\ RED BLOOD CELL DISORDERS AGE 0-      0.4175       17.0       14.2         4.5
                                17.
397..........................  COAGULATION DISORDERS...............     0.8276       20.4       17.0         8.2
398..........................  RETICULOENDOTHELIAL & IMMUNITY           0.6278       20.8       17.3         8.8
                                DISORDERS W CC.
399..........................  \1\ RETICULOENDOTHELIAL & IMMUNITY       0.4175       17.0       14.2         5.1
                                DISORDERS W/O CC.
401..........................  \4\ LYMPHOMA & NON-ACUTE LEUKEMIA W      1.1625       29.5       24.6        18.9
                                OTHER O.R. PROC W CC.
402..........................  \6\ LYMPHOMA & NON-ACUTE LEUKEMIA W      0.5594       21.0       17.5         6.3
                                OTHER O.R. PROC W/O CC.
403..........................  LYMPHOMA & NON-ACUTE LEUKEMIA W CC..     0.8846       23.9       19.9        13.2
404..........................  \3\ LYMPHOMA & NON-ACUTE LEUKEMIA W/     0.7819       23.9       19.9         6.6
                                O CC.
405**........................  \6\ ACUTE LEUKEMIA W/O MAJOR O.R.        0.7819       23.9       19.9         4.9
                                PROCEDURE AGE 0-17.
406..........................  \5\ MYELOPROLIF DISORD OR POORLY         1.6835       37.1       30.9        15.5
                                DIFF NEOPL W MAJ O.R.PROC W CC.
407..........................  \6\ MYELOPROLIF DISORD OR POORLY         1.1625       29.5       24.6         5.5
                                DIFF NEOPL W MAJ O.R.PROC W/O CC.
408..........................  \4\ MYELOPROLIF DISORD OR POORLY         1.1625       29.5       24.6        14.0
                                DIFF NEOPL W OTHER O.R.PROC.
409..........................  RADIOTHERAPY........................     0.8416       23.2       19.3         9.5
410..........................  CHEMOTHERAPY W/O ACUTE LEUKEMIA AS       1.2527       28.7       23.9         5.8
                                SECONDARY DIAGNOSIS.
411..........................  \6\ HISTORY OF MALIGNANCY W/O            0.5594       21.0       17.5         3.3
                                ENDOSCOPY.
412..........................  \6\ HISTORY OF MALIGNANCY W              0.5594       21.0       17.5         2.1
                                ENDOSCOPY.
413..........................  OTHER MYELOPROLIF DIS OR POORLY DIFF     0.8429       21.4       17.8        11.0
                                NEOPL DIAG W CC.
414..........................  \3\ OTHER MYELOPROLIF DIS OR POORLY      0.7819       23.9       19.9         6.4
                                DIFF NEOPL DIAG W/O CC.
417..........................  \6\ SEPTICEMIA AGE 0-17.............     0.7819       23.9       19.9        10.5
418..........................  POSTOPERATIVE & POST-TRAUMATIC           0.7961       24.1       20.1         9.6
                                INFECTIONS.
419..........................  \2\ FEVER OF UNKNOWN ORIGIN AGE >17      0.5594       21.0       17.5         6.8
                                W CC.
420..........................  \2\ FEVER OF UNKNOWN ORIGIN AGE >17      0.5594       21.0       17.5         4.9
                                W/O CC.
421..........................  VIRAL ILLNESS AGE >17...............     0.7065       20.4       17.0         6.2
422..........................  \6\ VIRAL ILLNESS & FEVER OF UNKNOWN     0.4175       17.0       14.2         5.6
                                ORIGIN AGE 0-17.
423..........................  OTHER INFECTIOUS & PARASITIC             1.0426       23.2       19.3        13.2
                                DISEASES DIAGNOSES.
424..........................  \5\ O.R. PROCEDURE W PRINCIPAL           1.6835       37.1       30.9        19.7
                                DIAGNOSES OF MENTAL ILLNESS.
425..........................  \1\ ACUTE ADJUSTMENT REACTION &          0.4175       17.0       14.2         5.3
                                PSYCHOSOCIAL DYSFUNCTION.
426..........................  DEPRESSIVE NEUROSES.................     0.4038       22.5       18.8         6.8
427..........................  \2\ NEUROSES EXCEPT DEPRESSIVE......     0.5594       21.0       17.5         7.3
428..........................  DISORDERS OF PERSONALITY & IMPULSE       0.5183       24.5       20.4        11.4
                                CONTROL.
429..........................  ORGANIC DISTURBANCES & MENTAL            0.5326       24.0       20.0         8.5
                                RETARDATION.
430..........................  PSYCHOSES...........................     0.4024       23.1       19.3        12.6
431..........................  \2\ CHILDHOOD MENTAL DISORDERS......     0.5594       21.0       17.5        10.1
432..........................  \1\ OTHER MENTAL DISORDER DIAGNOSES.     0.4175       17.0       14.2         6.1
433..........................  \6\ ALCOHOL/DRUG ABUSE OR                0.4175       17.0       14.2         4.2
                                DEPENDENCE, LEFT AMA.
439..........................  SKIN GRAFTS FOR INJURIES............     1.2203       36.0       30.0        13.6
440..........................  WOUND DEBRIDEMENTS FOR INJURIES.....     1.2248       34.4       28.7        13.4
441..........................  \2\ HAND PROCEDURES FOR INJURIES....     0.5594       21.0       17.5         5.2
442..........................  OTHER O.R. PROCEDURES FOR INJURIES W     1.3670       34.9       29.1        14.5
                                CC.
443..........................  \6\ OTHER O.R. PROCEDURES FOR            0.5594       21.0       17.5         5.6
                                INJURIES W/O CC.
444..........................  TRAUMATIC INJURY AGE >17 W CC.......     0.6598       23.2       19.3         6.4
445..........................  \2\ TRAUMATIC INJURY AGE >17 W/O CC.     0.5594       21.0       17.5         4.4
446**........................  \6\ TRAUMATIC INJURY AGE 0-17.......     0.5594       21.0       17.5         2.4
447..........................  \2\ ALLERGIC REACTIONS AGE >17......     0.5594       21.0       17.5         3.9
448**........................  \6\ ALLERGIC REACTIONS AGE 0-17.....     0.5594       21.0       17.5         2.9
449..........................  \3\ POISONING & TOXIC EFFECTS OF         0.7819       23.9       19.9         5.8
                                DRUGS AGE >17 W CC.
450..........................  \2\ POISONING & TOXIC EFFECTS OF         0.5594       21.0       17.5         2.9
                                DRUGS AGE >17 W/O CC.
451..........................  \6\ POISONING & TOXIC EFFECTS OF         0.7819       23.9       19.9        14.4
                                DRUGS AGE 0-17.
452..........................  COMPLICATIONS OF TREATMENT W CC.....     0.9275       25.7       21.4         7.8
453..........................  COMPLICATIONS OF TREATMENT W/O CC...     0.5790       21.6       18.0         4.2
454..........................  \3\ OTHER INJURY, POISONING & TOXIC      0.7819       23.9       19.9         6.5
                                EFFECT DIAG W CC.
455..........................  \6\ OTHER INJURY, POISONING & TOXIC      0.7819       23.9       19.9         3.4
                                EFFECT DIAG W/O CC.
461..........................  O.R. PROC W DIAGNOSES OF OTHER           1.1466       32.7       27.3         8.8
                                CONTACT W HEALTH SERVICES.
462..........................  REHABILITATION......................     0.5823       22.1       18.4        14.8
463..........................  SIGNS & SYMPTOMS W CC...............     0.6082       22.9       19.1         6.1
464..........................  SIGNS & SYMPTOMS W/O CC.............     0.5831       24.3       20.3         4.5

[[Page 27027]]

 
465..........................  AFTERCARE W HISTORY OF MALIGNANCY AS     0.6877       21.2       17.7         5.5
                                SECONDARY DIAGNOSIS.
466..........................  AFTERCARE W/O HISTORY OF MALIGNANCY      0.6700       21.7       18.1         7.0
                                AS SECONDARY DIAGNOSIS.
467..........................  \3\ OTHER FACTORS INFLUENCING HEALTH     0.7819       23.9       19.9         4.0
                                STATUS.
468..........................  EXTENSIVE O.R. PROCEDURE UNRELATED       2.1478       40.5       33.8        21.4
                                TO PRINCIPAL DIAGNOSIS.
469***.......................  \7\ PRINCIPAL DIAGNOSIS INVALID AS       0.0000        0.0        0.0         0.0
                                DISCHARGE DIAGNOSIS.
470***.......................  \7\ UNGROUPABLE.....................     0.0000        0.0        0.0         0.0
471..........................  \5\ BILATERAL OR MULTIPLE MAJOR          1.6835       37.1       30.9         6.2
                                JOINT PROCS OF LOWER EXTREMITY.
473..........................  ACUTE LEUKEMIA W/O MAJOR O.R.            0.9917       25.3       21.1        21.4
                                PROCEDURE AGE >17.
476..........................  \5\ PROSTATIC O.R. PROCEDURE             1.6835       37.1       30.9        17.7
                                UNRELATED TO PRINCIPAL DIAGNOSIS.
477..........................  NON-EXTENSIVE O.R. PROCEDURE             1.5119       35.9       29.9        14.8
                                UNRELATED TO PRINCIPAL DIAGNOSIS.
479..........................  \2\ OTHER VASCULAR PROCEDURES W/O CC     0.5594       21.0       17.5         3.9
480***.......................  \7\ LIVER TRANSPLANT AND/OR              0.0000        0.0        0.0         0.0
                                INTESTINAL TRANSPLANT.
481..........................  \6\ BONE MARROW TRANSPLANT..........     1.1625       29.5       24.6        35.2
482..........................  \5\ TRACHEOSTOMY FOR FACE,MOUTH &        1.6835       37.1       30.9        17.6
                                NECK DIAGNOSES.
484..........................  \6\ CRANIOTOMY FOR MULTIPLE              1.6835       37.1       30.9        23.1
                                SIGNIFICANT TRAUMA.
485..........................  \6\ LIMB REATTACHMENT, HIP & FEMUR       1.1625       29.5       24.6        14.7
                                PROC FOR MULTIPLE SIGNIFICANT
                                TRAUMA.
486..........................  \3\ OTHER O.R. PROCEDURES FOR            0.7819       23.9       19.9        21.8
                                MULTIPLE SIGNIFICANT TRAUMA.
487..........................  \4\ OTHER MULTIPLE SIGNIFICANT           1.1625       29.5       24.6        11.5
                                TRAUMA.
488..........................  \4\ HIV W EXTENSIVE O.R. PROCEDURE..     1.1625       29.5       24.6        29.6
489..........................  HIV W MAJOR RELATED CONDITION.......     0.9436       22.1       18.4        13.3
490..........................  HIV W OR W/O OTHER RELATED CONDITION     0.6456       20.3       16.9         8.5
491..........................  \5\ MAJOR JOINT & LIMB REATTACHMENT      1.6835       37.1       30.9         4.5
                                PROCEDURES OF UPPER EXTREMITY.
492..........................  \2\ CHEMO W ACUTE LEUKEMIA AS SDX OR     0.5594       21.0       17.5        23.1
                                W USE OF HIGH DOSE CHEMO AGENT.
493..........................  \4\ LAPAROSCOPIC CHOLECYSTECTOMY W/O     1.1625       29.5       24.6         9.8
                                C.D.E. W CC.
494..........................  \6\ LAPAROSCOPIC CHOLECYSTECTOMY W/O     1.1625       29.5       24.6         4.2
                                C.D.E. W/O CC.
495***.......................  \7\ LUNG TRANSPLANT.................     0.0000        0.0        0.0         0.0
496..........................  \4\ COMBINED ANTERIOR/POSTERIOR          1.1625       29.5       24.6        13.8
                                SPINAL FUSION.
497..........................  \5\ SPINAL FUSION EXCEPT CERVICAL W      1.6835       37.1       30.9         8.3
                                CC.
498..........................  \6\ SPINAL FUSION EXCEPT CERVICAL W/     1.6835       37.1       30.9         5.3
                                O CC.
499..........................  \5\ BACK & NECK PROCEDURES EXCEPT        1.6835       37.1       30.9         6.6
                                SPINAL FUSION W CC.
500..........................  \4\ BACK & NECK PROCEDURES EXCEPT        1.1625       29.5       24.6         3.3
                                SPINAL FUSION W/O CC.
501..........................  KNEE PROCEDURES W PDX OF INFECTION W     1.2164       33.3       27.8        15.4
                                CC.
502..........................  \3\ KNEE PROCEDURES W PDX OF             0.7819       23.9       19.9         8.7
                                INFECTION W/O CC.
503..........................  \4\ KNEE PROCEDURES W/O PDX OF           1.1625       29.5       24.6         6.1
                                INFECTION.
504..........................  \5\ EXTENSIVE BURNS OR FULL              1.6835       37.1       30.9        48.4
                                THICKNESS BURNS W MV 96+ HRS W SKIN
                                GRAFT.
505..........................  \5\ EXTENSIVE BURNS OR FULL              1.6835       37.1       30.9         9.4
                                THICKNESS BURNS W MV 96+ HRS W/O
                                SKIN GRAFT.
506..........................  \4\ FULL THICKNESS BURN W SKIN GRAFT     1.1625       29.5       24.6        26.1
                                OR INHAL INJ W CC OR SIG TRAUMA.
507..........................  \6\ FULL THICKNESS BURN W SKIN GRFT      0.4175       17.0       14.2        13.2
                                OR INHAL INJ W/O CC OR SIG TRAUMA.
508..........................  FULL THICKNESS BURN W/O SKIN GRFT OR     0.7588       25.6       21.3        12.1
                                INHAL INJ W CC OR SIG TRAUMA.
509..........................  \1\ FULL THICKNESS BURN W/O SKIN         0.4175       17.0       14.2         8.6
                                GRFT OR INH INJ W/O CC OR SIG
                                TRAUMA.
510..........................  NON-EXTENSIVE BURNS W CC OR              0.6720       22.6       18.8         9.7
                                SIGNIFICANT TRAUMA.
511..........................  \1\ NON-EXTENSIVE BURNS W/O CC OR        0.4175       17.0       14.2         5.7
                                SIGNIFICANT TRAUMA.
512***.......................  \7\ SIMULTANEOUS PANCREAS/KIDNEY         0.0000        0.0        0.0         0.0
                                TRANSPLANT.
513***.......................  \7\ PANCREAS TRANSPLANT.............     0.0000        0.0        0.0         0.0
515..........................  \4\ CARDIAC DEFIBRILLATOR IMPLANT W/     1.1625       29.5       24.6         5.9
                                O CARDIAC CATH.
518..........................  \6\ PERCUTANEOUS CARDIOVASC PROC W/O     0.4175       17.0       14.2         3.7
                                CORONARY ARTERY STENT OR AMI.
519..........................  \4\ CERVICAL SPINAL FUSION W CC.....     1.1625       29.5       24.6         7.4
520..........................  \6\ CERVICAL SPINAL FUSION W/O CC...     1.6835       37.1       30.9         2.8
521..........................  \2\ ALCOHOL/DRUG ABUSE OR DEPENDENCE     0.5594       21.0       17.5         8.4
                                W CC.
522..........................  \6\ ALCOHOL/DRUG ABUSE OR DEPENDENCE     0.5594       21.0       17.5        16.7
                                W REHABILITATION THERAPY W/O CC.
523..........................  \1\ ALCOHOL/DRUG ABUSE OR DEPENDENCE     0.4175       17.0       14.2         5.8
                                W/O REHABILITATION THERAPY W/O CC.

[[Page 27028]]

 
524..........................  \2\ TRANSIENT ISCHEMIA..............     0.5594       21.0       17.5         4.8
525..........................  \6\ OTHER HEART ASSIST SYSTEM            1.6835       37.1       30.9        24.1
                                IMPLANT.
528..........................  \6\ INTRACRANIAL VASCULAR PROCEDURES     1.6835       37.1       30.9        26.9
                                W PDX HEMORRHAGE.
529..........................  \5\ VENTRICULAR SHUNT PROCEDURES W       1.6835       37.1       30.9        11.7
                                CC.
530..........................  \6\ VENTRICULAR SHUNT PROCEDURES W/O     1.6835       37.1       30.9         4.5
                                CC.
531..........................  \5\ SPINAL PROCEDURES W CC..........     1.6835       37.1       30.9        15.5
532..........................  \3\ SPINAL PROCEDURES W/O CC........     0.7819       23.9       19.9         5.9
533..........................  \4\ EXTRACRANIAL PROCEDURES W CC....     1.1625       29.5       24.6         5.7
534..........................  \6\ EXTRACRANIAL PROCEDURES W/O CC..     1.1625       29.5       24.6         2.5
535..........................  \5\ CARDIAC DEFIB IMPLANT W CARDIAC      1.6835       37.1       30.9        15.6
                                CATH W AMI/HF/SHOCK.
536..........................  \6\ CARDIAC DEFIB IMPLANT W CARDIAC      1.1625       29.5       24.6        11.7
                                CATH W/O AMI/HF/SHOCK.
537..........................  LOCAL EXCISION & REMOVAL INT FIX         1.4672       39.9       33.3        10.8
                                DEVICES EXCEPT HIP & FEMUR W CC.
538..........................  \4\ LOCAL EXCISION & REMOVAL INT FIX     1.1625       29.5       24.6         4.5
                                DEVICES EXCEPT HIP & FEMUR W/O CC.
539..........................  \4\ LYMPHOMA & LEUKEMIA W MAJOR O.R.     1.1625       29.5       24.6        18.1
                                PROCEDURE W CC.
540..........................  \6\ LYMPHOMA & LEUKEMIA W MAJOR O.R.     0.4175       17.0       14.2         5.6
                                PROCEDURE W/O CC.
541..........................  ECMO OR TRACH W MV 96+ HRS OR PDX        3.8893       58.1       48.4        65.8
                                EXC FACE, MOUTH & NECK W MAJ O.R..
542..........................  TRACH W MV 96+ HRS OR PDX EXC FACE,      2.8689       45.1       37.6        49.1
                                MOUTH & NECK W/O MAJ O.R..
543..........................  \5\ CRANIOTOMY W MAJOR DEVICE            1.6835       37.1       30.9        20.4
                                IMPLANT OR ACUTE COMPLEX CNS PDX.
544..........................  \5\ MAJOR JOINT REPLACEMENT OR           1.6835       37.1       30.9         6.1
                                REATTACHMENT OF LOWER EXTREMITY.
545..........................  \5\ REVISION OF HIP OR KNEE              1.6835       37.1       30.9         7.4
                                REPLACEMENT.
546..........................  \6\ SPINAL FUSION EXC CERV WITH          1.6835       37.1       30.9        13.4
                                CURVATURE OF THE SPINE OR MALIG.
547..........................  \6\ CORONARY BYPASS W CARDIAC CATH W     1.1625       29.5       24.6        17.8
                                MAJOR CV DX.
548..........................  \6\ CORONARY BYPASS W CARDIAC CATH W/    1.1625       29.5       24.6        12.0
                                O MAJOR CV DX.
549..........................  \6\ CORONARY BYPASS W/O CARDIAC CATH     1.1625       29.5       24.6        15.0
                                W MAJOR CV DX.
550..........................  \6\ CORONARY BYPASS W/O CARDIAC CATH     1.1625       29.5       24.6         9.3
                                W/O MAJOR CV DX.
551..........................  PERMANENT CARDIAC PACEMAKER IMPL W       1.6035       29.5       24.6        10.3
                                MAJ CV DX OR AICD LEAD OR GNRTR.
552..........................  \4\ OTHER PERMANENT CARDIAC              1.1625       29.5       24.6         5.5
                                PACEMAKER IMPLANT W/O MAJOR CV DX.
553..........................  OTHER VASCULAR PROCEDURES W CC W         1.5837       32.5       27.1        15.8
                                MAJOR CV DX.
554..........................  OTHER VASCULAR PROCEDURES W CC W/O       1.2817       31.6       26.3         9.3
                                MAJOR CV DX.
555..........................  \3\ PERCUTANEOUS CARDIOVASCULAR PROC     0.7819       23.9       19.9         7.8
                                W MAJOR CV DX.
556..........................  \6\ PERCUTANEOUS CARDIOVASC PROC W       0.4175       17.0       14.2         2.9
                                NON-DRUG-ELUTING STENT W/O MAJ CV
                                DX.
557..........................  \4\ PERCUTANEOUS CARDIOVASCULAR PROC     1.1625       29.5       24.6         6.5
                                W DRUG-ELUTING STENT W MAJOR CV DX.
558..........................  \6\ PERCUTANEOUS CARDIOVASCULAR PROC     0.4175       17.0       14.2         2.6
                                W DRUG-ELUTING STENT W/O MAJ CV DX.
559..........................  \6\ ACUTE ISCHEMIC STROKE WITH USE       0.7819       23.9       19.9        10.7
                                OF THROMBOLYTIC AGENT.
560..........................  BACTERIAL & TUBERCULOUS INFECTIONS       0.9308       25.5       21.3        16.9
                                OF NERVOUS SYSTEM.
561..........................  NON-BACTERIAL INFECTIONS OF NERVOUS      0.8145       22.3       18.6        15.5
                                SYSTEM EXCEPT VIRAL MENINGITIS.
562..........................  SEIZURE AGE >17 W CC................     0.6844       23.2       19.3         7.6
563..........................  \2\ SEIZURE AGE >17 W/O CC..........     0.5594       21.0       17.5         4.9
564..........................  HEADACHES AGE >17...................     0.7565       24.1       20.1         5.3
565..........................  RESPIRATORY SYSTEM DIAGNOSIS WITH        2.0557       34.7       28.9        23.3
                                VENTILATOR SUPPORT 96+ HOURS.
566..........................  RESPIRATORY SYSTEM DIAGNOSIS WITH        1.5445       27.4       22.8        13.2
                                VENTILATOR SUPPORT < 96 HOURS.
567..........................  \5\ STOMACH, ESOPHAGEAL & DUODENAL       1.6835       37.1       30.9        25.4
                                PROC AGE >17 W CC W MAJOR GI DX.
568..........................  \5\ STOMACH, ESOPHAGEAL & DUODENAL       1.6835       37.1       30.9        19.2
                                PROC AGE >17 W CC W/O MAJOR GI DX.
569..........................  \5\ MAJOR SMALL & LARGE BOWEL            1.6835       37.1       30.9        22.5
                                PROCEDURES W CC W MAJOR GI DX.
570..........................  \5\ MAJOR SMALL & LARGE BOWEL            1.6835       37.1       30.9        14.9
                                PROCEDURES W CC W/O MAJOR GI DX.
571..........................  MAJOR ESOPHAGEAL DISORDERS..........     0.8214       21.9       18.3         7.5
572..........................  MAJOR GASTROINTESTINAL DISORDERS AND     0.8505       23.3       19.4        11.0
                                PERITONEAL INFECTIONS.
573..........................  \5\ MAJOR BLADDER PROCEDURES........     1.6835       37.1       30.9        16.7
574..........................  MAJOR HEMATOLOGIC/IMMUNOLOGIC DIAG       0.8106       19.7       16.4         9.1
                                EXC SICKLE CELL CRISIS & COAGUL.
575..........................  SEPTICEMIA W MV 96+ HOURS AGE >17...     1.6583       27.8       23.2        24.4

[[Page 27029]]

 
576..........................  SEPTICEMIA W/O MV 96+ HOURS AGE >17.     0.7925       23.0       19.2        11.8
577..........................  \6\ CAROTID ARTERY STENT PROCEDURE..     1.1625       29.5       24.6         3.3
578..........................  O. R. PROCEDURE W PDX EXC                1.4849       35.7       29.8        26.5
                                POSTOPERATIVE OR POST-TRAUMATIC
                                INFECTION.
579..........................  O. R. PROCEDURE W PDX OF                 1.2978       35.2       29.3       18.0
                                POSTOPERATIVE OR POST-TRAUMATIC
                                INFECTION.
----------------------------------------------------------------------------------------------------------------
\1\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 1.
\2\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 2.
\3\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 3.
\4\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 4.
\5\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 5.
\6\ Relative weights for these LTC-DRGs were determined by assigning these cases to the appropriate low volume
  quintile because they had no LTCH cases in the FY 2005 MedPAR file.
\7\ Relative weights for these LTC-DRGs were assigned a value of 0.0000.
\8\ Relative weights for these LTC-DRGs were determined after adjusting to account for nonmonotonicity.
* ``IPPS Comparable Threshold'' for the revision to the short-stay outlier policy, as discussed in section
  V.A.2. of the preamble of this final rule.
** IPPS hospital statistical data for these LTC-DRGs was supplemented due to a low volume of IPPS cases.
*** Although IPPS hospital statistical data for these DRGs may be available, a value of zero for the ``IPPS
  Comparable Threshold'' was assigned for these LTC-DRGs since the relative weights for these LTC-DRGs were
  assigned a value of 0.0000, as discussed in section III. of the preamble of this final rule.

[FR Doc. 07-2206 Filed 5-1-07; 4:00 pm]
BILLING CODE 4120-01-P