## Monday,

November 15, 2004

Book 2 of 4 Books
Pages 65681–66234



# Part II



# Department of
Health and Human

Services

Centers for Medicare & Medicaid Services

42 CFR Part 419
Medicare Program; Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2005 Rates;

Final Rule


### 65682 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

**DEPARTMENT OF HEALTH AND**
**HUMAN SERVICES**

**Centers for Medicare & Medicaid**
**Services**

**42 CFR Part 419**

**[CMS–1427–FC]**

**RIN 0938–AM75**

**Medicare Program; Changes to the Hospital Outpatient Prospective**  **Payment System and Calendar Year 2005 Payment Rates** 

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

**ACTION :**  Final rule with comment period.

**SUMMARY :**  This final rule with comment period revises the Medicare hospital outpatient prospective payment system to implement applicable statutory requirements and changes arising from our continuing experience with this system and to implement certain related provisions of the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003. In addition, the final rule with comment period describes final changes to the amounts
and factors used to determine the payment rates for Medicare hospital outpatient services paid under the prospective payment system. These changes are applicable to services furnished on or after January 1, 2005.

In this final rule with comment period, we are responding to public comments received on the January 6,
2004 interim final rule with comment period relating to MMA provisions that were effective January 1, 2004, and finalizing those policies. Further, we are responding to public comments received on the November 7, 2003 final rule with comment period pertaining to the ambulatory payment classification assignment of Healthcare Common Procedure Coding System (HCPCS)
codes identified in Addendum B of that rule with the new interim (NI) comment indicators (formerly referred to as condition codes).

**DATES :**  Effective Date: This final rule with comment period is effective on January 1, 2005.

Comment Date: We will consider comments on the ambulatory payment classification assignments of HCPCS
codes identified in Addendum B with
new interim comment codes and other areas specified throughout this preamble, if we receive them at the appropriate address, as provided below no later than 5 p.m. on January 14, 2005.

**ADDRESSES :**  In commenting, please refer
to file code CMS–1427–FC. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX)

transmission.

You may submit comments in one of three ways (no duplicates, please):

1. Electronically

You may submit electronic comments

to http://www.cms.hhs.gov/regulations/

ecomments (Attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word).

2. By Mail

You may mail written comments (one original and two copies) to the following address only: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS–1427–FC, P.O. Box 8010, Baltimore, MD 21244–8018.

Please allow sufficient time for mailed
comments to be received before the close of the comment period.

3. By Hand or Courier

If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786–7195 in advance to schedule your arrival with one of our staff members. Room 445–G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD

21244–1850.

(Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

Inspection of Public Comments: All
comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential
business information that is included in
a comment. After the close of the comment period, CMS posts all
electronic comments received before the close of the comment period on its public website. Written comments received timely will be available for public inspection as they are received, generally beginning approximately 4 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, MD 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone (410) 786–7195.

**FOR FURTHER INFORMATION CONTACT :**  Dana Burley, (410) 786–0378, Outpatient prospective payment issues and Suzanne Asplen, (410) 786–4558, Partial hospitalization and community
mental health center issues.

**SUPPLEMENTARY INFORMATION :** 
Availability of Copies and Electronic

Access

Copies: To order copies of the Federal Register containing this document, send your request to: New Orders, Superintendent of Documents, PO Box 371954, Pittsburgh, PA 15250–7954. Specify the date of the issue requested and enclose a check or money order payable to the Superintendent of Documents, or enclose your Visa or Master Card number and expiration
date. Credit card orders can also be placed by calling the order desk at (202) 512–1800 (or toll-free at 1–888–293– 6498) or by faxing to (202) 512–2250. The cost for each copy is $10. As an alternative, you can view and photocopy the Federal Register document at most libraries designated as Federal Depository Libraries and at many other public and academic libraries throughout the country that
receive the Federal Register

.

This Federal Register document is
also available from the Federal Register online database through GPO Access, a service of the U.S. Government Printing
Office. The Web site address is: http:// www.gpoaccess.gov/fr/index.html.

Alphabetical List of Acronyms Appearing in
the Final Rule With Comment Period
ACEP—American College of Emergency Physicians AHA—American Hospital Association
AHIMA—American Health Information Management Association
AMA—American Medical Association APC—Ambulatory payment classification AMP—Average manufacturer price ASP—Average sales price ASC—Ambulatory surgical center AWP—Average wholesale price BBA—Balanced Budget Act of 1997, Public

Law 105–33 BIPA—Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Public Law 106–554 BBRA—Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Public Law 106–113 CAH—Critical access hospital CCR—(Cost center specific) cost-to-charge

ratio CMHC—Community mental health center


### 65683 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

CMS

— Centers for Medicare & Medicaid Services (formerly known as the Health Care Financing Administration)

CORF

— Comprehensive outpatient rehabilitation facility

CPT

— [Physicians ’ ] Current Procedural Terminology, Fourth Edition, 2004, copyrighted by the American Medical

Association

CRNA

— Certified registered nurse anesthetist

CY

— Calendar year

DMEPOS

— Durable medical equipment, prosthetics, orthotics, and supplies

DMERC

— Durable medical equipment regional carrier

DRG

— Diagnosis-related group

DSH

— Disproportionate share hospital

EACH

— Essential Access Community Hospital
E/M

— Evaluation and management

EPO

— Erythropoietin

ESRD

— End-stage renal disease

FACA

— Federal Advisory Committee Act,
Public Law 92

– 463

FDA

— Food and Drug Administration

FI

— Fiscal intermediary

FSS

— Federal Supply Schedule

FY

— Federal fiscal year

HCPCS

— Healthcare Common Procedure Coding System

HCRIS

— Hospital Cost Report Information System

HHA

— Home health agency

HIPAA

— Health Insurance Portability and Accountability Act of 1996, Public Law

104

– 191
ICD

– 9

– CM

— International Classification of Diseases, Ninth Edition, Clinical
Modification

IME

— Indirect medical education

IPPS

— (Hospital) inpatient prospective
payment system
IVIG

— Intravenous immune globulin

LTC

— Long-term care
MedPAC

— Medicare Payment Advisory

Commission

MDH

— Medicare-dependent hospital

MMA

— Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Public Law 108

– 173
MSA

— Metropolitan Statistical Area

NCCI

— National Correct Coding Initiative

NCD

— National Coverage Determination

OCE

— Outpatient code editor

OMB

— Office of Management and Budget

OPD

— (Hospital) outpatient department

OPPS

— (Hospital) outpatient prospective
payment system

PET

— Positron Emission Tomography

PHP

— Partial hospitalization program

PM

— Program memorandum

PPI

— Producer Price Index

PPS

— Prospective payment system

PPV

— Pneumococcal pneumonia (virus)

PRA

— Paperwork Reduction Act QIO

— Quality Improvement Organization

RFA

— Regulatory Flexibility Act

RRC

— Rural referral center

SBA

— Small Business Administration

SCH

— Sole community hospital

SDP

— Single drug pricer

SI

— Status indicator

TEFRA

— Tax Equity and Fiscal Responsibility Act of 1982, Public Law

97

– 248
TOPS

— Transitional outpatient payments USPDI

— United States Pharmacopoeia Drug
Information
To assist readers in referencing sections contained in this document, we are providing the following outline of

contents:

Outline of Contents
I. Background

A. Legislative and Regulatory Authority for

the Outpatient Prospective Payment System B. Excluded OPPS Services and Hospitals C. Prior Rulemaking D. APC Advisory Panel 1. Authority for the APC Panel
2. Establishment of the APC Panel 3. APC Panel Meetings and Organizational

Structure E. Provisions of the Medicare Prescription

Drug, Improvement, and Modernization
Act of 2003 F. Summary of the Provisions of the

August 16, 2004 Proposed Rule
G. Public Comments Received on the

August 16, 2004 Proposed Rule
H. Public Comments Received on the

January 6, 2004 Interim Final Rule with
Comment Period
I. Public Comments Received on the

November 7, 2003 Final Rule with
Comment Period II. Changes Related to Ambulatory Payment Classifications (APCs) A. APC Changes: General
B. APC Panel Review and

Recommendations 1. February 2004 Panel Meeting. 2. September 2004 Panel Meeting
3. Contents of This Section of the Preamble 4. APC 0018: Biopsy of Skin/Puncture of

Lesion 5. Level I and II Arthroscopy 6. Angiography and Venography Except

Extremity a. February 2004 Panel Meeting
b. Public Comments Received c. Final Policy for CY 2005 7. Packaged Codes in APCs
C. Limits on Variations Within APCs:

Application of the 2 Times Rule 1. Cardiac and Ambulatory Blood Pressure

Monitoring 2. Electrocardiograms 3. Excision/Biopsy 4. Posterior Segment Eye Procedures 5. Laparoscopy
6. Anal/Rectal Procedures 7. Nerve Injections 8. Anterior Segment Eye Procedures 9. Pathology

10. Immunizations 11. Pulmonary Tests
12. Clinic Visits 13. Other APC Assignment Issues a. Catheters for Brachytherapy Services b. Peripherally Inserted Central Catheters

(PICC)
c. External Fixation Devices d. Apheresis e. Imaging for Intravenous Cholangiogram

(IVC) Filter Placement and Breast Biopsy f. Hysteroscopic Endometrial Ablation

Procedures g. Hysteroscopic Female Sterilization h. Urinary Bladder Residual Study i. Intracranial Studies, Electrodiagnostic

Testing, Autonomic Testing, and EEG j. Therapeutic Radiation Treatment k. Hyperthermia Procedures l. Physician Blood Bank Services
m. Caloric Vestibular Test

n. APC 0365

— Level II Audiometry o. Noncoronary Intravascular Ultrasound

(IVUS) p. Electronic Analysis of Neurostimulator

Pulse Generators q. Endoscopic Ultrasound Services r. External Counterpulsation D. Exceptions to the 2 Times Rule E. Coding for Stereostatic Radiosurgery

Services 1. Background 2. Proposal for CY 2005
3. Public Comments Received and

Departmental Responses 4. Final Policy for CY 2005
F. Movement of Procedures from New

Technology APCs to Clinically Appropriate APCs 1. Background
2. APC Panel Review and Recommendation 3. Proposed and Final Policy for CY 2005 a. Computerized Reconstruction CT of

Aorta b. Left Ventricular Pacing, Lead and

Connector c. Positron Emission Tomography (PET)

Scans d. Bard Endoscopic Suturing System e. Stretta System f. Gastrointestinal Tract Capsule

Endoscopy g. Proton Beam Therapy 4. Public Comments Received Relating to

Other New Technology APC Issues a. Computerized Reconstruction CT of

Aorta b. Kyphoplasty c. Laser Treatment of Benign Prostatic

Hyperplasia (BPH) d. Computerized Tomographic

Angiography (CTA)
e. Acoustic Heart Sound Services f. Laparoscopic Ablation Renal Mass g. Intrabeam Intra-Operative Therapy h. New Technology Process Issues G. Changes to the Inpatient List H. Assignment of ‘‘ Unlisted ’’ HCPCS Codes 1. Background 2. Proposed and Final Policies for CY 2005
I. Addition of New Procedure Codes J. OPPS Changes Relating to Coverage of

Initial Preventive Physical Examinations and Mammography under Public Law

108

– 173 1. Payment for Initial Preventive Physical

Examinations (Section 611 of Pub. L.

108

– 173) a. Background b. Amendments to Regulations c. Assignment of New HCPCS Codes for

Payment of Initial Preventive Physical

Examinations d. APC Assignment of Initial Preventive

Physical Examinations 2. Payment for Certain Mammography

Services (Section 614 of Pub. L. 108

– 173) III. Recalibration of APC Relative Weights for

CY 2005
A. Database Construction


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1. Treatment of Multiple Procedure Claims 2. Use of Single Procedure Claims
B. Calculation of Median Costs for CY 2005 C. Adjustment of Median Costs for CY 2005 1. Device-Dependent APCs a. APC 0226: Implantation of Drug Infusion

Reservoir b. APC 0048: Arthroscopy with Prosthesis c. APC 0385: Level I Prosthetic Urological

Procedures d. APC 0119: Implantation of Infusion

Device and APC 0115: Cannula/Access
Device Procedures 2. Treatment of Specified APCs a. APC 0315: Level II Implantation of

Neurostimulator b. APC 0651: Complex Interstitial

Radiation Application c. APC 0659: Hyperbaric Oxygen Therapy
3. Other APC Median Cost Issues a. APC 0312 Radioelement Applications b. Percutaneous Radiofrequency Ablation

of Liver Tumors c. Heparin Coated Stents d. Aqueous Drainage Assist Device 4. Required Use of C-Codes for Devices
5. Submission of External Data D. Calculation of Scaled OPPS Payment

Weights IV. Payment Changes For Devices

A. Pass-Through Payments For Devices 1. Expiration of Transitional Pass-Through

Payments for Certain Devices 2. Proposed and Final Policies for CY 2005 B. Provisions for Reducing Transitional

Pass-Through Payments to Offset Costs Packaged Into APC Groups 1. Background 2. Proposed and Final Policies for CY 2005C. Criteria for Establishing New PassThrough Device Categories V. Payment Changes for Drugs, Biologicals, and Radiopharmaceutical Agents, and
Blood and Blood Products A. Transitional Pass-Through Payment for

Additional Costs of Drugs and Biologicals 1. Background 2. Expiration in CY 2004 of Pass-Through

Status for Drugs and Biologicals3. Drugs and Biologicals With PassThrough Status in CY 2005 B. Drugs, Biologicals, and

Radiopharmaceuticals Without PassThrough Status 1. Background 2. Criteria for Packaging Payment for

Drugs, Biologicals, and Radiopharmaceuticals 3. Payment for Drugs, Biologicals, and

Radiopharmaceuticals Without PassThrough Status That Are Not Packaged a. Payment for Specified Covered

Outpatient Drugsb. Treatment of Three Sunsetting PassThrough Drugs as Specified Covered Outpatient Drugs c. CY 2005 Payment for Nonpass-Through

Drugs, Biologicals, and Radiopharmaceuticals with HCPCS Codes But Without OPPS Hospital
Claims Data d. Payment for Separately Payable

Nonpass-Through Drugs and Biologicals e. CY 2005 Change in Payment Status for

HCPCS Code J7308 4. Public Comments Received on the January 6, 2004 Interim Final rule With Comment Period and Departmental Responses C. Coding and Billing for Specified

Outpatient Drugs D. Payment for New Drugs, Biologicals,

and Radiopharmaceuticals Before HCPCS Codes Are Assigned 1. Background
2. Provisions of Public Law 108

– 173 E. Payment for Vaccines F. Changes in Payment for Single

Indication Orphan Drugs G. Changes in Payment Policy for

Radiopharmaceuticals H. Coding and Payment for Drug

Administration I. Payment for Blood and Blood Products VI. Estimated Transitional Pass-Through Spending in CY 2005 for Drugs, Biologicals, and Devices
A. Basis for Pro Rata Reduction B. Estimate of Pass-Through Spending for

CY 2005 VII. Other Policy Decisions and Policy ChangesA. Statewide Average Default Cost-toCharge Ratios B. Transitional Corridor Payments:

Technical Change
C. Status Indicators and Comment

Indicators Assigned in Outpatient Code Editor (OCE) 1. Payment Status Indicators
2. Comment Indicators
D. Observation Services E. Procedures That Will be Paid Only as

Inpatient Procedures F. Hospital Coding for Evaluation and

Management Services 1. Background 2. Proposal for Evaluation and

Management Guidelines G. Brachytherapy Payment Issues Related

to Public Law 108

– 173 1. Payment for Brachytherapy Sources

(Section 621(b) of Pub. L. 108

– 173) 2. HCPCS Codes and APC Assignments for

Brachytherapy Sources H. Payment for APC 0375, Ancillary

Outpatient Services When Patient Expires VIII. Conversion Factor Update for CY 2005 IX. Wage Index Changes for CY 2005 X. Determination of Payment Rates and Outlier Payments for CY 2005 A. Calculation of the National Unadjusted

Medicare Payment B. Hospital Outpatient Outlier Payments C. Payment for Partial Hospitalization 1. Background 2. PHP APC Update for CY 2005 3. Separate Threshold for Outlier Payments

to CMHCs
D. General Public Comments XI. Beneficiary Copayments for CY 2005

A. Background B. Copayment for CY 2005
XII. Addendum Files Available to the Public

Via Internet XIII. Collection of Information Requirements XIV. Regulatory Impact Analysis

A. OPPS: General B. Impact of Changes in this Final Rule

with Comment Period C. Alternatives Considered D. Limitations of Our Analysis E. Estimated Impacts of this Final Rule

with Comment Period on Hospitals F. Projected Distribution of Outlier

Payment G. Estimated Impacts of This Final Rule

with Comment Period on Beneficiaries XV. Regulation Text

Addenda

Addendum A

— List of Ambulatory Payment Classification (APCs) with Status Indicators, Relative Weights, Payment Rates, and Copayment Amounts for CY

2005 Addendum B

— Payment Status by HCPCS
Code and Related Information

— CY 2005
Addendum C

— Healthcare Common Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC) (Available only on
CMS Web site via Internet. See section XIII. of the preamble of this final rule with comment period.)
Addendum D1

— Payment Status Indicators for Hospital Outpatient Prospective Payment System
Addendum D2

— Comment Indicators
Addendum E

— CPT Codes That Are Paid Only as Inpatient Procedures

I. Background

A. Legislative and Regulatory Authority for the Outpatient Prospective Payment System

When the Medicare statute was originally enacted, Medicare payment for hospital outpatient services was based on hospital-specific costs. In an
effort to ensure that Medicare and its beneficiaries pay appropriately for services and to encourage more efficient delivery of care, the Congress mandated replacement of the cost-based payment methodology with a prospective payment system (PPS). The Balanced Budget Act of 1997 (BBA) (Pub. L. 105

– 33), enacted on August 5, 1997, added section 1833(t) to the Social Security Act (the Act) authorizing implementation of a PPS for hospital outpatient services. The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA) (Pub. L.

106

– 113), enacted on November 29, 1999, made major changes that affected the hospital outpatient PPS (OPPS). The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. L. 106

– 554), enacted on December 21, 2000, made further changes in the OPPS. Section 1833(t) of the Act was also recently amended by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Public Law 108

– 173, enacted on December 8, 2003 (these
amendments are discussed later under
section I.E. of this final rule with comment period). The OPPS was first


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1 Interim final rule with comment period, August 3, 2000 (65 FR 47670); interim final rule with comment period, November 13, 2000 (65 FR 67798);

final rule and interim final rule with comment period, November 2, 2001 (66 FR 55850 and 55857); final rule, November 30, 2001 (66 FR 59856); final rule, December 31, 2001 (66 FR 67494); final rule, March 1, 2002 (67 FR 9556); final rule, November 1, 2002 (67 FR 66718); final rule with comment period, November 7, 2003 (68 FR 63398); and interim final rule with comment period, January 6, 2004 (69 FR 820). implemented for services furnished on or after August 1, 2000. Implementing regulations for the OPPS are located at

42 CFR Part 419.

Under the OPPS, we pay for hospital outpatient services on a rate-per-service basis that varies according to the ambulatory payment classification (APC) group to which the service is assigned. We use Healthcare Common Procedure Coding System (HCPCS) codes (which include certain Current Procedural Terminology (CPT) codes) and descriptors to identify and group the services within each APC group. The OPPS includes payment for most hospital outpatient services, except
those identified in section I.B. of this final rule with comment period. Section 1833(t)(1)(B)(ii) of the Act provides for Medicare payment under the OPPS for certain services designated by the Secretary that are furnished to inpatients who have exhausted their
Part A benefits or who are otherwise not in a covered Part A stay. In addition, the OPPS includes payment for partial hospitalization services furnished by community mental health centers (CMHCs).

The OPPS rate is an unadjusted national payment amount that includes the Medicare payment and the beneficiary copayment. This rate is
divided into a labor-related amount and
a nonlabor-related amount. The laborrelated amount is adjusted for area wage differences using the inpatient hospital wage index value for the locality in which the hospital or CMHC is located.

All services and items within an APC group are comparable clinically and with respect to resource use (section 1833(t)(2)(B) of the Act). In accordance with section 1833(t)(2) of the Act, subject to certain exceptions, services and items within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the APC group is more than 2 times greater
than the lowest median cost for an item or service within the same APC group (referred to as the ‘‘ 2 times rule ’’ ). In implementing this provision, we use the
median cost of the item or service assigned to an APC group.

Special payments under the OPPS may be made for new technology items and services in one of two ways. Section 1833(t)(6) of the Act provides for temporary additional payments or

‘‘ transitional pass-through payments ’’ for certain drugs, biological agents, brachytherapy devices used for the treatment of cancer, and categories of
medical devices for at least 2 but not more than 3 years. For new technology services that are not eligible for passthrough payments and for which we lack sufficient data to appropriately assign them to a clinical APC group, we have established special APC groups based on costs, which we refer to as
APC cost bands. These cost bands allow us to price these new procedures more appropriately and consistently. Similar to pass-through payments, these special payments for new technology services are also temporary; that is, we retain a service within a new technology APC group until we acquire adequate data to assign it to a clinically appropriate APC

group.

B. Excluded OPPS Services and Hospitals

Section 1833(t)(1)(B)(i) of the Act authorizes the Secretary to designate the hospital outpatient services that are paid under the OPPS. While most hospital outpatient services are payable under the OPPS, section 1833(t)(1)(B)(iv) of the Act excluded payment for ambulance, physical andoccupational therapy, and speechlanguage pathology services, for which payment is made under a fee schedule. The Secretary exercised the broad authority granted under the statute to
exclude from the OPPS those services that are paid under fee schedules or other payment systems. Such excluded services include, for example, the professional services of physicians and nonphysician practitioners paid under the Medicare Physician Fee Schedule; laboratory services paid under the clinical diagnostic laboratory fee schedule; services for beneficiaries with end-stage renal disease (ESRD) that are paid under the ESRD composite rate; and services and procedures that require an inpatient stay that are paid under the hospital inpatient prospective payment system (IPPS). We set forth the services that are excluded from payment under
the OPPS in § 419.22 of the regulations.

Under § 419.20 of the regulations, we specify the types of hospitals and entities that are excluded from payment
under the OPPS. These excluded entities include Maryland hospitals, but only for services that are paid under a
cost containment waiver in accordance with section 1814(b)(3) of the Act; critical access hospitals (CAHs); hospitals located outside of the 50 States, the District of Columbia, and Puerto Rico; and Indian Health Service hospitals.

C. Prior Rulemaking

On April 7, 2000, we published in the Federal Register a final rule with comment period (65 FR 18434) to implement a prospective payment system for hospital outpatient services. The hospital OPPS was first implemented for services furnished on or after August 1, 2000. Section 1833(t)(9) of the Act requires the Secretary to review certain components of the OPPS not less often than annually and to revise the groups, relative payment weights, and other adjustments to take into account changes in medical practice, changes in technology, and the addition of new services, new cost data,
and other relevant information and factors. Since implementing the OPPS, we have published final rules in the Federal Register annually to implement statutory requirements and changes arising from our experience with this system. For a full discussion of the changes to the OPPS, we refer readers to
these Federal Register final rules. 1

On November 7, 2003, we published a final rule with comment period in the Federal Register (68 FR 63398) that revised the OPPS to update the payment weights and conversion factor for services payable under the calendar year (CY) 2004 OPPS on the basis of claims data from April 1, 2002 through December 31, 2002. In this final rule with comment period, we are finalizing the APC assignments and addressing public comments received pertaining to
the new interim HCPCS codes listed in Addendum B of the November 7, 2003 final rule with comment period identified by new interim (NI) comment indicators (formerly referred to as condition codes). Subsequent to publishing the November 7, 2003 final rule with comment period, we published a correction of the final rule with comment period on December 31, 2003 (68 FR 75442). That December 31,
2003 document corrected technical errors in the November 7, 2003 final rule with comment period and included responses to a number of public comments that were inadvertently
omitted from the November 2003 final rule with comment period.

On January 6, 2004, we published in
the Federal Register an interim final rule with comment period (69 FR 820) that implemented provisions of Public

Law 108

– 173 that affected payments made under the OPPS, effective January 1, 2004. We are finalizing this interim


### 65686 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

final rule and addressing public
comments associated with that rule in this final rule with comment period.

D. APC Advisory Panel

1. Authority of the APC Panel

Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of the BBRA of 1999, requires that we consult with an outside panel of experts to review the clinical integrity of the payment groups and weights under the OPPS. The Advisory Panel on APC Groups (the APC Panel), discussed under section I.D.2. of this preamble, fulfills this requirement. The Act further specifies that the Panel will act in an advisory capacity. This expert panel, which is to be composed of 15 representatives of providers subject to the OPPS (currently employed full-time, not consultants, in their respective areas of expertise),
reviews and advises us about the clinical integrity of the APC groups and their weights. The APC Panel is not restricted to using our data and may use data collected or developed by organizations outside the Department in conducting its review.

2. Establishment of the APC Panel

On November 21, 2000, the Secretary signed the charter establishing the Advisory Panel on APC Groups. The
APC Panel is technical in nature and is governed by the provisions of the Federal Advisory Committee Act (FACA), as amended (Public Law 92

– 463). On November 1, 2002, the Secretary renewed the charter. The
renewed charter indicates that the APC
Panel continues to be technical in nature, is governed by the provisions of the FACA, may convene up to three meetings per year, and is chaired by a
Federal official.

Originally, in establishing the APC Panel, we solicited members in a notice published in the Federal Register on December 5, 2000 (65 FR 75943). We received applications from more than
115 individuals who nominated either colleagues or themselves. After carefully reviewing the applications, we chose 15 highly qualified individuals to serve on
the APC Panel. Because of the loss of
four APC Panel members due to the expiration of terms of office on March 31, 2004, we published a Federal Register notice on January 23, 2004 (69 FR 3370) that solicited nominations for APC Panel membership. From the 24 nominations that we received, we chose
four new members. The entire APC Panel membership is identified on the
CMS Web site at http:// www.cms.hhs.gov/faca/apc/

apcmem.asp. 3. APC Panel Meetings and Organizational Structure

The APC Panel first met on February 27, February 28, and March 1, 2001. Since that initial meeting, the APC Panel has held five subsequent meetings, with the last meeting taking place on September 1, 2, and 3, 2004. Prior to each of these biennial meetings, we published a notice in the Federal Register to announce each meeting and, when necessary, to solicit nominations for APC Panel membership. For a more
detailed discussion about these announcements, refer to the following Federal Register notices: December 5, 2000 (65 FR 75943), December 14, 2001 (66 FR 64838), December 27, 2002 (67 FR 79107), July 25, 2003 (68 FR 44089), and December 24, 2003 (68 FR 74621), and August 5, 2004 (69 FR 47446).

During these meetings, the APC Panel established its operational structure that, in part, includes the use of three subcommittees to facilitate its required APC review process. Currently, the
three subcommittees are the Data Subcommittee, the Observation Subcommittee, and the Packaging
Subcommittee. The Data Subcommittee is responsible for studying the data issues confronting the APC Panel and for recommending viable options for resolving them. This subcommittee was initially established on April 23, 2001,
as the Research Subcommittee and
reestablished as the Data Subcommittee on April 13, 2004. The Observation Subcommittee, which was established on June 24, 2003, and reestablished with new members on March 8, 2004,
reviews and makes recommendations to the APC Panel on all issues pertaining to observation services paid under the OPPS, such as coding and operational issues. The Packaging Subcommittee, which was established on March 8, 2004, studies and makes recommendations on issues pertaining to services that are not separately payable under the OPPS but are bundled or packaged APC payments.
Each of these subcommittees was established by a majority vote of the APC Panel during a scheduled APC Panel meeting. All subcommittee
recommendations are discussed and voted upon by the full APC Panel.

For a detailed discussion of the APC Panel meetings, refer to the hospital
OPPS final rules cited in section I.C. of this preamble. Full discussions of the
APC Panel ’ s February 2004 and September 2004 meetings and the resulting recommendations are included in sections II., III., IV., V., and VI. of this preamble under the appropriate subject headings. E. Provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),
Public Law 108

– 173, was enacted.
Public Law 108

– 173 made changes to the Act relating to the Medicare OPPS. In a January 6, 2004 interim final rule with comment period, we implemented provisions of Public Law 108

– 173 relating to the OPPS that were effective
for CY 2004. In this final rule with comment period, we are responding to public comments received on the January 6, 2004 interim final rule and finalizing that rule. In addition, in this final rule with comment period, we are implementing the following sections of
Public Law 108

– 173 that are effective
for CY 2005:

• Section 611, which provides for Medicare coverage of an initial preventive physical examination under Part B, subject to the applicable deductible and coinsurance, as an outpatient department (OPD) service payable under the OPPS. The provisions of section 611 apply to services furnished on or after January 1, 2005, but only for individuals whose coverage period under Medicare Part B begins on
or after that date.

• Section 614, which provides that screening mammography and diagnostic mammography services are excluded from payment under the OPPS. This amendment applies to screening mammography services furnished on or
after the date of enactment of Public

Law 108

– 173 (that is, December 8, 2003), and in the case of diagnostic mammography, to services furnished on or after January 1, 2005.

• Section 621(a)(1), which requires special classification of certain separately paid radiopharmaceutical agents and drugs or biologicals, and specifies the pass-through payment percentages, effective for services furnished on or after January 1, 2005, for the three categories of ‘‘ specified covered OPD drugs ’’ defined in the statute: sole source drug; innovator multiple source drug; and noninnovator multiple source drug. In addition, payment for these drugs for CYs 2004
and 2005 does not have to be made in a budget neutral manner.

• Section 621(a)(2), which specifies
the reduced threshold for the establishment of separate APCs with respect to drugs or biologicals from $150 to $50 per administration for drugs and biologicals furnished in CYs 2005 and

2006.


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• Section 621(a)(3), which excludes separate drug APCs from outlier payments. Specifically, no additional payment will be made in the case of APC groups established separately for drugs and biologicals.

• Section 621(b), which requires that all devices of brachytherapy consisting of a seed or seeds (or radioactive source) furnished on or after January 1, 2004, and before January 1, 2007, be paid based on the hospital ’ s charges for each device, adjusted to cost. This provision also requires that these brachytherapy
services be excluded from outlier payments.

F. Summary of the Provisions of the August 16, 2004 Proposed Rule

On August 16, 2004, we published a proposed rule in the Federal Register (69 FR 50447) that set forth proposed changes to the Medicare hospital OPPS and to implement provisions of Public

Law 108

– 173 specified in section I.E. of this preamble that would be effective for services furnished on or after January 1, 2005. The following is a summary of the major changes that we proposed to
make:

1. Changes to the APC Groups

As required by section 1833(t)(9)(A) of the Act, we proposed the annual update of the APC groups and the relative payment weights. This section also requires that we consult with an outside panel of experts, the Advisory Panel on APC Groups, to review the clinical integrity of the groups and weights under the OPPS. Based on analyses of
Medicare claims data and recommendations of the APC Panel, we proposed to establish a number of new APCs and to make changes to the assignment of HCPCS codes under a number of existing APCs.

We also discussed the application of the 2 times rule and proposed exceptions to it; coding for stereotactic radiosurgery services; the proposed movement of procedures from the new technology APCs; the proposed changes to the list of procedures that will be paid as inpatient services; and the proposed addition of new procedure
codes to the APCs.

2. Recalibrations of APC Relative Payment Weights

In the proposed rule, we discussed the methodology used to recalibrate the proposed APC relative payment weights and set forth the proposed recalibration of the relative weights for CY 2005.

3. Payment Changes for Devices

In the proposed rule, we discussed proposed changes to the pass-through payment for devices and the methodology used to reduce, if applicable, transitional pass-through payments to offset costs packaged into APC groups.

4. Payment Changes for Drugs, Biologicals, Radiopharmaceutical Agents, and Blood and Blood Products

In the proposed rule, we discussed our proposed payment changes for drugs, biologicals, radiopharmaceutical agents, and blood and blood products.

5. Estimated Transitional Pass-Through Spending in CY 2005 for Drugs, Biologicals, and Devices

In the proposed rule, we discussed the proposed methodology for measuring whether there should be an estimated pro rata reduction for transitional pass-through drugs, biologicals, and devices for CY 2005.

6. Other Policy Decisions and Proposed Policy Changes

In the proposed rule, we presented our proposals for CY 2005 regarding the following:

• Update of statewide default cost-tocharge ratios (CCRs).

• A conforming change to the regulation relating to the use of the first available cost reporting period ending
after 1996 and before 2001 for determining a provider ’ s payment-tocost ratio to calculate transitional corridor payments for hospitals paid
under the OPPS that did not have a 1996 cost report.

• Changes in the status indicators and comment indicators assigned to APCs
for CY 2005.

• Elimination of the diagnostic tests criteria as a requirement for hospitals to qualify for separate payment of
observation services under APC 0339 (Observation) and changes to the guidelines to hospitals for counting patients ’ time spent in observation care.

• Payment under the OPPS for certain procedures currently assigned to the inpatient list.

• Strategy for giving the public notice of new implementation guidelines for new evaluation and management codes.

• Addition of three new HCPCS codes and descriptors for brachytherapy sources that would be paid separately, pursuant to Public Law 108

– 173.

• Modification of the HCPCS code descriptors for brachytherapy source descriptors for which units of payment are not already delineated.

• Payment for services furnished emergently to an outpatient who dies before admission to a hospital as an inpatient. 7. Conversion Factor Update for CY

2005

As required by section 1833(5)(3)(C)(ii) of the Act, in the proposed rule, we proposed to update
the conversion factor used to determine payment rates under the OPPS for CY

2005.

8. Wage Index Changes for CY 2005

In the proposed rule, we discussed the proposed retention of our current policy to apply the IPPS wage indices to wage adjust the APC median costs in determining the OPPS payment rate and the copayment standardized amount. These indices reflect major changes for CY 2005 relating to hospital labor
market areas as a result of OMB revised definitions of geographical statistical areas; hospital reclassifications and redesignations, including the one-time
reclassifications under section 508 of
Public Law 108

– 173; and the wage index adjustment based on commuting patterns of hospital employees under
section 505 of Public Law 108

– 173.

9. Determination of Payment Rates and Outlier Payments for CY 2005

In the proposed rule, we discussed how APC payment rates are calculated and how the payment rates are adjusted to reflect geographic differences in
labor-related costs. We also discussed proposed changes in the way we would calculate outlier payments for CY 2005.

10. Regulatory Impact Analysis

In the proposed rule, we set forth our analysis of the impact that the proposed changes would have on affected hospitals and CMHCs.

G. Public Comments Received on the August 16, 2004 Proposed Rule

We received over 550 timely pieces of correspondence containing multiple comments on the August 16, 2004 proposed rule. Summaries of the public comments and our responses to those
comments are set forth in the various sections of this preamble under the appropriate heading.

We received a number of general public comments on our proposed changes to the OPPS for CY 2005.

Comment: Some commenters were
concerned about the extent to which OPPS payment rates have fluctuated from year to year. Because Medicare payment is a very significant portion of income for most hospitals, they stated that the instability in the OPPS payment rates makes it difficult for hospitals to plan and budget. They indicated that there is a tremendous degree of
variation across APCs in terms of payment to cost ratios and that they


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would expect that after three years of operating the OPPS, the payment to cost
ratios would be much more stable. One commenter offered to share analysis of payment to cost ratios with CMS.
Commenters stated that such variation in payments compared to costs puts full-service hospitals and their
communities at risk because limitedservice, or ‘‘ niche ’’ providers can easily identify and redirect patients with more lucrative APCs to their facilities, leaving full-service hospitals with a disproportionate share of patients who receive services that are assigned to the underpaid APCs.

Response: We recognize hospitals ’ need for stability in payments for hospital outpatient services. We would appreciate receiving studies of the
extent to which there is variation across APCS in terms of payment to cost ratios across the multiple years of the OPPS to aid us in assessing factors that might contribute to instability in the payment

rates.

Comment: One commenter indicated that the entire OPPS is underfunded, as it pays only 87 cents of every dollar of hospital outpatient care provided to
Medicare beneficiaries. The commenter
stated that it will continue to work with Congress to address inadequate payment rates and updates in order to ensure access to hospital-based outpatient
services for Medicare beneficiaries.

Response: Our early analyses indicated that the OPPS was, in its inception, based on payment that was less than cost due to statutory reductions in payment for hospital outpatient costs prior to the enactment of the Balanced Budget Act of 1997,
which authorized the current OPPS. We agree that the commenter will need to work with Congress to change certain
fundamental features of the OPPS. For example, the base amounts upon which the OPPS was established, the rules concerning budget neutrality, and subsequent out-year adjustments such
as annual reductions in coinsurance and adjustments to outlier and pass-through payment allocations are established in statute and, as such, would require legislation to amend.

Comment: One commenter objected to the use of the display date to start the 60-day comment period for the proposed rule. The commenter stated that the display copy did not contain all
of the information included in the proposed rule, such as the comment due date, and did not satisfy the statute ’ s requirement that the notice of proposed rulemaking be published in the Federal Register , with provision for a 60-day comment period. The commenter indicated that the use of the display date to start the comment period gives reviewers too short a period of time to comment properly and also, in this case, gives CMS an inadequate period of time to review the comments and prepare the final rule. The commenter urged CMS to publish a proposed rule no later than late July to provide more time for CMS to consider public comments.

Response: While the law requires that we provide a 60-day public comment period and that the notice of proposed rulemaking be published in the Federal Register , it does not require that the
date of Federal Register publication be the first day of the comment period. The two requirements are independent. We post the proposed rule on the CMS Web site on the date of display of the proposed rule at the Federal Register

, thereby making the proposed rule far more easily available to the public than was the case when the only public dissemination was publication in the Federal Register , and satisfying the requirement for a 60-day comment period. By making the proposed rule available on the CMS Web site (as well
as at the Federal Register ), we provided the public with access to not only the proposed rule but also to all of the supporting files and documents cited in the proposed rule in a manner that can be used for analysis. We note that the computer files posted on the Web site can be manipulated for independent analysis. Therefore, we believe that beginning the comment period for the proposed rule with the display date at
the Federal Register , and posting the proposed rule and data files on the CMS Web site on the display date, fully complies with the statute and provides a far better opportunity for the public to have meaningful input than the past practice under which the comment period began with the publication date
in the Federal Register a week or longer after the display date and no other data in any other form was furnished.

With respect to the publication date of the proposed rule, we publish the proposed rule as soon as it is practicable for us to do so. Our process for development of the proposed rule begins with a winter meeting of the APC Panel based on the earliest possible data analysis for the forthcoming year. We then pull claims for the period ending December of the data year and also pull cost report data for development of CCRs to apply to the claims data. This step cannot be started until approximately March 1 of the year and the development of the proposed rule
data takes considerable time as there are many analyses to be performed and decisions to be made before each stage of data development can be undertaken. We have to balance the need to improve the process and to deal with each year ’ s special issues with the need to issue a proposed rule in sufficient time to permit the public to comment and to permit us sufficient time to review the comments and develop the final rule. Each year we review the timeline and process to determine how we can best achieve that balance, while ensuring that we issue the best possible proposed rule for public comment.

H. Public Comments Received on the January 6, 2004 Interim Final Rule With
Comment Period

We received approximately 40 timely pieces of correspondence containing multiple comments on the MMA provisions relating to payment for drugs and brachytherapy under the OPPS that were included in the January 6, 2004 interim final rule with comment period. Summaries of the public comments and our responses to those comments are set
forth in sections V. and VII.G. of this preamble under the appropriate heading.

I. Public Comments Received on the November 7, 2003 Final Rule With
Comment Period

We received 25 timely pieces of correspondence on the November 7, 2003 final rule with comment period, some of which contained multiple comments on the APC assignment of
HCPCS codes identified with the new interim condition indicators (now referred to as condition codes) in
Addendum B of that final rule with comment period. Summaries of the public comments and our responses to
those comments are set forth in various sections of this preamble under the appropriate subject areas.

II. Changes Related to Ambulatory Payment Classifications (APCs)

Section 1833(t)(2)(A) of the Act requires the Secretary to develop a classification system for covered hospital outpatient services. Section 1833(t)(2)(B) provides that this classification system may be composed of groups of services, so that services within each group are comparable clinically and with respect to the use of
resources. In accordance with these provisions, we developed a grouping classification system, referred to as the Ambulatory Payment Classification Groups (or APCs), as set forth in § 419.31 of the regulations. We use
Level I and Level II Healthcare Common Procedure Coding System (HCPCS) codes and descriptors to identify and group the services within each APC. The APCs are organized such that each


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group is homogeneous both clinically and in terms of resource use. (However, new technology APCs that are temporary groups for certain approved
services are structured based on cost rather than clinical homogeneity.) Using this classification system, we have established distinct groups of surgical, diagnostic, and partial hospitalization services, and medical visits. Because of the transitional pass-through provisions, we also have developed separate APC groups for certain medical devices, drugs, biologicals, radiopharmaceuticals, and devices of brachytherapy.

We have packaged into each procedure or service within an APC group the cost associated with those items or services that are directly related and integral to performing a procedure or furnishing a service. Therefore, we would not make separate payment for packaged items or services. For example, packaged items and services include: Use of an operating, treatment, or procedure room; use of a recovery room; use of an observation bed; anesthesia; medical/surgical supplies; pharmaceuticals (other than those for which separate payment may be allowed under the provisions discussed in section V. of this preamble); and
incidental services such as venipuncture. Our packaging methodology is discussed in section
IV.B.3. of this final rule with comment period.

A. APC Changes: General

Under the OPPS, we pay for hospital outpatient services on a rate-per-service basis that varies according to the APC group to which the service is assigned. Each APC weight represents the median hospital cost of the services included in that APC relative to the median hospital
cost of the services included in APC 0601, Mid-Level Clinic Visits. The APC weights are scaled to APC 0601 because
a mid-level clinic visit is one of the most frequently performed services in the outpatient setting.

Section 1833(t)(9)(A) of the Act requires the Secretary to review the components of the OPPS not less than annually and to revise the groups and relative payment weights and make other adjustments to take into account changes in medical practice, changes in technology, and the addition of new services, new cost data, and other
relevant information and factors. Section 1833(t)(9)(A) of the Act, as amended by section 201(h) of the BBRA of 1999, also requires the Secretary, beginning in CY 2001, to consult with an outside panel of experts to review the APC groups and the relative payment weights.

Finally, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the group is more than 2 times greater than
the lowest median cost for an item or service within the same group (referred
to as the ‘‘ 2 times rule ’’ ). We use the
median cost of the item or service in implementing this provision. The statute authorizes the Secretary to make exceptions to the 2 times rule in unusual cases, such as low volume
items and services.

Section 419.31 of the regulations sets forth the requirements for the APC system and the determination of the payment weights. In this section, we discuss the changes that we proposed to the APC groups; the APC Panel ’ s review
and recommendations from the February 2004 meeting and our proposals in response to those recommendations; the application of the 2 times rule and proposed exceptions to it; coding for stereotactic radiosurgery services; the proposed movement of procedures from the new technology APCs; the proposed changes to the inpatient list; and the proposed additions of new procedures codes to the APCs. In addition, in this section under the appropriate subject heading, we present the APC Panel ’ s review and
recommendations of items discussed at the September 1, 2, and 3, 2004 meeting held after publication of the proposed
rule and our final decisions on these recommendations. We then present our final policies that are effective for CY

2005.

B. APC Panel Review and
Recommendations

1. February 2004 Panel Meeting

As stated above, the APC Panel held its first 2004 meeting on February 18, 19, and 20, 2004, to discuss the revised
APCs for the CY 2005 OPPS. In preparation for that meeting, we published a notice in the Federal Register on December 24, 2003 (68 FR 74621), to announce the location, date, and time of the meeting; the agenda items; and the fact that the meeting was open to the public. In that notice, we solicited public comment specifically on the items included on the agenda for that meeting. We also provided
information about the APC Panel meeting on the CMS Web site: http:// www.cms.hhs.gov/faca/apc/panel. Oral presentations and written comments submitted for the February 2004 APC Panel meeting met, at a minimum, the adopted guidelines for presentations set forth in the Federal Register document (68 FR 74621). In conducting its APC review, the APC Panel heard testimony and received evidence in support of the testimonies from a number of interested parties. For the February 2004 deliberations, the APC Panel used hospital outpatient claims data for the period January 1, 2003, through September 30, 2003, that provided, at a minimum, median costs for the APC structure in place in CY
2004 and that was based on CCRs used for setting the CY 2004 payment rates. The data set presented to the APC Panel represented 9 months of the CY 2003 data that we proposed to use to recalibrate the APC relative weights and to calculate the proposed APC payment
rates for CY 2005. In sections II.B.4. through 7. and sections II.C. through I. of this preamble, we summarize the APC issues discussed during the APC
Panel ’ s February 2004 meeting, the
Panel ’ s recommendations, the proposals that we included in the August 16, 2004 proposed rule, our proposals with respect to those recommendations, and the policies that we are finalizing for CY
2005 in this final rule with comment period.

2. September 2004 Panel Meeting

As stated earlier, the APC Panel held its second 2004 meeting on September

1

– 3, 2004. In preparation for that meeting, we published a notice in the Federal Register on August 5, 2004 (69 FR 47446) to announce the location, date, and time of the meeting, the agenda items, and the fact that the meeting was open to the public. In that notice, we solicited public comments specifically on the items included on the agenda for that meeting. During the September 2004 APC Panel meeting, the APC Panel heard testimony on a number of the proposed changes in APCs included in the August 16, 2004 proposed rule. We are summarizing the topics that were discussed at the September 2004 Panel meeting and the
APC Panel ’ s recommendations on each topic in the chart below. We have included references to the appropriate section of this preamble for the more
detailed discussion of each
recommendation.

For the September 2004 deliberations, the APC Panel used the hospital outpatient claims data that we used in developing the proposed rule; that is, data for the period of January 1, 2003,


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through December 31, 2003, including updated CCRs.

**BILLING CODE 4120**

**– 01** 

**– P** 


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3. Contents of This Section of the
Preamble

The discussion in this section II.B. of this final rule with comment period is limited to APC changes regarding APCs
other than those that violate the 2 times rule and those that represent drugs,biologicals, and transitional passthrough devices, or those that are new technology APCs. The specific APC
Panel review and recommendations applicable to those APCs are discussed in sections II.C., IV., III., and II.F., respectively, of the preamble to this final rule with comment period.

4. APC 0018: Biopsy of Skin/Puncture of

Lesion

During the February 2004 APC Panel meeting, one presenter recommended moving CPT tracking codes 0046T (Catheter lavage, mammary duct(s)) and 0047T (Each additional duct) from APC 0018 and placing them in an APC that more accurately reflects each of the procedures. The APC Panel recommended that we reassign CPT codes 0046T and 0047T to APC 0021, Level III Excision/Biopsy.

In the August 16, 2004 proposed rule, we proposed to accept the APC Panel ’ s recommendation. We did not receive any public comments on our proposal. Therefore, we are adopting as final, without modification, our proposal to reassign CPT codes 0046T and 0047T to

APC 0021.

5. Level I and II Arthroscopy

APC 0041: Level I Arthroscopy

APC 0042: Level II Arthroscopy

We testified before the APC Panel at its February 2004 meeting regarding a
comment that we received in 2003 requesting that we reassign CPT code 29827 (Arthroscopy, shoulder with rotator cuff repair) from APC 0041 to APC 0042, based on its similarity to CPT 29826 (Arthroscopy, shoulder decompression of subacromial space with partial acromioplasty without coracoacromial release). Our clinical staff considered the request and
determined that APCs 0041 and 0042 should be reconfigured to improve clinical homogeneity. An APC Panel presenter provided evidence to support moving CPT code 29827 to an APC that would more accurately recognize the complexity of that procedure. We requested the APC Panel ’ s recommendation regarding a total
revision of these two APCs.

The APC Panel recommended that we
reevaluate the codes in APCs 0041 and 0042 and propose restructuring that would improve the clinical homogeneity in the two APCs. In the August 16, 2004 proposed rule, we proposed to accept the APC Panel ’ s recommendation and to revise APCs 0041 and 0042 as presented in Tables 1 and 2 of that proposed rule. We received one public comment on our proposed restructuring.

Comment: One commenter requested
that we move code 0014T from APC
0041 to APC 0042. The commenter provided information in support of its belief that the procedure more accurately matches the clinical work and resource inputs of APC 0042 than
of APC 0041.

Response: We agree with the commenter and are assigning the procedure to APC 0042. The tracking code 0014T is being retired and the
successor code is CPT code 29868 (Arthroscopy, knee, surgical, osteochondral autograft(s) meniscal transplantation (including arthrotomy for meniscal insertion, medial or lateral). Placement of this code in APC 0042 is subject to comment in response to this final rule with comment period
because the code is a new code for CY

2005.

Accordingly, restructured APCs 0041 and 0042 for CY 2005, as modified based on the public comment received,
are shown in Tables 1 and 2 below.


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### 65693 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

**BILLING CODE 4120**

**– 01** 

**– C** 
6. Angiography and Venography Except Extremity
APC 0279: Level II Angiography and Venography Except Extremity

APC 0280: Level III Angiography and Venography Except Extremity

APC 0668: Level I Angiography and Venography Except Extremity

a. February 2004 Panel Meeting

As requested by the APC Panel, at the February 2004 Panel meeting, we presented our proposal for reconfiguring APCs 0279, 0280, and 0668 that reflected changes based on prior input with outside clinical experts. The APC Panel had previously reviewed these APCs during its January 2003 meeting
and had recommended that we not
restructure these three APCs until we received input from clinical experts in the field. When we updated the APC groups in CY 2003, we accepted the
APC Panel ’ s recommendation and made no changes to APCs 0279, 0280, and

0668.

A review of these APCs was prompted by a commenter who requested that we move CPT code 75978 (Repair venous blockage) from APC 0668 to APC 0280
and that we move CPT code 75774 (Artery x-ray, each vessel) from APC
0668 to APC 0279. The commenter submitted evidence in support of these requests and testified before the APC Panel regarding the common use of CPT code 75978 for treating dialysis patients and the often required multiple intraoperative attempts to succeed with this procedure for such patients.

After receiving input from the clinical experts, we determined that these three APCs should be revised to improve their clinical homogeneity. At the February 2004 meeting, we presented our proposed restructuring of APCs 0279, 0280, and 0668 to the APC Panel. The APC Panel concurred with our proposal.

In addition, subsequent to the APC Panel meeting, we discovered several procedures in these APCs that were more appropriately placed in other APCs in order to remedy any 2 times
rule violations. We included those modifications in our proposed restructured APCs published in Table 3 in the August 16, 2004 proposed rule.

b. Public Comments Received

Comment: Several commenters requested that CMS postpone or cancel the proposed plans for moving angiography codes 75960 (Transcatheter introduction of intravascular stent(s), (non-coronary vessel) percutaneous and/or open, radiological supervision and interpretation, each vessel), 75962 (Transluminal balloon angioplasty, peripheral artery, radiological supervision and interpretation), 75964 (Transluminal balloon angioplasty, each additional peripheral artery, radiological supervision and interpretation), 75966 (Transluminal balloon angioplasty, renal or other visceral artery, radiological supervision and interpretation), and 75968 (Transluminal balloon angioplasty, each additional visceral artery, radiological supervision and interpretation), which are integral to a number of angioplasty and stent placement procedures, from

APC 0280 to APC 0668. One commenter indicated that the proposed decreases in payments for these services that would result from their APC reassignment were
inconsistent with CMS ’ proposal tolimit payment decreases for devicedependent APCs. Another commenter was particularly concerned that code 75962, which is used for angioplasty of arterial blockages, may have a wide range of associated procedure costs. The commenters stated that aggregate payment for all services billed for many high volume procedures such as peripheral transluminal angioplasty and single stent placement will decrease by 16 to 21 percent, in large part due to the reassignment of codes 75960, 75962, 75964, 75966, and 75968 to the lower level APC 0668 in the angiography and venography except extremity series and


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to their placement on the bypass list.
Two commenters were concerned that supervision and interpretation services as part of peripheral atherectomy procedures were assigned to higher paying APC 0279, potentially providing hospitals with an incentive to perform atherectomy instead of angioplasty or stent procedures, or both. Further, the commenters suggested that the lower payment for the supervision and interpretation services moved to APC 0668 for CY 2005 provides an incentive for hospitals to treat patients on an inpatient basis or may limit
beneficiaries ’ access to the outpatient procedures. One commenter indicated that the cost and complexity of performing angiographic procedures for angioplasty are similar, if not more complex, than those of performing angiographic procedures for atheretomy.

The commenters did not understand why CMS reassigned the supervision and interpretation codes from a Level III
to a Level I APC and believed that CMS did not take into account the higher level of hospital resources and staffing required for certain therapeutic radiology supervision and interpretation services. Further, they questioned the assumptions CMS adopted in the creation of the bypass list to develop

‘‘ pseudo ’’ single claims. They suggested that there might be significant differences between the multiple procedure claims that CMS converts to

‘‘ pseudo ’’ single claims and those that CMS is unable to use. Thus, the commenters questioned the reliability of the claims data and encouraged CMS to
use external data as the basis for the decisionmaking. One commenter noted that, of a large number of claims for APC 0668, 79 percent accounted for device costs and 81 percent accounted for room charges, but CMS ’ single claim methodology had only 4 percent of claims accounting for device costs or room charges.

Finally, one commenter, a group of providers, stated that they expected substantial payment decreases to result from the proposed restructuring of APCs 0279, 0280, and 0668. The commenter suggested that CMS should establish a mechanism (such as dampening) to offset large payment swings similar to those anticipated as a result of the CMS proposal.

Response: Our analyses of claims data
used for the CY 2004 OPPS and several past comments led us to recognize the need to restructure APCs 0279, 0280,
and 0668 for the CY 2005 OPPS. There were only two services in APC 0668 for CY 2004, APC 0279 was excepted from the 2 times rule in CY 2004, and the
median costs for individual services in APCs 0668, 0279, and 0280 showed significant overlap. The APC Panel also acknowledged the need to reconfigure these APCs. In our proposed rule, we presented the restructured APCs in which the procedures within each APC
demonstrated both clinical and resource homogeneity, and our final data confirmed the appropriate assignment of the services. For instance, the peripheral atherectomy supervision and interpretation codes (75992 through 75996) assigned to the Level II APC (0279) consistently had higher median costs than the supervision and interpretation codes for intravascular stent placement or peripheral or visceral artery balloon angioplasty, which are assigned to the Level I APC (0668). For CY 2005, the median costs for the supervision and interpretation codes for stent placement and angioplasty were
much lower than the median cost of their prior APC 0280 ($1,181) and were within the range of median costs ($239

– $444) for other procedures assigned to APC 0668. As APCs 0668, 0279, and 0280 are not device-dependent APCs because we expect the devices to be reported with the interventionalprocedures provided (that are in devicedependent APCs), it would beinappropriate to apply the devicedependent APC policy to APCs 0668, 0279, and 0280. In addition, there were
no violations of the 2 times rule in the restructured APCs 0668, 0279, or 0280 based on full year 2003 hospital claims
data.

The supervision and interpretation codes 75960, 75962, 75964, 75966, and 75968, along with peripheral atherectomy supervision and interpretation CPT codes, were proposed for the bypass list for CY 2005. As the commenters noted, we recognized that angiography and venography services generally involve multiple procedure claims, and less than 10 percent of bills for APCs 0668, 0279, and 0280 were available for ratesetting for CY 2004. We proposed to place a number of radiological supervision and interpretation codes on the bypass list for CY 2005 because we
believed that these codes should have little packaging associated with them and we recognized that their addition to the bypass list might enable us to use significantly more data from multiple procedure claims for APCs 0668, 0279, 0280, and others. We did not expect that devices and room charges would generally be packaged with the supervision and interpretation services, but rather would be packaged with the interventional procedures they accompanied. This accounts for the low percentage of device and room costs on the single bills in APC 0668 used for the
median calculation. None of the commenters provided any information about why it would be inappropriate to include these codes on the bypass list, other than to point out the decline in proposed payment rates for the services. If packaging appropriately attributable to the supervision and interpretation services through the bypass procedure had been assigned to the interventional procedures that the supervision and interpretation services accompanied (such as angioplasty or stent placement),
there should have been increases in the
median costs for the interventional procedures. We did not see any such significant increases, and believe that our data do not indicate any specific packaging allocation problems with respect to the supervision and interpretation services. We have no evidence of underreporting of costs used
to calculate the median costs for APC

0668.

For CY 2005, we had a significantly greater number of single claims
available for use in median calculation for APCs 0668, 0279, and 0280. For example, for CY 2005, the median costs for the two supervision and interpretation codes with the highest
volume that were of concern to the commenters (codes 75960 and 75962) were based on 20 percent of claims in contrast to only 1 percent used last year. While it is possible, as suggested by the commenters, that there may be differences between the packaging in multiple procedure claims that we were
able to convert to ‘‘ pseudo ’’ single
claims and those that we were unable to use, we have no reason to believe that these issues are unique to these APCs or especially problematic for these supervision and interpretation services. Our goal continues to be to use as much of our historical hospital claims data to set payment rates as possible. As we have consistently stated, we are pursuing strategies to improve our ability to utilize multiple procedure claims for median calculation, including
discussions with the APC Panel Data
Subcommittee.

With regard to the commenter ’ s suggestion that we establish a mechanism to offset payment changes from one year to the next, we
understand the commenter ’ s desire for a stable system. However, while we are
not convinced that an overall dampening policy is required, we continue to work toward improving the hospital claims data through education, data management, and data analyses.
We believe that we have achieved significant improvements so far.


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c. Final Policy for CY 2005

After consideration of the APC Panel ’ s recommendations and the public comments we received on the August 16, 2004 proposal, we are finalizing our proposal for the restructuring of APCs 0668, 0279, and 0280. Tables 3, 4, and 5 reflect the final restructuring of APCs 0668, 0279, and

0280.

**BILLING CODE 4120**

**– 01** 

**– P** 


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**BILLING CODE 4120**

**– 01** 

**– C** 
7. Packaged Codes in APCs

As a result of requests from the public, the Packaging Subcommittee of
the APC Panel was established to review
all the CPT codes with a status indicator
of ‘‘ N. ’’ Status indicator ‘‘ N ’’ indicates that payment for packaged codes is bundled into the payment that providers receive for separately payable codes for items or services provided on the same day. Providers have often suggested that many codes could be billed alone, without any separately payable service on the claim, and requested that these codes not be assigned status indicator

‘‘ N. ’’ The Packaging Subcommittee identified areas for change of some packaged CPT codes for items or services that could be provided as the sole service on a given date. During the September 2004 meeting, the APC Panel accepted the report of the Packaging Subcommittee and made the following
recommendations:

• The Panel recommended that the Packaging Subcommittee review packaged codes individually instead of making a global decision for all packaged codes.

• The Panel recommended that CMS assign a modifier to CPT codes 36540 (Collect blood venous device), 36600 (Withdrawal of arterial blood), 51701 (Insert bladder catheter), and 97602 (Wound[s] care, non-selective) to be used when these codes are the only code on that particular claim for the
same date of service. The APC Panel
indicated that it would revise this
subset of codes once data become
available.

• The Panel recommended that CMS educate providers and intermediaries on the correct billing procedures for the packaged CPT codes 36540, 36600, 51701, and 97602.

• The Panel recommended that CMS not change the status indicator for CPT 76397 (Ultrasound guidance for vascular access). The Panel indicated that it
would review the data on this code as they become available.

• The Panel recommended that the Packaging Subcommittee continue to meet throughout the year to discuss other problematic packaged codes. CMS is considering the
recommendation that a modifier be used when certain codes are the only codes on a particular claim for the same date
of service. We note that code 97602 is assigned a status indicator of ‘‘ A ’’ in this final rule with comment period, and is no longer payable under OPPS. Therefore, a modifier, if applicable, would not be assigned for this code.

Comment: One commenter asked CMS to review all the packaged codes
to determine which codes should become separately payable. Several commenters also requested that codes 36540 (Collect blood venous device), 36600 (Withdrawal of arterial blood), and 97602 (Wound[s] care, nonselective) become separately payable because they are often the only procedure on a bill. In cases where there is no separately payable code on a claim, providers do not receive payment for these packaged services.

Response: We appreciate the

commenters ’ suggestions. As stated above, the APC Panel Packaging Subcommittee recently reviewed all the packaged codes. We are currently


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considering whether to create a modifier to be used for CPT codes 36540, 36600, and 51701 when these codes appear on a claim without any separately payable
code on the same date of service. As stated above, code 97602 will not be payable under OPPS for CY 2005 and, therefore, is excluded from this
discussion. Additional detailed suggestions for the Packaging
Subcommittee should be submitted to APCPanel@cms.hhs.gov with

‘‘ Packaging Subcommittee ’’ in the subject line.

Comment: Two commenters requested that code 76937 (Ultrasound guidance for vascular access) be assigned to APC 0268 (Ultrasound Guidance Procedures),
with status indicator ‘‘ S ’’ instead of the proposed status indicator ‘‘ N. ’’

Response: We are accepting the APC
Panel ’ s recommendations that code 76937 remain packaged for CY 2005. We
are concerned that there will be unnecessary utilization of this procedure if it is separately payable. In addition, because code 76937 only became effective on January 1, 2004, there are currently no claims data for
this code. When we review the CY 2004 claims data for the CY 2006 payment rates, we will reexamine the status of
code 76937. We also note that the APC Panel Packaging Subcommittee remains active, and additional issues and new data concerning the packaging status of
codes will be shared for their
consideration as information becomes
available.

Comment: Several commenters requested that the following CPT codes become unpackaged: 42550 (Injection for salivary x-ray) and other x-ray injection codes; 75998 (Fluoroscopic guidance for central venous access device placement); 74328 (Endoscopic catheterization of the biliary ductal system, S&I); 74329 (Endoscopic catheterization of the pancreatic ductal system, S&I); 74330 (Combined endoscopic catheterization of the biliary and pancreatic ductal systems, S&I); 36500 (Insert of catheter, vein); 75893 (venous sampling by catheter); 75989 (abscess drainage under x-ray); 76001 (Fluoroscope exam); 76003 (Needle localization by x-ray); 76005 (Fluoroguide for spine inject); 90471 and 90472 (Immunization administration); 94760, 94761, and 94762 (Pulse oximetry); and G0269 (Occlusive device in vein art). The
commenters were concerned that the OPPS has denied hospitals
reimbursement for these services.

Response: Hospitals include charges for packaged services on their claims,
and the costs associated with these packaged services are then bundled into the costs for separately payable procedures on the claims. Hospitals may use CPT codes to report any packaged services that were performed, consistent with CPT coding guidelines. Because these imaging codes are packaged, their presence on a claim that includes a code for another separately payable service does not necessarily result in the claim being a multiprocedure claim. Payment for these imaging services is packaged in this way into payment for the separately payable services with which the imaging services are billed.

The Packaging Subcommittee reviewed every code that was packaged
in CY 2004. The Committee narrowed the list of packaged codes to a list of potentially problematic codes and subsequently reviewed utilization and
median cost data for these codes. One of the main criteria evaluated by the Packaging Subcommittee to determine
whether a code should become unpackaged was how likely it was for the code to be billed without any other code for separately payable services on the claim. We encourage submission of clinical scenarios involving currently packaged codes to the Packaging
Subcommittee for review at future meetings. Submissions should be sent to
the APCPanel@cms.hhs.gov with

‘‘ Packaging Subcommittee ’’ in the subject line.

We will continue to package CPT codes 42550 and other x-ray injection codes, 75998, 73428, 74329, 74330,

36500, 75893, 75989, 76001, 76003,
76005, 90471, 94472, 94760, 94761, 94762, and G0269 for CY 2005 and will
discuss these codes with the APC Panel Packaging Subcommittee.

Comment: One commenter requested
that the status indicator for code G0102 (Prostate cancer screening; digital rectal examination) be changed from packaged to separately payable. The commenter indicated that the screening is administered as part of the initial preventive physical examination. The commenter stated, ‘‘ The payment for
G0102 will be zero because it is
identified with status indicator ‘ N ’ which means it is packaged and not paid for separately. ’’

Response: Currently, under the OPPS, we do not make separate payment for
code G0102. Its costs are bundled into the costs of other separately payable services furnished by the hospital on the same day. For example, a digital rectal examination is usually furnished as part of an evaluation and management service, so its payment would generally be bundled into payment for the evaluation and management service
when a covered evaluation and management service is furnished on the same day as the digital rectal examination. It is a relatively quick and simple procedure. Likewise, when the examination is performed during the same visit as the initial preventive examination, we would expect that
costs associated with the examination
would be bundled into the costs for the initial preventive examination. Accordingly, we are continuing to package code G0102.

Comment: One commenter requested that we map code G0168 (Wound closure by adhesive) to an APC instead of assigning status indicator ‘‘ N ’’ to the
code. The commenter was concerned
that access to wound adhesives would be reduced if this code is not separately payable.

Response: Wound adhesives are considered supplies used to repair lacerations and surgical incisions. These products are used instead of sutures to close wounds. We do not make separate payments for sutures under the OPPS. Providers are paid when they use
wound adhesives in the same manner as they are paid for other ‘‘ packaged ’’ procedures. The charges for code G0168 should be packaged into whichever procedure(s) is billed on the same date of service. Payment to the provider reflects the cost of performing the procedure and the related supplies.

C. Limits on Variations Within APCs: Application of the 2 Times Rule

Section 1833(t)(2) of the Act provides
that the items and services within an APC group cannot be considered comparable with respect to the use of resources if the median (or mean) of the highest cost item or service within an APC group is more than 2 times greater
than the median of the lowest cost item or service within that same group. However, the statute authorizes the Secretary to make exceptions to this
limit on the variation of costs within each APC group in unusual cases such
as low volume items and services. No exception may be made in the case of a drug or biological that has been designated as an orphan drug under section 526 of the Federal Food, Drug, and Cosmetic Act. We implemented this statutory provision in § 419.31 of the regulations. Under this regulation, we elected to use the highest median cost
and lowest median cost to determine comparability.

During the APC Panel ’ s February 2004 meeting, we presented data and information concerning a number of
APCs that violate the 2 times rule and
asked the APC Panel for its
recommendation. We discuss below the
APC Panel ’ s recommendations specific to each of these APCs, our proposals in


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response to the APC Panel ’ s recommendations that were discussed in the August 2004 proposed rule, and our final policies.

1. Cardiac and Ambulatory Blood Pressure Monitoring

APC 0097: Cardiac and Ambulatory Blood Pressure Monitoring

We expressed concern to the APC Panel that APC 0097 appears to violate the 2 times rule. We sought the APC
Panel ’ s recommendation on revising the
APC to address the violation. Based on clinical homogeneity considerations, the
APC Panel recommended that we not
restructure APC 0097 for CY 2005.

We proposed to accept the APC
Panel ’ s recommendation that we make no changes to APC 0097 for CY 2005. We did not receive any public comments on our proposal. Accordingly, in this final rule, we are not making any changes to APC 0097 for

CY 2005.

2. Electrocardiograms

APC 0099: Electrocardiograms

We expressed concern to the APC Panel at its February 2004 meeting that APC 0099 appears to violate the 2 times
rule. We asked the APC Panel to recommend options for resolving this
violation. Based on clinical homogeneity considerations, the APC
Panel recommended that we not alter
the structure of APC 0099 for CY 2005.

We proposed to accept the APC
Panel ’ s recommendation that we make no changes to APC 0099 for CY 2005. We did not receive any public comments on our proposal. Accordingly, in this final rule with comment period, we are not making any changes to APC 0099 for CY 2005.

3. Excision/Biopsy

APC 0019: Level I Excision/Biopsy

APC 0020: Level II Excision/Biopsy

APC 0021: Level III Excision/Biopsy

We expressed concern to the APC Panel at its February 2004 meeting that APC 0019 appears to violate the 2 times
rule. We advised the APC Panel that this
violation was not evident in CY 2004
because the CY 2002 median cost data used in calculating the CY 2004 APC updates supported moving CPT codes 11404 (Removal of skin lesion) and 11623 (Removal of skin lesion) from APC 0020 and APC 0021. However, based on the CY 2003 data reviewed by the APC Panel, APC 0019 would violate the 2 times rule. Therefore, we asked the APC Panel to recommend an approach to resolve the violation. We asked the
APC Panel if we should leave this APC as is; divide APC 0019 into two separate APCs; or move some codes in APC 0019 to higher level excision/biopsy APCs. In making its recommendation, the APC
Panel noted that the 2 times violation in APC 0019 was minor, and recommended that we not modify APC

0019.

We proposed to accept the APC
Panel ’ s recommendation to not make any modifications to APC 0019 for CY 2005. We did not receive any public comments on our proposal. Accordingly, in this final rule with comment period, we are not making any changes to APC 0019 for CY 2005.

4. Posterior Segment Eye Procedures

APC 0235: Level I Posterior Segment Eye Procedures

We expressed concern to the APC Panel at its February 2004 meeting that APC 0235 appears to violate the 2 times rule. At the August 2003 APC Panel meeting, the APC Panel recommended
that we monitor the data for APC 0235 for review at its February 2004 meeting. In order to address the apparent violation, we asked the APC Panel to consider moving a few CPT codes from APC 0235 into a higher level posterior segment eye procedure APC. The APC
Panel noted that the 2 times violation in APC 0235 was minor, and recommended that we not change APC

0235.

We proposed to accept the APC
Panel ’ s recommendation that we make no changes to the structure of APC 0235 for CY 2005. We receive one public comment regarding this proposal.

Comment: One commenter urged CMS not to finalize the proposal to keep
the CY 2004 structure of APC 0235 for
CY 2005. The commenter asked CMS to consider moving codes 67220 (Treatment of choroids lesion), 67221 (Ocular photodynamic therapy), 67225 (Eye photodynamic therapy, add-on), 67101 (Repair detached retina), and 67141 (Treatment of retina) to a higher level Posterior Segment Eye Procedure

APC.

Response: After further analysis, we
continue to believe that the resources
and clinical characteristics of these codes are most compatible and homogeneous with those services in Level I Posterior Segment Eye Procedures, APC 0235. We plan to discuss the possible restructuring of APCs 0235, 0236, and 0237 (Level I, Level II, and Level III Posterior Segment Eye Procedures, respectively) at the next APC Panel meeting. We invite
comments on these APCs.

In this final rule with comment period, we are adopting as final the proposal not to make any changes to
APC 0235 for CY 2005.

5. Laparoscopy

APC 0130: Level I Laparoscopy

APC 0131: Level II Laparoscopy

We expressed concern to the APC Panel at its February 2004 meeting that APC 0130 appears to violate the 2 times rule. We suggested moving CPT code 44970 (Laparoscopy, appendectomy)
from APC 0130 to APC 0131. The APC
Panel recommended that we make this change.

We proposed to accept the APC
Panel ’ s recommendation to move CPT
code 44970 from APC 0130 to APC 0131. We did not receive any public comments on our proposal. Accordingly, in this final rule with comment period, we are adopting as final without modification our proposal
to move CPT code 44970 from APC 0130

to APC 0131.

6. Anal/Rectal Procedures

APC 0148: Level I Anal/Rectal
Procedure

APC 0155: Level II Anal/Rectal
Procedure

APC 0149: Level III Anal/Rectal
Procedure

APC 0150: Level IV Anal/Rectal
Procedure

We expressed concern to the APC Panel at its February 2004 meeting that APC 0148 appears to violate the 2 times rule. We suggested moving CPT code 46020 (Placement of seton) from APC 0148 to a higher level anal/rectal procedure APC. The APC Panel
reviewed the four anal/rectal APCs (APC 0148, 0149, 0150, and 0155) and recommended moving CPT codes 46020 and 46706 (Repair of anal fistula with glue) from APC 0148 to APC 0150. The APC Panel also recommended moving CPT codes 45005 (Drainage of rectal abscess) and 45020 (Drainage of rectal abscess) from APC 0148 to APC 0155.

We proposed to accept the APC
Panel ’ s recommendations specific to
APC 0148. We received one favorable public comment on our proposal. Accordingly, in this final rule with comment period, we are adopting as final without modification our proposal and are moving CPT codes from APC
0148 to APCs 0150 and 0155 as shown
in the Table 6 below.


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7. Nerve Injections
APC 0204: Level I Nerve Injections

APC 0206: Level II Nerve Injections

APC 0207: Level III Nerve Injections

APC 0203: Level IV Nerve Injections

We expressed concern to the APC
Panel that APC 0203 and APC 0207 appear to violate the 2 times rule. After
careful consideration of new data presented during the February 2004 meeting, the APC Panel recommended moving CPTs 64420 (Nerve block injection, intercostal nerve), 64630 (Injection treatment of nerve), 64640 (Injection treatment of nerve), and 62280 (Treatment of a spinal cord lesion) from APC 0207 to APC 0206.
The APC Panel also recommended moving CPT code 62282 (Treatment of a spinal canal lesion) from APC 0207 to

APC 0203.

After reviewing more recent, complete calendar year data that was not available in February 2004, we proposed to accept only the APC Panel ’ s recommendation
to move CPTs 64630 and 64640 from
APC 0207 to APC 0206 and to make some other changes that we believed were appropriate to improve the nerve injection APCs ’ clinical and resource homogeneity, as shown in Tables 7, 8, and 9 of the proposed rule.

We received two comments regarding our proposed reassignment of four CPT
codes from APC 0203 to APC 0207 to address an apparent violation of the 2
times rule.

Comment: Commenters urged CMS not to finalize the proposed changes to CPT codes 64620 (Injection treatment of nerve), 64680 (Injection treatment of nerve), 62263 (Lysis epidural adhesions) and 62264 (Epidural lysis on single day), which we proposed to move from
APC 0203 to APC 0207. The commenters stated that the proposed payment for these services was well below the cost of the resources required to provide the services at an acceptable
standard of care. The commenters requested that we not move these four
codes from APC 0203.

Response: After further analysis, we agree with the commenters that CPT codes 64620, 62263, and 62264 should
remain in APC 0203 based on clinical and resource homogeneity with the services in APC 0203. Therefore, in this final rule with comment period, we are not moving these three codes from APC 0203, as displayed in Table 9B below.

However, based on our final CY 2003 hospital data for CPT code 64680, utilizing over half of the several

hundred total bills for this service for calculation of median hospital costs, we

continue to believe that the resources

and clinical characteristics of destruction of the celiac plexus by neurolytic nerve agent are most compatible and homogeneous with

those services in Level III Nerve Injections, APC 0207. Therefore, in this final rule with comment period, we are adopting as final the proposed

movement of CPT code 64680 from APC 0203 to APC 0207, as displayed in Table

9B below.

Accordingly, all of the final APC reassignments of nerve injections codes in this final rule with comment period are displayed below in Tables 7, 8, 9A,

and 9B.


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8. Anterior Segment Eye Procedures

APC 0232: Level I Anterior Segment Eye
Procedures

APC 0233: Level II Anterior Segment Eye Procedures

We expressed concern to the APC Panel at its February 2004 meeting that APC 0233 appears to violate the 2 times rule. We suggested moving CPT codes 65286 (Repair of eye wound), 66030 (Injection treatment of eye), and 66625 (Removal of iris) from APC 0233 to APC 0232. The APC Panel agreed and recommended that we move CPT codes 65286, 66030, and 66625 from APC

0233 to APC 0232.

We proposed to accept the APC
Panel ’ s recommendation and to reassign
these three codes. We received one public comment on our proposal.

Comment: One commenter asserted that the costs for performing the procedures under CPT codes 65286 and
66625 are similar to the costs for performing procedures in APC 0233 and requested that these codes not be moved

to APC 0232. Response: After further analysis, we
continue to believe that the resources
and clinical characteristics of codes 62586 and 66625 are most compatible and homogeneous with those services in Level I Anterior Segment Eye Procedures, APC 0232.

Therefore, in this final rule with comment period, we are adopting as final without modification our proposal and are moving CPT codes 65286, 66030, and 66625 from APC 0233 to
APC 0232 as shown in the Table 10
below.


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9. Pathology

APC 0343: Level II Pathology

APC 0344: Level III Pathology

We expressed concern to the APC Panel at its February 2004 meeting that APC 0343 appears to violate the 2 times rule. We suggested moving CPT code 88346 (Immunoflourescent study) from
APC 0343 to APC 0344. The APC Panel concurred with our proposal.

We proposed to accept the APC
Panel ’ s recommendation and to move
CPT code 88346 from APC 0343 to APC 0344. We received one public comment on our proposal.

Comment: One commenter requested that CMS split APC 0344 into two APCs to create another level for the pathology procedures. The commenter stated that
creation of another level would lead to more economically homogenous APCs to provide payment that more closely covers the costs of the procedures. The commenter pointed out that APC 0344, as currently configured, violates the 2
times rule and recommended that CMS split APC 0344 into two APCs and that CMS should assign them to a newly
created APC rather than finalize itsproposal to assign the new computerassisted image analysis procedures to

APC 0344.

Response: We believe that our proposed reassignment of CPT code 88346 from APC 0343 to 0344, as recommended by the APC Panel, will improve the resource and clinical homogeneity of the APCs. We are reluctant to make further reassignments without hospital cost data to support changes. Several of the codes that the commenter is concerned about, including APC codes 88360 (Morphometric analysis, tumor immunohistochemistry, quantitative or semiquantitative, each antibody; manual), 88368 (Morphometric analysis, in situ hybridization, each probe; manual), and 88367 (Morphometric analysis, in situ hybridization, each probe; using computer assisted technology) were new in CY 2004 and CY 2005 and, as such, we do not have available claims data for analysis.

Given the new codes mentioned by
the commenter and the 2 times rule violations in APC 0342 and 0344, we expect that we will want to solicit the advice of the APC Panel regarding the configuration of all the pathology APCs: 0342, 0343, 0344, and 0661, at their next meeting. We will reexamine the APCs for future updates to the OPPS, but will not make other changes to the APCs at
this time.

In this final rule with comment period, we are adopting as final without modification our proposal and are moving CPT code 88346 from APC 0343

to APC 0344.

10. Immunizations

APC 0355: Level III Immunizations (for CY 2005: Level I Immunizations)

APC 0356: Level IV Immunizations (for CY 2005: Level II Immunizations)

We expressed concern to the APC Panel at its February meeting that APCs 0355 and 0356 appear to violate the 2
times rule. In order to eliminate this violation, we suggested moving CPT 90636 (Hepatitis A/Hepatitis B vaccine, adult dose, intramuscular use) from
APC 0355 to APC 0356. We also suggested moving CPT codes 90375 (Rabies immune globulin, intramuscular or subcutaneous), 90740 (Hepatitis B vaccine, dialysis or immunosuppressed patient, intramuscular), 90723 (Diphtheria-pertussis-tetanus, Hepatitis B, Polio vaccine, intramuscular), and 90693 (Typhoid vaccine, AKD, subcutaneous) from APC 0356 to APC

0355.

The APC Panel recommended moving
CPT 90636 from APC 0355 to APC 0356 and CPT codes 90740, 90723, and 90693
from APC 0356 to APC 0355. The APC Panel delayed making a
recommendation on CPT 90375 and requested that we collect additional cost data on this procedure for discussion at the next scheduled APC Panel meeting.

In the August 16, 2004 proposed rule, we proposed to accept the APC Panel ’ s recommended changes to move CPT code 90740 from APC 0356 to 0355, and
to move CPT code 90636 from 0355 to
0356. Based on our review of more
recent claims data than were available to the APC Panel, we also determined
that the medians for CPT codes 90693 and 90375 are below the $50 drug packaging threshold. Therefore, we also proposed to package both CPT codes 90693 and 90375 and to change the
status indicator for CPT code 90723 to

‘‘ E ’’ because it is not payable by
Medicare.

We received one public comment relating to CPT code 90740.

Comment: One commenter requested that CMS not reassign CPT code 90740 Recombivax 40mcg/mL (a brand name for Hepatitis B vaccine), from APC 0356 (Level II Immunizations) to APC 0355 (Level I Immunizations), as proposed.
The commenter stated that the CMS median cost of $5.55 is erroneous and that the lowest published price for Recombivax 40mcg/mL in the Federal Supply Schedule is $79.33. Therefore,
the commenter believed that code 90740
does not violate the 2 times rule when assigned to APC 0356.

Response: We are using the CY 2003 hospital claims as the basis for payment and we believe we have adequate claims on which to base payment for CPT code
90740 for CY 2005. We were able to use 99 percent of the claims for CPT code
90740 for median calculation and believe that our assignment of CPT code 90740 for CY 2005 is appropriate.

In this final rule with comment period, we are adopting as final without modification our proposal and are moving CPT code 90740 from APC 0356
to APC 0355 and CPT code 90636 from APC 0355 to APC 0356, as shown in Table 11, and packaging both CPT codes
90693 and 90375.


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11. Pulmonary Tests

APC 0367: Level I Pulmonary Tests

APC 0368: Level II Pulmonary Tests

APC 0369: Level III Pulmonary Tests

We expressed concern to the APC Panel at its February 2004 meeting that APC 0369 appears to violate the 2 times rule. We suggested moving CPT code 94015 (Patient recorded spirometry) from APC 0369 to APC 0367. The APC Panel concurred with our proposal.

In the August 16, 2004 proposed rule, we proposed to accept the APC Panel ’ s recommendation and to move CPT code

94015 from APC 0369 to APC 0367. In addition, during our analysis of more recent claims data following the APC Panel meeting, we noted that APC 0367 violated the 2 times rule. Therefore, we proposed to reassign CPT codes 94375, 94750, 94450, 94014, 94690, and 93740

to APC 0368.

We did not receive any public comments on our proposal. Accordingly, in this final rule with comment period, we are adopting as final without modification our proposal and are moving CPT code 94015 from APC 0369 to APC 0367 and reassigning CPT codes 93740, 94014, 94375, 94450, 94690, and 94750 to APC 0368, as
shown in Table 12A.

12. Clinic Visits

APC 0600: Low Level Clinic Visits

We expressed concern to the APC Panel at its February 2004 meeting that APC 0600 appears to violate the 2 times rule. We suggested moving HCPS code G0264 (Assessment other than CHF, chest pain, asthma) to a higher level
clinic visit. The APC Panel recommended that we not make any changes to APC 0600.

We proposed to accept this recommendation and not make any changes to APC 0600 for CY 2005. We received one public comment on our proposal from a provider group.

Comment: One comment recommended that CMS investigate further the apparent two times violation
in APC 0600. The commenter believed that, although the APC Panel did not recommend reassignment of HCPCS code G0264 (Initial nursing assessment of patient directly admitted to observation with diagnosis other than CHF, chest pain or asthma or patient directly admitted to observation with diagnosis of CHF, chest pain or asthma when the observation stay does not qualify for G0244), in order to remedy the apparent violation, CMS should make the reassignment of G0264 to a much higher level clinic visit (APC 0602, High Level Clinic Visit) due to the resources involved in directly admitting a patient to observation. The commenter provided examples of services that the commenter believed are part of the initial observation nursing assessment provided by a hospital, including patient registration, comprehensive nursing clinical admission assessment, initiation of physician orders, coordination and scheduling of ancillary services, administration of medications, and assessment of discharge planning needs.

Response: We do not agree with the

commenter ’ s assertion that the services coded using G0264 are necessarily more
resource intensive than a low-level clinic visit. The beneficiary whose observation stay would be coded using G0264 presents to the hospital following a physician visit. The beneficiary has already been assessed by the physician who, as a result of the assessment, has
decided that observation care is
warranted. We are concerned that hospitals may be attributing costs to the initial nursing assessment that are more appropriately attributable to observation services themselves, such as administration of medications, scheduling of tests to be conducted during the period of observation, and discharge planning. It is not apparent why the services provided in the hospital associated with admission to observation care (including some of those listed by the commenter) should require the resources of a High Level Clinic Visit (APC 0602) as the commenter suggested. Thus, we agree
with the APC Panel ’ s recommendation
to leave G0264 in APC 0600.

Accordingly, in this final rule with comment period, we are adopting as final our proposal not to make any changes to APC 0600 for CY 2005.

13. Other APC Assignment Issues

We received a number of comments about specific APC assignments and payment amounts that were generated by our proposed rates or proposed changes to HCPCS code APC assignments resulting from our revisions
to address violations of the 2 times rule. Those changes were not all specifically discussed in the proposed rule, but were open to comment. We respond to these
comments in this section of the final
rule.

a. Catheters for Brachytherapy Services

Comment: One commenter asked that CMS consider carefully in which APCs to place new CPT codes 19296, 19297, and 19298 (for placement of catheters into the breast for brachytherapy) because the services have, heretofore, been coded under unlisted code 19499, which is assigned to APC 0028 (Level I Breast Surgery) and with a proposed payment amount of $1,081 for CY 2005.
The commenter believed that this


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proposed amount is too low to appropriately reflect the costs of these

services.

Response: We have assigned new CPT
codes 19296 and 19298 in New Technology APC 1524 (New Technology-Level XIV ($3,000

– $3,500)) with a payment amount of $3,250 and CPT code 19297 in APC 1523 (New Technology-Level XXIII ($2,500

– $3,000)) with a payment amount of $2,750 for CY 2005 OPPS. These are new codes and the APC assignments were not included in the proposed rule. Therefore, the APC assignments are subject to comment.

b. Peripherally Inserted Central Catheters (PICC)

We received one comment regarding our proposed APC reassignment of CPT codes 36568 (Insertion of peripherally inserted central venous catheter (PICC), without subcutaneous port or pump; under 5 years of age) and 36569 (Insertion of peripherally inserted central venous catheter (PICC), without subcutaneous port or pump; age 5 years or older to APC 0187 (Miscellaneous placement/repositioning). We made the proposal based on a recommendation by the APC Panel during its February 2004 meeting.

Comment: One commenter requested that we not reassign CPT codes 36568
and 36569 from APC 0032 to APC 0187 as proposed.

Response: We proposed to reassign
the PICC lines to APC 0187 based on our agreement with the APC Panel that there are significant differences in the clinical complexity and resource use associated with the procedures assigned to APC 0032 compared to PICC line insertion. We will reevaluate the APC assignment
of the PICC line insertion once we have
sufficient data to evaluate the assignment.

c. External Fixation Devices

Comment: One commenter indicated that APC 0046 (Open/Percutaneous Treatment Fracture) contains violations
of the two times rules and should be broken into multiple APCs so that CPT codes 20690 (Apply bone fixation device) and 20692 (Apply bone fixation device), which are for application of external fixation devices, could be paid appropriate amounts. Other commenters asked that CMS require that claims for
these codes must contain codes for the
devices and asked that we revise the definition of C1713 (Anchor/screw for opposing bone to bone or soft tissue to bone (implantable)) to also apply to
external fixation devices and to remove the requirement that the device be implantable. One commenter also asked that we instruct providers to bill code
20690 or 20692 when external fixation is provided with the reduction of a
fracture and asked that we create a new
APC to contain CPT codes 20690 and

20692.

Response: CPT codes 20690 and 20692 are currently in APC 0050 and no changes were proposed for 2005 OPPS.
There are no 2 times violations in the APC in which they are located and each of these codes represents approximately one percent of the volume in the APC.
Therefore we see no reason to create a
new APC for these codes. The CPT
codes for treatment of a fracture often
include with or without fixation in the
definition of the code. Where fixation is included in the definition of the code, it would be miscoding to also report 20690 or 20692; these codes should be reported if, and only if, fixation is not
included in the definition of the CPT
code for treatment of the fracture.
Providers should review the CPT
instructions and look to the AMA ’ s guidance on coding if they have questions about when these codes should be reported.

d. Apheresis

Comment: Two commenters disagreed with our proposed reassignment of CPT code 36515 (Apheresis, adsorp/reinfuse) to APC 0111 (Blood Product Exchange)
and recommended that the code be reassigned to APC 0112 (Apheresis, Photopheresis and Plasmapheresis). One of the commenters, a medical specialty society, indicated that the procedure involves an expensive disposable supply item that costs more than the proposed payment rate for APC 0111. In addition, this commenter stated that the proposed payment rate would be significantly less than the physician ’ s office payment, which the commenter concluded indicated that the charge
data used to establish the median cost of the procedure may be incorrect.

Response: APC assignments are based on clinical homogeneity and comparable resource utilization for all
CPT and HCPCS codes within an APC. After careful review, we disagree with
the commenters that CPT code 36515 should be reassigned to APC 0112. We believe that the resources required for
CPT code 36515 are more similar to the other CPT codes in APC 0111. Thus, for CY 2005, we are adopting as final our proposal to assign CPT code 36515 to APC 0111, effective January 1, 2005.

e. Imaging for Intravenous Cholangiogram (IVC) Filter Placement and Breast Biopsy

Comment: One commenter requested
that we move CPT code 75940 (Percutaneous placement of IVC filter, radiological supervision and interpretation) from APC 0187 (Miscellaneous Placement/ Repositioning) to APC 0280 (Level III Angiography and Venography Except Extremity) and CPT code 76095 (Stereotactic localization guidance for breast biopsy or needle placement, each lesion, radiological supervision and interpretation) from APC 0187 (Miscellaneous Placement/ Repositioning) to APC 0289 (Needle Localization for Breast Biopsy). The commenter believed that imaging for IVC filter placement and breast biopsy are entirely unrelated services to the central venous access surgical procedures comprising the majority of
the codes in APC 0187.

Response: We understand the

commenter ’ s concern regarding the clinical inconsistency between the services described by CPT codes 75940 and 76095, which are assigned to APC 0187, and the central venous access (CVA) procedures that are also assigned to APC 0187. However, we disagree
with the commenter ’ s recommendation
that CPT codes 75940 and 76095 be reassigned. First, if we were to accept
the commenter ’ s recommendation to reassign CPT code 75940 to APC 0280 and CPT code 76095 to APC 0289, the resource homogeneity of those two APCs would be compromised, and we would be significantly overpaying CPT code 75940 and underpaying CPT code
76095 based on the median costs of
those two codes relative to the median costs of the procedures currently assigned to APCs 0280 and 0289, respectively. Further, we lack data for a
number of the CVA codes in APC 0187 because they are new codes that were
established in CY 2004. We believe that these new CVA codes are clinically similar to the codes that comprise APC 0187, and we estimate that they are also similar in terms of resource costs, which is why we assigned them to APC 0187.
Once we have accumulated data for these new codes, we will review the configuration of APC 0187, and make whatever changes are appropriate in future updates. Therefore, we are maintaining CPT codes 75940 and
76095 in APC 0187 for CY 2005.

f. Hysteroscopic Endometrial Ablation
Procedures

Comment: Some commenters opposed
the APC Panel recommendation that both CPT codes 0009T (Endometrial cryoablation) and 58563 (Hysteroscopic endometrial ablation) be assigned to APC 0387 (Level II Hysteroscopy) in CY
2005. The commenters were concerned that adding endometrial cryoablation


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(CPT 0009T) to APC 0387 would seriously weaken the clinical homogeneity of APC 0387 because CPT 0009T (Endometrial ablation with ultrasonic guidance) does not use hysteroscopy, and it requires an ultrasound machine and a separate capital unit, or compressor console, to provide cryotherapeutic energy. Instead, the commenters urged CMS not to keep CPT code 58563 in APC 0387, but rather, to assign it to APC 0202, in addition to assigning code 0009T to APC 0202, as we had proposed. One commenter argued that the clinical homogeneity of APC 0202 would be enhanced by grouping the two endometrial ablation procedures that
use visualization to monitor and
confirm the destruction of the
endometrium in the same APC. Moreover, moving both CPT codes
58563 and 0009T to APC 0202 would highlight APC 0202 ’ s clinical homogeneity as a more device-intensive family of new technology procedures while better organizing APC 0387 as the group of non-device hysteroscopic procedures involving surgical removal
or resection of intrauterine tissue for
reasons other than abnormal uterine bleeding (AUB). The same commenter also believed that assigning both codes to APC 0202 would negate any inappropriate incentives to use either treatment because of payment. Other
commenters asked that CMS create a new APC for endometrial cryoablationand place that APC on the devicedependent list as it did for cryoablation of the prostate because they have found that the device is 70 percent of the total cost of endometrial cryoablation. The
commenters asked that the new APC be paid at least $3,448 to appropriately reflect the hospital ’ s cost of the service.

Response: After careful consideration of the comments, we have decided to make final for CY 2005 our proposal to retain hysteroscopic endometrial ablation (CPT code 58563) in APC 0387. In addition, we are making final for CY 2005 our proposal to assign endometrial cryoablation with ultrasonic guidance to APC 0202. (We note that CPT code 0009T for endometrial cryoablation with ultrasonic guidance is replaced by new CPT code 58356 for CY 2005.). We believe that the need for a hysteroscope to perform hysteroscopic endometrial
ablation makes it similar to the other
services in APC 0387. On the other hand, Endometrial cryoablation uses a device but not a hysteroscope and, therefore, is more clinically compatible with APC 0202, which contains other resource intensive gynecologic services
that also use a device but not a hysteroscope. Moreover, APC 0202 is a device-dependent APC and, therefore, a more appropriate placement for a procedure that uses a device.

g. Hysteroscopic Female Sterilization

Comment: One commenter indicated

that the AMA intended create a new CPT level III tracking code for hysteroscopic female sterilization for CY 2005 and urged CMS to assign it to APC

0202. The commenter indicated that this new service places implants through a hysteroscope to occlude the fallopian tubes and that, therefore, it should be assigned to APC 0202, which would provide appropriate payment for this new service for which the implants cost
$1,000 to $1,500.

Response: This service is represented by new CPT code 58565 (Hysteroscopic fallopian tube cannulation and micro insert placement), which was created after the issuance of the proposed rule. We are placing this new code to APC

0202 for CY 2005 for the OPPS. The placements of new codes in APCs, such as this code, are subject to comment during the comment period of this final rule with comment period.

h. Urinary Bladder Residual Study

Comment: One commenter asked us to keep CPT code 78730 (Urinary bladder residual study) in APC 0404 (Renal and Genitourinary Studies Level I) instead of moving it to APC 0340 (Minor Ancillary Procedures). The commenter noted that this code is being misused to report other than urinary bladder residual imaging.

Response: CPT code 78730 was created and originally valued for the Medicare Physician Fee Schedule as a procedure that required the services of

a nuclear medicine technician. Subsequently, the use of the code has changed so that it is now used primarily by urologists. We do not believe that urologists perform services requiring nuclear medicine technicians and so, as the commenter pointed out, it appears that the code may now be utilized for coding a service that is different from

that for which it was created.

However, we are not reassigning the code at this time, as requested by the commenter, pending further review. To that end, we would appreciate

submission of resource data from other physician specialties that use CPT code

78730 for us to review in the context of our hospital data so that we can

examine this issue further. i. Intracranial Studies, Electrodiagnostic Testing, Autonomic Testing, and EEG

We received one comment relating to the APC assignments for several electrodiagnostic testing, autonomic testing, and EEG codes.

Comment: One commenter requested that CPT code 93888 (Intracranial study) be moved from APC 0266 (Level II Diagnostic Ultrasound Except Vascular) and assigned to APC 0267 (Level III Diagnostic Ultrasound Except Vascular) as it was in CY 2002; that CPT codes 95870 (Muscle test, nonparaspinal), 95900 (Motor nerve conduction test), and 95904 (Sensory NCV) be assigned to APC 0218 (Level II Nerve Muscle Tests); that CPT codes 95921, 95922, and 95923 (Autonomic nerve function tests) be assigned to APC 216 (Level III Nerve and Muscle Tests); and that CPT codes 95953 and 95956 (EEG monitoring) be assigned to APC 209 (Extended EEG Studies and Sleep Studies, Level II).

Response: Based on our final CY 2003 hospital data for CPT codes 93888, 95870, 95900, 95904, 95921, and 95922,
we continue to believe that the
resources and clinical characteristics of those codes are most compatible with other services in the APCs to which they are assigned. We made no proposal to change any of those APC assignments. Therefore, in this final rule with comment period, we are finalizing our continued placement of CPT code 93888 in APC 0266; CPT codes 95870, 95900, and 95904 in APC 0215; and CPT codes
95921 and 95922 in APC 0218. We are moving CPT code 95923 from APC 0215
to APC 0218 because the resources for this code are most compatible and homogenous with those services in
Level II Nerve and Muscle Tests.

Based on our further review of CPT codes 95953 and 95956, we are moving these two CPT codes, as well as code 95950, to APC 0209 (Extended EEG Studies and Sleep Studies, Level II).
Based on our review of clinical and
resource use characteristics of these CPT codes, we discovered that 95953, 95956 and 95950 all are more homogenous with procedures assigned to APC 0209 than in their current APCs. Although we did not propose to make these reassignments in the proposed rule, based in part on the comment received and our further review, we are making these reassignments in this final rule with comment period in the interest of clinical and resource use homogeneity.

Accordingly, we are reassigning the CPT codes relating to intracranial studies, electrodiagnostics testing, autonomic testing, and EEG to APCs, as displayed below in Table 12B.


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j. Therapeutic Radiation Treatment

Comment: Some commenters objected to the proposed movement of CPT code 77370 (Radiation physics consult) from APC 0305 (Level II Therapeutic Radiation Treatment Preparation) to APC 0304 (Level I Therapeutic Radiation Treatment Preparation), with a proposed reduction in the payment rate by 51 percent from the CY 2004 payment rate of $200.60. The
commenters indicated that the current CY 2004 payment rate is already inadequate. The commenters expressed concern that the proposed payment of $98.27 would not compensate for the
costs incurred to deliver this service and urged that CPT code 77370 remain in

APC 0305.

Response: The median of $134.22 for
CPT code 77370 was based on 95 percent of the total CY 2003 claims (33,070 single procedure claims out of 34,792 total claims). Based on these claims data, we believe that the
movement of CPT code 77370 from APC 0305 (with a proposed median of $229.92) to APC 0304 (with a proposed median of $99.92) is appropriate. Therefore, we are finalizing our
movement of CPT code 77370 from APC
0305 to APC 0304 for CY 2005.

k. Hyperthermia Procedures

Comment: One commenter expressed concern about the 9-percent decrease in the proposed payment rate for hyperthermia procedures (CPT codes 77600 through 77605) assigned to APC 0314 (Hyperthermic Therapies). The commenter asserted that the hospital charges do not reflect the tremendous capital costs associated with hyperthermia procedures. The commenter suspected that the questionably high utilization for these procedures may be a result of miscoding. The commenter requested that CMS consider the hyperthermia practice expense data submitted through the Practice Expense Advisory Council (PEAC) and Medicare Physician Fee Schedule (MPFS) processes. The commenter urged CMS to maintain the CY 2004 payment rates for hyperthermia through CY 2005 to allow additional
time for the commenter to educate providers on the proper coding and cost reporting for hyperthermia.

Response: We believe the data do not support the commenter ’ s concern that a high utilization for these codes is indicative of miscoding, as we do not
consider 552 total claims to reflect a high utilization that gives rise to question. The payment rate for APC 0314 for CY 2005 noted in the proposed rule was set using 86 percent of the total claims (that is, 452 single procedure claims out of 522 total claims), which we consider to be sufficiently robust for ratesetting purposes. Therefore, we will not consider practice expense data submitted through the PEAC or MPFS

processes.
l. Physician Blood Bank Services

Comment: One commenter asked that CMS place CPT codes 86077, 86078 and 86079 (Physician blood bank services) into an APC and make payment for
them under the OPPS. The commenter indicated that the current assignment of
status indicator ‘‘ A ’’ is assigned to HCPCS codes that are paid under
another fee schedule but that these services are not paid under any other fee schedule or payment system and, therefore, the hospital is not being paid
for these services. The commenter noted
that the services had status indicator

‘‘ X ’’ for minor services and had APC assignments in the CY 2003 OPPS.

Response: We agree and have assigned these CPT codes to APC 343
with status indicator ‘‘ X. ’’ These services consist mainly of physician professional services, which are paid through the Medicare Physician Fee Schedule, but we expect there may also be some hospital resources utilized. We have given these codes a condition code of ‘‘ NI ’’ (new interim) in this interim final rule with comment because they were not paid under the OPPS in CY
2004 and because we were not able to
use the data for these codes in the
calculation of the median cost for APC

343.

m. Caloric Vestibular Test

Comment: One commenter requested an explanation for the proposed movement of CPT code 92543 (Caloric vestibular test) from APC 0363 (Level I Otorhinolaryngologic Function Tests) to APC 0660 (Level 2 Otohinplaryngologic Function Tests), and CPT codes 92553 (Audiometry, air and bone) and 92575 (Sensorineural acuity test) from APC 0365 (Level II Audiometry) to APC 0364 ((Level I Audiometry).

Response: We regularly review CPT codes to ensure that they are in appropriate clinical APCs, based on resource use and clinical homogeneity. Upon review, we have found that code 92543 fits more appropriately in a higher-paying APC in the same family of otorhinolaryngologic function test APCs, while codes 92553 and 92575 fit in a lower-paying APC in the same family of audiometry APCs.

n. APC 0365

— Level II Audiometry

Comment: One commenter stated that the services in APC 0365 (Level II Audiometry) are not clinically homogeneous and also violate the 2 times rule, sometimes by a spread of 300 percent. The commenter asked that CMS split the APC into two APCs: one containing CPT codes 92604, 92602, 92603, 92601 and 92561 and a second new APC containing CPT codes 92577,

92579, 92582, 92557.

Response: We agree that revision of this APC would result in improved clinical homogeneity and better grouping of services with similar resources. Therefore, we are establishing a new APC 0366 (Level III Audiometry), and are placing in the new APC those


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services that are specific to aural
rehabilitation after cochlear implantation: CPT codes 92601, 92602, 92603, and 92604.

o. Noncoronary Intravascular Ultrasound (IVUS)

Comment: One commenter requested that CMS keep CPT code 37250 (Intravascular ultrasound (non-coronary vessel) during diagnostic evaluation and/or therapeutic intervention; initial vessel) in APC 0670 (Level II
Intravascular and Intracardiac Ultrasound and Flow Reserve) and to use only those claims that captureintravascular ultrasound (IVUS) devicerelated costs to calculate the median cost for this procedure.

Response: We assigned CPT 37250 to APC 0416 (Level I Intravascular and
Intracardiac Ultrasound and Flow Reserve) in the proposed rule. We created two levels for IVUS by creating APC 0416 in order to recognize both the
clinical and resource use differences between the coronary and noncoronary vessel procedures, as well as the initial
vessel and each additional vessel procedures. Prior to creation of APC 0416, all IVUS procedures, coronary and noncoronary, as well as initial vessel and each additional vessel, were assigned to APC 0670. Based on analysis of our CY 2003 hospital claims data, we
concluded that the services in APC 0670 had widely varying median costs, with
lower median costs for both the each additional vessel (noncoronary and coronary) and initial noncoronary vessel services in APC 0670, as compared with the initial coronary vessel IVUS. We recognized that the additional vessel services would not require a second costly device in most cases. We also noted that the initial vessel coronary IVUS code, CPT 92978, includes imaging supervision and the interpretation and report, while the initial vessel noncoronary IVUS code, CPT 37250, does not include the radiological supervision and interpretation, which is billed using another CPT code. Thus, we believe that the hospital resources utilized to perform initial vessel noncoronary and coronary IVUS are likely to be different
because the service elements in the CPT codes vary. Based on this review, we believe CPT 37250, a noncoronary vessel procedure with a median cost of $361, is appropriately assigned to APC 0416 and would be significantly overpaid if assigned to APC 0670.

For CY 2005, we did not have the ‘‘ C ’’coded claims to use to identify devicerelated costs with the level of specificity that was possible for CY 2004. However, we had significantly more claims available for CPT 37250 for ratesetting this year than for CY 2004. We believe that the data on which the assignment
to APC 0416 was based were reflective of hospital claims data regarding the
resources utilized for the service. As we note elsewhere in this preamble, we will be requiring the use of device codes to report all devices utilized, beginning January 1, 2005.

Accordingly, in this final rule we are finalizing the assignment of CPT 37250
to APC 0416 for CY 2005.

p. Electronic Analysis of
Neurostimulator Pulse Generators

Comment: One commenter stated that the services in APC 0692 (Electronic Analysis of Neurostimulator Pulse Generators) are not clinically homogeneous and also violate the 2
times rule. The commenter asked that CMS split the APC into two APCs: one containing CPT codes 95972 and 95975, and a second new APC containing CPT codes 95970, 95971, and 95974.

Response: We recognize that there is
a violation of the two times rule in APC 0692. Therefore, we are moving CPT code 95970 to APC 0218 (Level II Nerve and Muscle Tests), which places it in a
clinical APC that is suitable in terms of
resource use for the service and results in APC 0692 conforming to the 2 times
rule.

q. Endoscopic Ultrasound Services

Comment: One commenter asked that CMS create a separate APC for endoscopic ultrasound services because
the commenter believed that there are unique costs associated with them. The
commenter also believed that ultrasound costs were not packaged into the median for endoscopic ultrasound services because of correct coding edits that define endoscopic ultrasound services as including ultrasound.

Response: We have no reason to believe that the costs for endoscopic
ultrasound services do not contain the costs for the ultrasound component of
the service. Ultrasound services are
included in the definition of the endoscopy CPT codes, and the hospital would include charges for the ultrasound in the charge for endoscopy
that uses ultrasound services. We believe that the current APC placement of the codes for endoscopic ultrasound services in APC 0141 (Level I Upper GI Procedures) is valid, both with regard to clinical homogeneity and resource use.

r. External Counterpulsation (ECP)

Comment: Several commenters requested that G0166 (External Counterpulsation) in APC 0678 (External Counterpulsation) be assigned status indicator ‘‘ S ’’ rather than ‘‘ T ’’ and that CMS maintain the payment rate for external counterpulsation at the CY
2004 level. The commenters asserted that external counterpulsation is a stand-alone procedure and that assigning it a status indicator ‘‘ T ’’ has contributed to declining and inadequate payment rates for the services. The commenters argued that the proposed payment rate for CY 2005 is not
reflective of the costs of the service and
that the rate should be consistent with other cardiovascular equipment trends such as echocardiography. They
contended that the claims data CMS used are erroneous and pointed out that the payment rate has decreased every year since CY 2000, from $112.72 in CY 2004 to a proposed rate of $105.38 for
CY 2005. The commenter also speculated that ‘‘ batching ’’ or

‘‘ misreporting ’’ of claims also may be contributing to the rate decline trend for external counterpulsation.

Response: We do not believe that the rate decrease for these procedures has anything to do with the ‘‘ T ’’ status indicator. The rate for external counterpulsation proposed in the August 16, 2004 proposed rule was based on virtually all (35,764) of the 37,565 hospital claims submitted and the APC is comprised of only this one procedure. We are confident that the claims data are representative of actual costs and as such, that the proposed decreased rate is appropriate.

The status indicator only affects the payment rate when external counterpulsation is billed with another procedure that has a status indicator

‘‘ T. ’’ There are few multiple procedure claims for this procedure in the CY 2003 claims data and, thus, only a very small effect of multiple procedure discounting was possible.

In the absence of supporting information from the commenters, it is not clear what the commenters mean by considering the batching of claims as contributing to the payment decrease. It
is also not clear whether or not the

commenters ’ belief that misreporting may be contributing to the rate decline trend for external counterpulsation is justified. However, we encourage hospitals to code accurately.

D. Exceptions to the 2 Times Rule

As discussed earlier, the Secretary is authorized to make exceptions to the 2
times limit on the variation of costs within each APC group in unusual cases
such as low volume items and services.

Taking into account the APC changes that we proposed for CY 2005 based on
the APC Panel recommendations
discussed in section II.C. of this


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preamble and the use of CY 2003 claims
data to calculate the median cost of procedures classified in the APCs in the August 16, 2004 proposed rule, we
discussed our review of all the APCs to
determine which APCs would not meet the 2 times limit. We used the following criteria to decide whether to propose exceptions to the 2 times rule for
affected APCs:

• Resource homogeneity.

• Clinical homogeneity.

• Hospital concentration.

• Frequency of service (volume).

• Opportunity for upcoding and code fragments.

For a detailed discussion of these criteria, refer to the April 7, 2000 OPPS final rule with comment period (65 FR 18457).

In the August 16, 2004 proposed rule, we proposed to exempt 54 APCs from
the 2 times rule based on the criteria
cited above. In cases in which a
recommendation of the APC Panel appeared to result in or allow a violation of the 2 times rule, we generally accepted the APC Panel ’ s recommendation because these
recommendations were based on explicit consideration of resource use, clinical homogeneity, hospital specialization, and the quality of the
data used to determine the APC payment rates that we proposed for CY 2005. The median cost for hospital outpatient services for these and all
other APCs can be found at Web site: http//www.cms.hhs.gov.

We received one public comment on our proposal.

Comment: One commenter
recommended that we use statistical
methods to determine variations in the medians of services mapped to an APC. Specifically, the commenter suggested
the cost data for an APC should include
the standard deviation and the coefficient of variation using the geometric mean as the basis for the measure of dispersion. The commenter recommended that very few APCs be
allowed to violate the 2 times rule.

Response: We appreciate the

commenter ’ s recommendations. We will
consider these recommendations for future recalibrations. We do currently review the range of standard descriptive statistics for all APCs, including, but not limited to, the standard deviation and
coefficient of variation. As we stated in the proposed rule, we used multiple criteria to assess whether to propose exceptions to the 2 times rule for affected APCs, including resource and clinical homogeneity, hospital concentration, frequency of services, and opportunities for upcoding and code fragments. Despite an increase in
the number of clinical APCs in the OPPS over the last several years, the number of APCs excepted from the 2 times rule has remained relatively
stable.

The proposed rule listed exceptions
from the 2 times rule based on data from January 1, 2004 through September 30,
2004. For this final rule with comment period, we used data from January 1, 2003 through December 31, 2003. As a result of the additional data, the list of APCs that we are excepting from the 2 times rule has been updated. In this final rule with comment period, we are adopting 57 APCs as excepted from the 2 times rule, as shown in Table 13
below.

**BILLING CODE 4120**

**– 01** 

**– P** 


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### 65710 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

**BILLING CODE 4120**

**– 01** 

**– C**  E. Coding for Stereotactic Radiosurgery

Services

1. Background

In the November 7, 2003 final rule with comment period (68 FR 63403), we
discussed the APC Panel ’ s consideration of HCPCS codes G0242 (Cobalt 60-based stereotactic radiosurgery plan) and G0243 (Cobalt 60-based stereotactic radiosurgery delivery). At its August 22, 2003 meeting, the APC Panel discussed combining the coding for these procedures under one code, with the payment for the new code derived by adding together the payments for
HCPCS codes G0242 and G0243. The
APC Panel recommended that we solicit additional input from professional societies representing neurosurgeons, radiation oncologists, and other experts in the field before recommending changes to the coding configuration for
Cobalt 60-based stereotactic radiosurgery planning and delivery.

In a correction to the November 7, 2003 final rule with comment period, issued on December 31, 2003 (68 FR 75442), we considered a commenter ’ s request to combine HCPCS codes G0242 and G0243 into a single procedure code in order to capture the costs of this treatment in a single procedure claim because the majority of patients receive the planning and delivery of this treatment on the same day. We responded to the commenter ’ s request by explaining that several other
commenters stated that HCPCS code G0242 was being misused to code forthe planning phase of linear acceleratorbased stereotactic radiosurgery planning. Because the claims data for HCPCS code G0242 represent costs for
linear accelerator-based stereotactic radiosurgery planning (due to misuse of the code), in addition to Cobalt 60-based stereotactic radiosurgery planning, we
were uncertain of how to combine these
data with HCPCS code G0243 to determine an accurate payment rate for a combined code for planning and delivery of Cobalt 60-based stereotactic radiosurgery.

In consideration of the misuse of HCPCS code G0242 and the potential for causing greater confusion by combining HCPCS codes G0242 and G0243, we created a planning code for linear
accelerator-based stereotactic radiosurgery (HCPCS code G0338) to distinguish this procedure from Cobalt 60-based stereotactic radiosurgery planning. We maintained both HCPCS
codes G0242 and G0243 for the planning and delivery of Cobalt 60- based stereotactic radiosurgery treatment, consistent with the use of two G-codes for planning (HCPCS code G0338) and delivery (HCPCS codes G0173, G0251, G0339, G0340, as applicable) of each type of linear
accelerator-based treatment. We
indicated that we intend to maintain
these new codes in their current new technology APCs until the payment rates could be set using medians from this expanded set of codes. We also stated that we would solicit input from the APC Panel at its February 2004 meeting.

During the February 2004 APC Panel meeting, several presenters discussed
with the APC Panel their rationale for requesting that HCPCS codes G0242 and G0243 be combined into a single procedure code. One presenter explained that the request to combine
the codes was made because certain fiscal intermediaries were rejecting
claims in which HCPCS codes G0242 and G0243 were reported with a surgery revenue code. Although we have not issued any national instructions to fiscal intermediaries to deny claims for these services if they are billed with a surgery revenue code, the presenter stated that we may have indirectly led some fiscal
intermediaries to believe that Cobalt 60- based stereotactic radiosurgery should be reported with a radiation therapy revenue code because the procedure is separated into a planning code and a delivery code, which reflect the coding pattern of a radiation therapy procedure rather than a single code for a surgical procedure. The presenter stated that because of the way that CMS has coded this procedure, some fiscal
intermediaries have established local edits to deny claims in which HCPCS codes G0242 and G0243 are reported on a claim with a surgery revenue code.

The APC Panel recommended that CMS work with the presenters to determine if any fiscal intermediaries have established local edits to reject
claims in which HCPCS codes G0242 and G0243 are reported on a claim, and to determine specific reasons for any
such local edits. The APC Panel also recommended that CMS take necessary action to ensure that any such claims are not being denied payment due to local edits. The APC Panel did not agree that the solution to ensuring payment
was to combine HCPCS codes G0242 and G0243 into a single code, but rather
recommended that CMS educate fiscal intermediaries as to the appropriate procedures for submission of these claims for Medicare payment.

2. Proposal for CY 2005

In the August 16, 2004 proposed rule, for CY 2005, we proposed to accept the
APC Panel ’ s recommendation to work with the presenters to ensure that claims
in which HCPCS codes G0242 and G0243 are reported are not being inappropriately denied payment due to local edits established by fiscal intermediaries. In the meantime, for CY 2005, we proposed to maintain HCPCS code G0242 in New Technology APC 1516 (New Technology, Level XVI) at a payment rate of $1,450, and HCPCS code G0243 in New Technology APC 1528 (New Technology, Level XXVIII) at a payment rate of $5,250. These payment rates are the same as those
established for CY 2004.

3. Public Comments Received and Departmental Responses

Comment: Numerous comments urged CMS to replace HCPCS codes G0242 (Cobalt 60-based multisource photon SRS, planning) and G0243 (Cobalt 60- based multisource photon SRS, delivery) with one surgical code (that is, CPT code 61793, Stereotactic radiosurgery, one or more lesions) for billing Cobalt 60-based multisource photon stereotactic radiosurgery. These commenters explained that Cobalt 60- based multisource photon SRS is considered to be a one session, neurosurgical procedure and is not separated into planning and delivery
sessions. One commenter contended that this procedure is managed and performed exclusively by

neurosurgeons.

In response to the OPPS final rule with comment period published on November 7, 2003, one commenter suggested that a combined surgical code representing Cobalt 60-based stereotactic radiosurgery could be appropriately assigned to APC 0222 (Implantation of Neurological Device), APC 0226 (Implantation of Drug Infusion Reservoir), or APC 0227 (Implantation of Drug Infusion Device) to reflect the device costs, the neurosurgical nature of the procedure, and the clinical homogeneity of the other CPT codes that currently reside in
these APCs.

In response to the OPPS final rule with comment period published on November 7, 2003, and the OPPS proposed rule published on August 16, 2004, several commenters indicated that the current coding structure has resulted in a low volume of single procedure claims for these codes, reflecting the fact that single procedure claims are billed in error for this procedure due to the necessity of billing both HCPCS codes G0242 and G0243 to capture the planning and delivery costs of this procedure. These commenters explained that the concept of planning and delivery is representative of radiation


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therapy and, therefore, does not accurately describe Cobalt 60-based multisource photon SRS. The
commenters believed that the creation
of HCPCS codes G0242 and G0243 has created an unnecessary burden on hospitals because commercial payors do not recognize these codes. One
commenter described the burden of reporting the same service using two different coding systems as the costs associated with hiring and training additional staff, preparing individual negotiations with insurers, and addressing the rejection of claims and the delay of treatments.

In contrast, three commenters objected to the use of the term

‘‘ radiosurgery ’’ to describe Cobalt 60- based multisource photon SRS planning and delivery. One of these commenters
indicated that Cobalt 60-based multisource photon SRS is a radiation therapy procedure. This commenter
contended that the indirect costs of operating a radiation therapy department are considerably higher than that of a surgery department, when factoring in the cost of a radiation physicist and therapist. The commenter further indicated that the cost-to-charge ratio (CCR) for the radiation therapy cost center more accurately reflects the costs of providing this service relative to a surgical designation. Another commenter objected to our use of the

term ‘‘ radiosurgery ’’ and asserted that this term is a misleading nomenclature because surgery is not involved, except for the placement of an externally
attached coordinate reference frame. The commenter explained that this treatment usually consists of one or more high dose radiation treatments delivered by either a linear accelerator or a cobalt 60-based unit and, therefore,
should be referred to as ‘‘ stereotactic radiation therapy. ’’

In response to the OPPS final rule with comment period published on November 7, 2003, one commenter urged that CMS not attempt to label stereotactic radiosurgery as either neurosurgery or external beam radiotherapy, and explained that stereotactic radiosurgery is a unique procedure that combines elements of both neurosurgery and external beam radiotherapy. This commenter recommended that we recognize CPT codes specifically designed for stereotactic radiosurgery.

Response: Considering the wide range of conflicting recommendations we received from commenters, we believe that appropriate coding for Cobalt 60- based multisource photon SRS remains a highly contentious and unsettled area of interest among hospitals, neurosurgeons, radiation oncologists, and non-Medicare payors. Based upon our reading of the comments and the observations of CMS staff, we do not
believe that Cobalt 60-based multisource photon SRS can be easily classified as either a neurosurgical or radiation therapy procedure specifically. Rather, for the safe and effective delivery of Cobalt 60-based multisource photon SRS to typical patients with brain lesions, the contributions of hospital physician and nonphysician staff with expertise in neurosurgery and radiation therapy are essential for both the planning of the treatment and its delivery.

In the OPPS November 30, 2001 final
rule in which we first established payment rates for stereotactic radiosurgery planning and treatment using G-codes in lieu of CPT codes, we noted that, for historical hospital claims for CPT code 61793 (Stereotactic radiosurgery), other combinations of codes from the radiation oncology CPT
code section were billed most of the
time as well. This confirmed our recognition of the multidisciplinary nature of the service. However, we note
that the classification of stereotactic radiosurgery as either neurosurgery or radiation therapy is not relevant to payment for the service under the OPPS. Therefore, for purposes of the OPPS, we
have not attributed the service to one specialty or the other.

While we consider the adoption of CPT codes that describe this service, we
will continue to maintain HCPCS codes G0242 and G0243 as separate codes in their respective new technology APCs 1516 and 1528 for CY 2005. Although we recognize that the single claims data we collect from these codes may include aberrant claims due to the necessity of billing both HCPCS codes G0242 and
G0243 on the same date of service for a correctly coded claim, the adoption of CPT code 61793 to replace HCPCS codes G0242 and G0243, as recommended by some commenters, would not resolve the multiple procedure claims dilemma due to the fact that typically hospitals would need to bill additional CPT codes along with CPT code 61793 to report the full range of services that are currently bundled
into HCPCS codes G0242 and G0243. For example, in our November 30, 2001
final rule in which we described our
determination of the total cost for stereotactic radiosurgery, to model costs for planning, we added the median costs of CPT codes 77295 (the most typical
simulation code billed with CPT code 61793), 77300, 77370 (the most common physics consult billed with CPT code 61793), and 77315 (the most common dose plan billed with CPT code 61793). Furthermore, the descriptor for CPT code 61793 describes multiple forms of stereotactic radiosurgery (that is, stereotactic radiosurgery, one or more lesions; particle beam, gamma ray or linear accelerator), rather than Cobalt 60-based multisource photon SRS alone. The adoption of CPT code 61793 under
the OPPS would have the effect of nullifying all of the stereotactic radiosurgery G

– codes, which we are unwilling to do without cost data supporting an equal payment for all forms of stereotactic radiosurgery. In light of all the above-mentioned reasons, we believe that any stereotactic radiosurgery code changes for CY 2005 would be premature without cost data to support a code restructuring. In the meantime, we will continue to pay
HCPCS codes G0242 and G0243 under their current respective new technology APCs 1516 and 1528 for CY 2005, as we continue to analyze new methods for resolving the issue of multiple procedure claims.

Comment: In response to the OPPS final rule with comment period published on November 7, 2003, and the OPPS proposed rule published on August 16, 2004, several commenters urged CMS to recognize the surgical
nature of Cobalt 60-based multisource photon SRS by mapping the procedure to a surgical revenue code. The
commenters claimed that some
Medicare fiscal intermediaries continue to reject claims in which HCPCS codes G0242 and G0243 are reported with a surgery revenue code, and encouraged
CMS to issue national instructions on the correct billing for stereotactic radiosurgery procedures. The
commenters believed that revenue codes are established by the general APC in which the procedure resides. Another commenter stated that the placement of
HCPCS codes G0242 and G0243 in new technology APCs labeled as radiation therapy has misled Medicare fiscal
intermediaries to assume that a radiation revenue code must be reported
with these claims. This commenter indicated that, as a result of providers reporting a radiation revenue code when billing HCPCS codes G0242 and G0243 and Medicare applying a radiation CCR ratio to these codes, the median costs for
HCPCS codes G0242 and G0243 were understated, as the CCR for radiation is around 33 percent compared to a 45- percent to 55-percent CCR for surgery

cost centers.

In response to the OPPS final rule with comment period published on November 7, 2003, and the OPPS proposed rule published on August 16, 2004, two commenters objected to the


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assignment of HCPCS codes G0243 and G0173 to the same new technology APC 1528. The commenters argued that these two procedures should not be grouped into the same APC because they are clinically dissimilar and do not share the same level of resource intensity. The
commenter believed that an APC grouping should be determined by the clinical nature of the procedure, its resource cost, the type of physician necessary to perform the procedure, the clinical setting in which the procedure is performed, and the clinical outcomes of the procedure. Another commenter
indicated that the cost of Cobalt 60- based SRS multisource photon SRS delivery is 2.45 times the cost of linear accelerator-based SRS delivery, which
the commenter believed to be an unacceptable violation of the 2 times rule. In contrast, one commenter reported that its facility has experienced no delays or claims rejections as a result of the current coding structure for stereotactic radiosurgery. The commenter urged CMS to maintain the current coding structure for Cobalt 60- based multi-source photon SRS planning and delivery, asserting that providers who carefully review the code descriptors should experience no delays or claims rejections.

Response: We believe the

commenter ’ s concerns regarding the clinical similarity and the application of the 2 times rule to a new technology APC reflect a misunderstanding of the purpose of the new technology APCS. We assign procedures to a new technology APC when we do not have adequate claims data upon which to
determine the relative median cost of performing a procedure, and must rely on other sources of information (that is,
external data that have been made publicly available) to determine its appropriate payment. New technology APCs do not carry clinical descriptors, such as radiation therapy; rather, the descriptor for each new technology APC represents a particular cost band (for example, $1,400 to $1,500). Payment for items assigned to a new technology APC is the mid-point of the band (for example, $1,450). As we stated in our proposed rule, we have worked together with some of the commenters to identify specific fiscal intermediaries who may be rejecting claims in which HCPCS codes G0242 and G0243 are reported. However, to date, we have been unable to identify any such local edits. Nor have we received examples of rejected claims from providers to enable us to determine why payment was not made
for the claims. CMS will continue to work with providers and contractors to clarify coding and billing for all stereotactic radiosurgery procedures through program instructions, Medlearn Matters articles, and other outreach

activities.

Comment: One commenter understood that the Advisory Panel on APC Groups is invested with the responsibility of providing correct coding for hospitals, and contended that
the Panel should address in more detail the coding issues for stereotactic radiosurgery procedures. This
commenter further indicated that the Panel is composed almost entirely of physicians rather than hospital financial personnel or hospital coders, to which the commenter objected as creating a direct conflict with hospital interests.

Response: We do not agree with the

commenter ’ s concerns regarding the Advisory Panel on APC Groups. The Panel is governed by the provisions of
Pub. L. 92

– 463, which set forth
standards for the formation and use of advisory panels (42 U.S.C. 13951 (t); section 1833(t) of the Act). According to the Charter, the function of the Panel is to review the APC groups and their associated weights and advise the Secretary of Health and Human Services
and the Administrator of CMS concerning the clinical integrity of the APC groups and their weights. The subject-matter of the Panel includes to the following issues and related topics: addressing whether procedures are similar both clinically and in terms of resource use; assigning new CPT codes to APCs; reassigning codes to different APCs; and reconfiguring the APCs into new APCs. Responsibility for providing correct coding for hospitals does not fall within the purview of the Panel. Furthermore, we wish to reassure the commenter about the makeup of the
Panel. The commenter ’ s understanding that the Panel is almost entirely composed of physicians and lacks representation from hospital financial personnel or hospital coders is not accurate. As required by the Charter, all of the Panel members are currently employed in a full-time status by a hospital and serve as representatives of their hospital employer. Furthermore, only approximately half of the Panel members hold a medical degree, while
the other half of the Panel members hold a hospital coding certification or nursing, pharmacy, or business degree(s), or both, or serve as hospital reimbursement officers, or both.

Comment: We received numerous comments suggesting various simplifications of the coding structure for SRS planning and delivery. Some commenters urged that CMS develop
one uniform series of treatment codes for the various types of stereotactic radiation therapy, based on the process of care rather than a vendor-specific technology. One commenter suggested
that CMS eliminate HCPCS codes G0338 (Linear accelerator-based SRS planning) and G0242 (Multi-source Cobalt 60- based photon SRS planning) and recognize existing CPT codes 77295 or
77301 to describe stereotactic radiation therapy planning, which the commenter believed would more accurately describe the process of care and reduce duplication in codes. Another
commenter recommended that CMS eliminate HCPCS code G0242, and recognize HCPCS code G0338 for describing all forms of stereotactic radiosurgery planning by deleting the phrase that restricts the code to linear
accelerator-based stereotactic radiosurgery planning.

In contrast, a commenter responding
to the OPPS final rule with comment period published on November 7, 2003, suggested that CMS eliminate HCPCS code G0338, and recognize HCPCS code G0242 for all stereotactic radiosurgery planning by deleting the phrase that
restricts the code to multisource Cobalt 60-based photon SRS planning. Other
commenters recommended that CMS simplify the stereotactic radiosurgery delivery codes as well by eliminating HCPCS codes G0173 (SRS delivery, complete session) and G0251 (Linear accelerator-based SRS delivery, fractionated sessions), and recognizing HCPCS codes G0339 (Image guided, robotic linear accelerator-based SRS, complete or first session) and G0340 (Image guided, robotic linear accelerator-based SRS, second through fifth sessions) for all forms of stereotactic radiosurgery delivery by removing the word ‘‘ robotic ’’ from their descriptors. Another commenter suggested an alternative option for simplifying the stereotactic radiosurgery delivery codes by eliminating HCPCS codes G0339 and G0340, and recognizing HCPCS codes G0173 and
G0251. This commenter recommended that CMS modify the descriptors for HCPCS codes G0173 and G0251 by deleting the linear accelerator specification so the codes apply to all forms of stereotactic radiosurgery delivery and deleting the maximum number of five sessions per course of treatment from the descriptor of HCPCS code G0251. One commenter suggested
that CMS eliminate HCPCS codes G0173, G0251, G0339, and G0340 and recognize HCPCS code G0243 as including all stereostactic radiosurgery delivery procedures by deleting the phrase that restricts its use to


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multisource Cobalt 60-based photon stereotactic radiosurgery delivery.

In response to the OPPS final rule with comment period published on November 7, 2003, one commenter
indicated that HCPCS code G0340 (Image guided, robotic linear accelerator-based SRS, second through fifth sessions) should not be described by radiosurgery, contending that radiosurgery is defined by a single
session treatment. The commenter recommended that the descriptor for HCPCS code G0340 be changed to

‘‘ image-guided, robotic, linearaccelerator-based radiation therapyhypofractionated delivery. ’’ One commenter responded to the OPPS proposed rule by applauding CMS for placing the first fraction of a multiplesession treatment delivery of imageguided robotic linear accelerator-based stereotactic radiosurgery (described by HCPCS code G0339) in the same APC as a complete single session treatment delivery of image-guided robotic linear
accelerator-based stereotactic radiosurgery, and stated that the resources consumed are identical, regardless of whether additional
treatment sessions are delivered. This commenter agreed with CMS ’ placement of subsequent fractionated sessions in a lower paying APC to reflect the fewer resources consumed during the delivery of subsequent sessions.

In response to the OPPS final rule with comment period published November 7, 2003, several commenters supported CMS ’ decision to assignHCPCS codes G0338 (Linear acceleratorbased stereotactic radiosurgery planning) and G0242 (Cobalt 60-based, multi-source photon stereotactic radiosurgery planning) to the same APC,
and stated that the resource costs of both types of stereotactic radiosurgery planning are comparable. Another commenter applauded CMS ’ creation of
HCPCS code G0338 to differentiate
linear accelerator stereotactic radiosurgery planning from multisource photon stereotactic radiosurgery planning (HCPCS code G0242), due to
the differences in their clinical uses and

cost resources.

In response to the OPPS final rule with comment period published on November 7, 2003, one commenter supported the creation of HCPCS codes G0339 and G0340, as long as these codes are used exclusively for extracranial stereotactic radiosurgery treatments, such as those of the spine, lung, and pancreas. Due to limited cost data and clinical efficacy published on image-guided, robotic stereotactic radiosurgery used to treat extracranial indications, the commenter believed that the costs for this new and emerging technology would be more accurately captured by limiting the use of HCPCS
codes G0339 and G0340 to extracranial stereotactic radiosurgery treatments.

Several commenters requested that CMS present their recommendations to the Advisory Panel on APC Groups during its next meeting in the event that the stereotactic radiosurgery code descriptors cannot be modified in time
for the CY 2005 final rule.

Response: For reasons stated in a previous response, we believe that any stereotactic radiosurgery code changes for CY 2005 would be premature without cost data to support a code restructuring. For instance, in preparation of the CY 2006 OPPS Update, we intend to conduct data analysis for the first time for HCPCS codes G0338, G0339, and G0340, which were newly created G-codes for CY 2004. Therefore, until we have completed any such analysis, we will
continue to maintain HCPCS codes G0173, G0251, G0338, G0339, G0242, and G0243 in their respective new technology APCs for CY 2005 as we consider the adoption of CPT codes to describe all stereotactic radiosurgery procedures for CY 2006, including the new CPT tracking codes 0082T (Stereotactic body radiation therapy, treatment delivery, one or more treatment areas, per day) and 0083T (Stereotactic body radiation therapy, treatment management, per day) that the AMA intends to make effective January 1, 2005. For CY 2005, we will assign a
status indicator of ‘‘ E ’’ for CPT code
0082T to reflect the fact that the current G-codes for stereotactic radiosurgery treatment delivery include this service,
and a status indicator of ‘‘ N ’’ for CPT
code 0083T because we consider the treatment management per session
bundled into the current stereotacticradiosurgery treatment delivery Gcodes.

In reference to commenters ’ request that CMS present their
recommendations for stereotactic radiosurgery code restructuring to the Advisory Panel on APC Groups, we
refer the readers to the discussion above in an earlier response concerning the purview of the Panel ’ s responsibilities. To the extent that the APC assignments for stereotactic radiosurgery codes are an issue, we may bring those to the
attention of the Panel.

Comment: In response to the OPPS final rule with comment period published on November 7, 2003, several commenters expressed concern that the placement of HCPCS code G0340(Image-guided robotic linear acceleratorbased SRS delivery, fractionated treatment) in a higher paying newtechnology APC than G0251 (Nonrobotic linear accelerator-based SRS delivery, fractionated treatment) creates
a financial incentive to use robotic SRS technology over non-robotic stereotactic radiosurgery technology. The commenters urged that HCPCS codes G0251 and G0340 be placed in the same APC until clinical evidence supports an improved clinical outcome using robotic stereotactic radiosrugery as compared to non-robotic stereotactic radiosurgery and sound financial data supports payment differentiation. In addition to placing G0251 and G0340 in the same APC, one commenter urged that CMS remove the language ‘‘ or first session of
fractionated treatment ’’ from the descriptor for G0339 and remove the language ‘‘ second through fifth

sessions ’’ from the descriptor for G0340, so that placement of HCPCS codes
G0251 and G0340 in the same APC will result in equal payments for the first session of fractionated therapy, regardless of the type of technology
used to deliver fractionated stereotactic radiosurgery.

In response to the OPPS final rule with comment published on November 7, 2003, and the OPPS proposed rule published on August 16, 2004, several
commenters asserted that the creation of
HCPCS codes G0339 and G0340 was unnecessary, on the premise that all stereotactic radiosurgery and radiotherapy equipment is image guided and robotic. One commenter expressed
concern that the creation of HCPCS codes G0339 and G0340, the limitation
of HCPCS code G0340 to five fractionated sessions, and the placement of HCPCS code G0340 in a higher paying APC than other SRS modalities inadvertently amount to an endorsement by CMS of the CyberKnife technology. The commenter believed that the current payment rate for CyberKnife therapy results in excessive copayments for beneficiaries and unfairly advantages a technology that has provided insufficient clinical evidence of an improved outcome above existing stereotactic radiosurgery and radiotherapy modalities, and has provided CMS with no convincing cost data to support such an excessive return
on investment. The commenter believed
that if CMS had consulted the Medicare Coverage Advisory Committee (MCAC) or the Medical Technology Council (MTC), which advise CMS on whether specific medical treatments and technology should receive coverage,
neither the MCAC nor the MTC would have recommended coverage for the CyberKnife technology. Other


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commenters urged that CMS eliminate what they believe to be an unfair advantage given to HCPCS code G0339 by modifying the descriptor for HCPCS code G0173 (SRS delivery, complete session) to describe a complete session
or first session of linear acceleratorbased stereotactic radiosurgery delivery, and modifying the descriptor for HCPCS code G0251 to describe second through
fifth sessions of linear accelerator-based stereotactic radiosurgery delivery, so that the first session of a multiple session treatment will be paid equal to that of a complete session, regardless of the type of stereotactic radiosurgery technology used.

Response: We disagree with
commenters who believe that the
creation of HCPCS codes G0339 and G0340, the limitation of HCPCS code G0340 to five fractionated sessions, and the placement of HCPCS code G0340 in a higher paying APC than other stereotactic radiosurgery modalities amount to an endorsement by CMS of a particular technology. We also note that the code descriptors for HCPCS codes
G0339 and G0340 do not limit themselves to the CyberKnife technology. As other commenters indicated, the term ‘‘ image-guided
robotic ’’ applies to other types of stereotactic radiosurgery besides CyberKnife. The OPPS payment system establishes payment rates for services based on relative resources utilized by hospitals to provide such services, based primarily on historical claims data if data are available. If hospital claims data are unavailable, we may
consider external data to assist us. From 2000 through 2002, the manufacturer of one type of image-guided robotic stereotactic radiosurgery technology (that is, CyberKnife), along with several hospitals, provided CMS with cost data indicating the level of resources utilized in the provision of this form of stereotactic radiosurgery. We believe these data support the current placement of HCPCS codes G0339 and G0340 in their respective new technology APCs 1528 and 1525 for CY

2005.

To date, we have not received such
cost data on non-robotic linear
accelerator-based stereotactic radoisurgery (that is, on HCPCS codes G0173 and G0251) to aid us in determining if the current payment differentiation is appropriate. Therefore,
we will maintain HCPCS codes G0339 and G0340 in APCs 1528 and 1525, respectively, and make no changes to their descriptors for CY 2005. In reference to CMS consulting a medical technology council for advice on new technology coverage, we refer the readers to section II.F.4., ’’ Public Comments Received Relating to Other New Technology APC Issues, ’’ of this final rule with comment period for a discussion of the recently established Council on Technology and Innovation.

Comment: A number of commenters, mostly providers of radiation oncology centers or departments, pointed out that stereoscopic kV x-ray guidance using infrared and/or camera technology is a new and important technology that allows for improved precision in radiation therapy targeting. These commenters indicated that kV x-ray guidance is not described by any current HCPCS or CPT code and requested that
CMS create a new HCPCS G-code for payment under the OPPS. In addition, one commenter requested that CMS establish a new HCPCS code necessary for target localization in conjunction with intensity modulated radiation therapy, stereotactic radiotherapy, and stereotactic radiosurgery.

Response: The kV x-ray guidance using infrared technology came to our attention by means of an application to be considered for assignment to a new technology APC. We have recently concluded that the kV x-ray guidance should receive a temporary ‘‘ C ’’ code for OPPS payment under certain circumstances described below, and that it should be placed into a new technology APC. Therefore, we are creating the following HCPCS code to describe kV x-ray guidance using infrared technology:

HCPCS code C9722 (Stereoscopic kV x-ray imaging with infrared tracking for localization of target volume)

We are assigning the new HCPCS code C9722 to New Technology APC 1502 at a payment of $75, effective on January 1, 2005.

While we are assigning a C-code and payment for hospital costs, we are not assigning a G-code because we believe that the interested party should seek a
CPT code from the AMA. We believe
that the CPT Editorial Panel needs to
assess the need for a code for the service, and, if a code is granted, evaluate the resources necessary to provide this service. This technology has been available for more than 2 years. We consider this time period to be sufficient for the interested party to request a CPT code from the AMA.

In addition, in our definition and payment instructions for this service, we are limiting additional payment for this service to occasions when kV x-ray
is not billed with stereotactic radiosurgery delivery G-codes. As all stereotactic radiosurgery delivery services require guidance, the current payments for the stereotactic radiosurgery delivery G-codes (HCPCS codes G0173, G0243, G0251, G0339, and G0340) bundle payment for guidance services with stereotactic radiosurgery delivery.

4. Final Policy for CY 2005

We are adopting our proposal to maintain HCPCS codes G0173, G0242, G0243, G0251, G0338, and G0339 in their respective new technology APCs
for CY 2005. We will consider the adoption of CPT codes to describe all stereotactic radiosurgery procedures in
the future.

F. Movement of Procedures From New Technology APCs to Clinically Appropriate APCs

1. Background

In the November 30, 2001 final rule (66 FR 59903), we made final our proposal to change the period of time during which a service may be paid under a new technology APC. Beginning in CY 2002, we retained services within new technology APC groups until we acquired adequate data to enable us to assign the service to a clinically appropriate APC. This policy allows us
to move a service from a new technology APC in less than 2 years if
sufficient data are available. It also
allows us to retain a service in a new technology APC for more than 3 years if sufficient data upon which to base a decision for reassignment have not been
collected.

In the November 7, 2003 final rule with comment period, we implemented a comprehensive restructuring of the new technology APCs to make the payment levels more consistent (68 FR 63416). We established payment levels in $50, $100, and $500 intervals and expanded the number of new technology payment levels.

2. APC Panel Review and
Recommendation

During the APC Panel ’ s February 2004 meeting, the APC Panel heard testimony from several interested parties who requested specific modifications to the APCs for the radiation oncology APC. They asked the APC Panel to make several recommendations: (1) That we move CPT code 77418 (Radiation treatment delivery, Intensity-modulated radiation therapy (IMRT)) from APC 0412 (IMR Treatment Delivery) back into a new technology APC; (2) that we dampen, or limit, any possible payment reductions to APC 0301 (Level II Radiation Therapy); (3) that we accept more external data to evaluate costs; and (4) that we identify more claims that are useful for ratesetting.


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In response to the testimony presented, the APC Panel recommended that we reassign CPT code 77418 to the new technology APC 1510 for CY 2005 and that we explain to providers any steps we take to limit payment reductions to APC 0301 so that they can better plan for future years during which we may decide not to apply a dampening, or payment reduction limitation, to the rates for APC 0301.

In the August 16, 2004 proposed rule, we did not propose to accept the APC
Panel ’ s recommendations because we believe that we have ample claims data for use in determining an appropriate APC payment rate for CPT code 77418. Moreover, we believe that the development of median cost for CPT
code 77418 based on those data is representative of hospital bills.

We have over 255,000 claims for this service, and over 95 percent were single claims that we could use for ratesetting. Moreover, the APC medians have been stable for the last 2 years of data. As indicated by our claims data, returning code 77418 to new technology APC 1510 would result in a payment for the service that is significantly higher than the resources utilized to provide it.

We refer the readers to section II.F.4.,

‘‘ Public Comments Received Relating to Other New Technology APC Issues, ’’ of this final rule with comment period for a discussion of the public comments and our final policy regarding the APC placement of CPT code 77418 for CY

2005.

Comment: Several commenters objected to the proposed assignment of
CPT code 77418 to APC 0412 at a payment rate of $307.78. These commenters disagreed with CMS ’ conclusion that the significant volume of single claims used to set the payment rate accurately reflects the costs hospitals incur to provide this service, and argued that hospitals are inaccurately coding this service and submitting insufficient charges for delivering this therapy. One commenter raised concerns that some providers are incorrectly billing procedures other than
IMRT under CPT code 77418. Commenters urged CMS to accept the recommendation of the Advisory Panel on APC Groups to return CPT code 77418 to a new technology APC with a payment rate comparable to the CY 2003 payment rate of $400.

Response: As we noted previously, we do not accept the Panel ’ s recommendation to move CPT code 77418 back to a new technology APC. We believe the 2 years (that is, CYs 2002 and 2003) that CPT code 77418 was in new technology APC 0710 allowed ample opportunity for providers to receive proper instruction on correctly coding and billing for this service. The proposed payment rate of $307.78 for CY 2005 was set using 96 percent of the total claims (that is, 246,045 single procedure claims out of 255,020 total claims) for CPT code 77418, which deeply supports its current placement in clinical APC 0412. Therefore, we will
maintain CPT code 77418 in APC 0412
for CY 2005.

Comment: Several commenters objected to the proposed movement of CPT code 77301 (Radiotherapy dose plan, IMRT) from new technology APC 1510 (New Technology, Level X) with a payment rate of $850 to clinical APC 0310 (Radiation treatment preparation, Level III) with a payment rate of $811.91. The commenters indicated that this procedure is relatively new and that hospitals appear to be inaccurately reporting the costs of providing this
service. The commenters recommended that, until more data can be collected and analyzed, CMS retain CPT code 77301 in new technology APC 1510 at a payment rate of $850.

Response: We move a procedure from a new technology APC to a clinical APC when we have adequate claims data for ratesetting. We believe that the proposed movement of CPT code 77301 from new technology APC 1510 to clinical APC 0310 is appropriate, considering that 88 percent of the total claims (66,076 single procedure claims out of 74,911 total claims) were used to set the payment rate of $811.91 for APC 0301. Furthermore, CPT code 77301 has been placed in a new technology APC for the past 3 years (that is, CY 2002 through CY 2004), which we believe to be ample time for providers to receive proper instruction on correctly coding and billing for CPT code 77301. Therefore, as proposed, we are moving CPT code 77301 from new technology
APC 1510 to clinical APC 0310 for CY

2005.

Comment: One commenter requestedthat new CPT 0073T (Compensatorbased beam modulation treatment delivery of inverse planned treatment using three or more high resolution (milled or cast) compensator convergent beam modulated fields, per treatment session) be assigned to APC 0412 with

an ‘‘ S ’’ status indicator. The commenter believed that the assignment of 0073T
should be the same as that for CPT

77418.

Response: We agree with the commenter and are assigning CPT
0073T to APC 0412 with status indicator

‘‘ S ’’ for CY 2005. 3. Proposed and Final Policy for CY

2005

There are 24 procedures currently assigned to new technology APCs for which we have data adequate to support assignment into clinical APCs. Therefore, in the August 16, 2004 proposed rule, we proposed to reassign these procedures to clinically appropriate APCs. We proposed to assign 24 of the procedures that were listed in Table 14 of the proposed rule to clinically appropriate APCs using CY
2003 claims data to set medians on which payments would be based.

As we did in the proposed rule, we present below a further explanation to provide a fuller understanding of the payment rates for several of the procedures that we proposed to move out of new technology APCs and into
clinical APCs.

a. Photodynamic Therapy of the Skin

For CPT code 96567 (Photodynamic therapy of the skin), the impact of the payment decrease between CY 2004 and CY 2005 is actually low, as the CY 2004 payment included the topically applied drug required to perform this procedure and the CY 2005 payment does not. We will now pay separately for the drug billed under HCPCS code J7308 in CY 2005. We have adequate claims data on which to base payment for that procedure in a clinically appropriate APC. Payment based on those data in addition to removal of the drug for separate payment resulted in a lower
median cost for the APC.

Comment: Several commenters objected to the proposed movement of CPT code 96567 (Photodynamic therapy of the skin) from New Technology APC 1540 (New Technology, Level III) with a payment rate of $150 to clinical APC 0013 (Level II Debridement and Destruction) with a proposed payment rate of $66.15. The commenters recognized that the drug (that is, HCPCS code J7308) used with this procedure is no longer bundled into the payment for CPT code 96567, and agreed that some payment reduction is appropriate. However, the commenters indicated that the proposed payment rate for APC 0013 would not cover the costs of providing this service even after excluding the costs of the drug.

Response: We believe that the
resources and the clinical nature of CPT
code 96567 are consistent with other codes that are placed in APC 0013. Therefore, in this final rule with comment period, we are finalizing our proposal to move CPT code 96567 from New Technology APC 1540 to clinical
APC 0013 for CY 2005.


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Comment: One commenter brought to
our attention that CPT code 96571 (Photodynamic therapy, additional 15 minutes) may have been moved mistakenly from New Technology APC 1541 to clinical APC 0012 (Level I Debridement and Destruction). The commenter suggested that CPT code 96571 be placed in the same clinical APC 0013 (Level II Debridement and Destruction) as CPT code 96570 (Photodynamic therapy, 30 minutes).

Response: We agree with the
commenter that CPT code 96571 was mistakenly moved to APC 0012 in the proposed rule. Because CPT code 96571
is an add-on code for an additional 15 minutes of photodynamic therapy, reported in addition to CPT code 96570,
which describes the first 30 minutes of therapy, we believe that both codes,
with status indicator ‘‘ T, ’’ should be placed in APC 0015 (Level III Debridement and Destruction). Therefore, in this final rule with comment period, we are moving CPT code 96571 from New Technology APC
1541 to clinical APC 0015 for CY 2005.

b. Left Ventricular Pacing, Lead and

Connection

Based on a comparison of payment rates for CY 2004 and CY 2005, it appears that there is a large increase in payment that results from reassigning CPT code 33224 (Insertion of left ventricular pacing, lead and connection) from its new technology APC to a
clinical APC. The difference is due to the fact that the CY 2005 APC payment
includes the cost of the left ventricular
lead that was not included in the CY 2004 new technology APC payment. The left ventricular lead was paid as a pass-through device under HCPCS code C1900 in CY 2004, but is not eligible for pass-through payments in CY 2005, and, as such, is now included in the APC for the procedure.

Similarly, the CY 2005 payment rate for CPT code 33225 (Left ventricular pacing lead add-on) includes the cost of the ventricular lead. However, for code 33225, the data are still somewhat unstable. Therefore, in the proposed rule, we maintained CPT code 33225 in a new technology APC, but at a higher payment level, to reflect the additional
cost of the lead.

We received no comments and, therefore, we are reassigning CPT code
33224 to a clinical APC for CY 2005.

c. Positron Emission Tomography (PET)

Scans

PET–FDG (Nonmyocardial)

In the proposed rule, we noted that a number of positron emission tomography (PET) scans currently are classified into APC 1516. We recognized that PET is an important technology in many instances and want to ensure that the technology remains available to Medicare beneficiaries when medically necessary. We believe that we have sufficient data to assign PET scans to a clinically appropriate APC. However,
we have been told that if the effect of doing so is to reduce payment significantly for the procedure, it may hinder access to this technology. Therefore, as indicated in the August 16, 2004 proposed rule, we considered three options as the proposed payment for these procedures in CY 2005, based
on our review of the 2003 claims data for the PET procedures. We specifically
invited comments on each of these options.

Option 1: Continue in CY 2005 the current assignment of the scans to New Technology APC 1516 prior to assigning
to a clinical APC.

Option 2: Assign the PET scans to a clinically appropriate APC priced according to the median cost of the
scans based on CY 2003 claims data. Under this option, we would assign PET scans to APC 0420 (PET Imaging).

Option 3: Transition assignment to a clinical APC in CY 2006 by setting payment in CY 2005 based on a transition payment of a 50

– 50 blend of the median cost and a New Technology APC payment for CY 2004. We would assign the scans to New Technology
APC 1513 for the blended transition payment.

We included the proposed rates for these options in Addendum B of the proposed rule.

Comment: Many commenters supported maintaining a number of PET scans in New Technology APC 1516 for CY 2005, as presented under option 1 of the proposed rule. These commenters expressed concern that options 2 and 3 set forth in the proposed rule would greatly impede patient access to PET technology. They stated that options 2 and 3 fail to account for the significant degree of variation in hospital mark-up practices and capital depreciation
methods associated with PET procedures and, therefore, underestimate hospitals ’ costs for performing PET scans. These commenters further explained that the majority of hospitals report PET procedures under an overall diagnostic radiology revenue code rather than distinguishing PET procedures under a diagnostic nuclear medicine revenue code. The commenters expressed concern that PET claims data, when adjusted using a cost to charge ratio not specific to PET, underestimate the relative costs associated with PET imaging procedures.

Another commenter commissioned a time-and-motion study at nine PET facilities in geographically diverse regions of the United States to estimate hospitals ’ actual costs for providing PET scans. According to the commenter, this cost study concluded that many hospitals could not afford to provide PET scans at a payment rate below $1,450. In addition, the commenter indicated that the cost study suggested that hospitals need to perform three or more scans per day in order to break even at the current payment rate of $1,450 per scan. The commenter pointed out that using a marketing share-weighted average, the cost study
found that PET facilities across the United States are performing an average of 2.63 PET scans per day, translating into a loss of $165.18 per scan for most PET providers at the current payment rate of $1,450 per scan. However, the commenter did not clarify whether this national average of performing 2.63 PET scans per day reflects utilization by both hospitals and freestanding PET centers. The commenter urged that PET remain in new technology APC 1516 for CY 2005, and noted that any reductions in payment, including the proposed blended payment rate of $1,150, would significantly impede patient access to this technology, especially in rural settings where the volume of PET scans
tends to be lower. Another commenter that provides FDG to 300 PET imaging centers in geographically diverse regions of the United States reviewed their May, June, and July 2004 data for these PET centers and reported an average number of 1.88 PET scans provided per day and a median of 1.3 PET scans provided per day across the 300 PET centers. Again, the commenter did not clarify whether this national average of performing 1.88 PET scans per day reflects utilization by both hospitals and freestanding PET centers. This commenter expressed concern that any reduction in payment for PET scans, with or without a reduction in payment for FDG, may drive many PET centers into an operating deficit and reduce the availability of PET scans for Medicare
beneficiaries.

Response: We appreciate the many comments we received on this topic and the efforts undertaken by several of the commenters to provide us with additional data concerning the costs of providing the scans. We acknowledge variations in hospital markup practices, capital depreciation and other cost allocation methods, although we note that the CCRs in the various reported cost centers (that is, Nuclear Medicine,


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Imaging Department, Radiology) for PET procedures are fairly consistent. The median hospital CCR for these cost centers ranges from 0.3118 to 0.3172, and does not vary greatly from the median overall hospital CCR of 0.33. We
believe that the robust number of claims (that is, 55,838 single procedure claims out of 61,492 total claims, representing 91 percent of the total claims) provides sufficient data to assign PET scans to a clinically appropriate APC. However,
we received numerous comments indicating that any reduction in payment for PET scans would hinder access by Medicare beneficiaries to this technology. Based on our review of the comments, we are setting the CY 2005 payment for PET scans based on a 50

– 50 blend of the median cost and the CY 2004 new technology APC payment rate, as presented under option 3 in the proposed rule. PET scans will be assigned to new technology APC 1513 for a blended payment rate of $1,150 for

CY 2005.

Comment: One commenter pointed out that the CY 2003 hospital claims data may not account for the current shift to PET/CT technology, which the commenter stated has virtually doubled the cost of launching a viable PET operation, from an average cost of $1,200,000 for a dedicated PET scanner to an average cost of $2,400,000 for a
PET/CT scanner. The commenter estimated that approximately 90 percent of the PET systems currently being sold are PET/CT scanners and predicted that
the current installed base of approximately 35 percent PET/CT and 65 percent dedicated PET will shift to an overwhelming majority of PET/CT scanners within the next 5 years. The commenter argued that investment in a PET/CT scanner is important to be competitive in the marketplace, due to better capability for detecting malignancies. The commenter stated that the higher capital costs of a PET/CT operation require a patient volume of between four and five patients per day to break even compared to a patient
volume of between two and three patients for a dedicated PET operation. According to the commenter, the
number of claims for PET remains relatively low compared to MRI and CT scans, comprising less than 1 percent of all imaging procedures performed in the United States. Therefore, the commenter argued that providers would be unlikely to recover significant losses through increased patient volume.

Several commenters indicated that the
American Medical Association will be creating three new CPT codes 78814, 78815, and 78816 to describe PET with
concurrent CT for anatomical localization for CY 2005. One
commenter recommended that CMS assign these new CPT codes for PET/CT scans to three different new technology APCs, while another commenter recommended that CMS place these new CPT codes in new technology APC 1516 at a payment rate of $1,450.

Response: The current G code descriptors do not describe PET/CT scan technology, and should not be reported
to reflect the costs of a PET/CT scan. At present, we have decided not to recognize the CPT codes for PET/CT
scans that the AMA intends to make effective January 1, 2005, because we believe the existing codes for billing a PET scan along with an appropriate CT scan, when provided, preserve the scope of coverage intent of the PET G-codes as well as allow for the continued tracking
of the utilization of PET scans for various indications. We plan to issue billing guidance through program instructions and provider education articles for hospitals to use when they provide both a PET and CT scan to patients in their outpatient department. While we acknowledge that PET/CT scanners may be more costly to purchase than dedicated PET scanners, a PET/CT scanner is versatile and may also be used to perform individual CT scans, thereby potentially expanding its
use if PET/CT scan demand is limited.

Comment: One commenter supported assigning PET procedures to new technology APC 1513 at a payment rate of $1,150, based on a 50

– 50 blend of the
median cost and the CY 2004 new technology payment, as presented under option 3 of the proposed rule. This commenter stated that option 3 provides the best balance between ensuring continued beneficiary access to this valuable technology and the need for CMS to consistently apply its ratesetting methodology to determine payment rates. Another commenter supported the assignment of PET procedures into a clinically appropriate APC that pays at least $1,200. This commenter believed that a payment of at least $1,200 would compensate adequately for the technology and necessary staffing.

Response: We agree with the
commenters that a balance must be reached between ensuring continued beneficiary access to PET scans and the necessity for CMS to apply consistently its rate-setting methodology. Balancing the concern regarding possible adverse effects on patient access that might result from a substantial precipitous reduction in payment with information from thousands of hospital claims and
the cost data we received from commenters, we are setting the CY 2005 payment for PET scans based on a 50

– 50 blend of the median cost and the CY 2004 new technology APC payment rate, as presented under option three in the proposed rule. We believe we have reached this balance for CY 2005 by assigning PET scans to new technology APC 1513 for a blended payment rate of $1,150.

Comment: Another commenter
addressed the issue of three new CPT codes 78811, 78812, and 78813 for tumor PET imaging to replace CPT code 78810 (Tumor imaging, positron emission tomography, metabolic evaluation) for CY 2005. The commenter recommended that CMS adopt these new CPT codes in place of the existing G-codes and place them in new clinical APCs, which would result in one level for brain PET scans, two levels for cardiac PET scans, and three levels for

tumor PET scans.

Response: At present, we believe that the existing G-codes for PET scans adequately serve the purpose of tracking
utilization of PET scans for various indications. Therefore, CMS willcontinue to recognize the existing Gcodes for PET scans.

Comment: One commenter requested that CMS provide the number of single procedure claims that support assigning FDG-PET scans to a clinically appropriate APC according to the median cost of the scans, as presented under option 2 in the proposed rule.

Response: The number of single procedure claims used to create the median of $898.64 discussed in the proposed rule under option 2 for APC 0420 (PET imaging) totaled 55,838 single procedure claims out of 61,492
total claims.

PET (Myocardial)

Comment: One commenter brought to
our attention that CPT code 78459 (myocardial imaging, PET, metabolic evaluation) and HCPCS code G0230 (PET imaging; metabolic assessment for myocardial viability following inconclusive SPECT study) are both currently paid under OPPS and describe nearly the same procedure, with the exception that HCPCS code G0230 has a more narrow description. The
commenter understood that CMS had intended to replace HCPCS code G0230 with CPT code 78459, but was confused by the payable status indicator for both
codes. Two commenters recommended that CMS clarify the proper use of these
codes and move CPT code 78459 from APC 0285 (Myocardial Positron Emission Tomography), with a payment rate of $690.61 to APC 1516 with a payment rate of $1,450.

Response: We appreciate the commenter bringing to our attention the


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duplication of codes for myocardial PET imaging for metabolic assessment. At present, we will change the status
indicator for CPT code 78459 (Myocardial imaging, PET, metabolic evaluation) to ‘‘ B, ’’ not payable under the OPPS, and move HCPCS code G0230 (PET imaging; metabolic assessment for myocardial viability following inconclusive SPECT study), along with the other PET codes currently assigned to APC 1516, from APC 1516 to APC
1513 for CY 2005. We will seek advice on the APC placement of HCPCS code G0230 from the Advisory Panel on APC Groups during their next meeting.

Comment: Several commenters indicated that the resources, other than the radiopharmaceuticals, required to perform the PET myocardial perfusion imaging studies assigned to APC 0285 (Myocardial Positron Emission Tomography) do not differ significantly from many of the PET tumor imaging procedures contained in new technology APC 1516. These commenters requested an explanation for the payment rate decrease from $1,058.87 in the proposed rule for the CY 2004 update to $772.08 in the final rule for the CY 2004 update, and the further decrease to $690.61 in the proposed rule for the CY 2005 update. The commenters objected to CMS creating an exception to the 2 times rule
for APC 0285. The commenters believed
that the small volume of these procedures and the complexity of multiple G-codes to describe both single and multiple imaging sessions preclude
reasonable conclusions about the cost of providing these services. The
commenters recommended that CMS
move the 18 G-codes from APC 0285 paying $690.61 to APC 1516 with a payment rate of $1,450. The
commenters further recommended that we reduce the complexity of billing for these procedures by collapsing these eighteen G-codes into two CPT codes based on resources for single and multiple studies, replacing HCPCS
codes G0030

– G0047 with CPT code 78491 (Myocardial imaging, PET, perfusion; single study at rest or stress) and CPT code 78492 (Myocardial imaging, PET, perfusion; multiple studies at rest or stress).

Response: The steady decline of the payment rate for APC 0285 since the CY 2004 proposed rule is attributable to the 153-percent increase in the number of single procedure claims used to set the payment rate for APC 0285, which gave rise to better data to more accurately set the payment rate. In the CY 2004 proposed rule, we used 613 single procedure claims out of 1,584 total claims (39 percent of total claims) to set the CY 2004 proposed payment rate of $1,058.87. In the CY 2004 final rule, we used 1,089 single procedure claims out of 1,778 total claims (61 percent of total claims) to set the CY 2004 final payment rate of $772.08. In the CY 2005 proposed rule, we used 1,451 single procedure claims out of 1,946 total claims (75 percent of total claims) to set the CY 2005 proposed payment rate of $690.61. At present, composition of
APC 0285 will be maintained for CY
2005 while we collect claims data on HCPCS codes G0030 through G0047.
Based on our CY 2003 data for the specific G-codes, we cannot identify a predictable pattern of increased hospital costs associated with multiple studies as compared with single studies. We will present before the Advisory Panel on APC Groups during their next meeting
the commenters ’ recommendation to recognize CPT codes 78491 and 78492 as representing single and multiple myocardial PET studies and movement
of these codes from APC 0285 to APC 1516. We note that we will be moving the PET scans currently in APC 1516 to APC 1513 for CY 2005, and will bring
that to the Panel ’ s attention as they consider potential APC movement of the myocardial PET studies.

d. Bard Endoscopic Suturing System

For CY 2005, we proposed to create APC 0422 for Level II Upper GI Procedures and to assign HCPCS code C9703 (the Bard Endoscopic Suturing System), as well as other procedures to
APC 0422 based on clinical and resource homogeneity. Currently, HCPCS code C9703 is assigned to New Technology APC 1555, with a payment of $1,650. Our examination of CY 2003
claims data for HCPCS code C9703 revealed that 137 of the 171 single claims were from a single institution with an extremely low and consistent cost per claim. We do not believe that those 137 claims represent the service described by HCPCS code C9703, which includes an upper gastrointestinal endoscopy along with suturing of the esophagogastric junction. Therefore, in establishing the median for APC 0422, we did not use the 137 claims, which we believe were incorrectly coded.

Comment: Several commenters opposed the movement of HCPCS code C9703 (Bard Endoscopic Suturing System) from New Technology APC 1555 with a payment rate of $1,650 to clinical APC 0422 (Level II Upper GI Procedures) with a proposed payment rate of $1,274. The commenters indicated that the proposed payment under APC 0422 is inadequate to cover even the equipment costs alone. The
commenters contended that the claims data are insufficient to support movement of this procedure out of its new technology APC and into a clinical APC, and urged CMS to maintain HCPCS code C9703 in New Technology APC 1555 with a payment rate of $1,650.

Response: As we stated in the proposed rule, our examination of the
CY 2003 claims data for APC 0422 revealed that 137 of the 171 single
claims for HCPCS code C9703 were incorrectly coded. Therefore, the remaining single claims were used in establishing the median for APC 0422. Considering that HCPCS code C9703 has remained in a new technology APC for 2 years with a relatively modest volume, we are not convinced that maintaining HCPCS code C9703 in a new technology APC will necessarily result in a high volume for future ratesetting. Furthermore, the median cost as calculated for HCPCS code C9703, using the subset of single claims, has been relatively stable over the past 2 years
and consistent with the median for APC 0422. In addition, in keeping with our practice to use CPT codes, if possible,
we will discontinue HCPCS code C9703 and instruct providers to report service with this technology under CPT code 0008T (Upper gastrointestinal endoscopy with suture), which will be payable under the OPPS for CY 2005. In this final rule with comment period, we are finalizing our proposal to move HCPCS code C9703, which will be replaced with CPT code 0008T, from New Technology APC 1555 to clinical
APC 0422 for CY 2005. Code 0008T is assigned status indicator ‘‘ NI ’’ and, as such, is open for public comment during the 60-day comment period
associated with this final rule with comment period.

e. Stretta System

Comment: Several commenters objected to the movement of HCPCS code C9701 (Stretta system) from New Technology APC 1557 with a payment rate of $1,850 to clinical APC 0422 (Level II Upper GI Procedures) with a proposed payment rate of $1,274. The commenters indicated that the proposed payment is inadequate to cover even the equipment costs alone, and urged CMS
to maintain HCPCS code C9701 in New Technology APC 1557 with a payment rate of $1,850.

Response: The single claims volume
for HCPCS code C9701 has remained modest for the past 2 years of its placement in a new technology APC. Therefore, we do not believe that maintaining HCPCS code C9701 in a new technology APC will necessarily result in a high volume for future


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ratesetting. Furthermore, the median
cost for HCPCS code C9701 has been stable over the past 2 years and
consistent with the median for APC
0422. Moreover, we can now
discontinue HCPCS code C9701 and will instruct providers to report service with this technology under CPT code 43257 (Upper gastrointestinal endoscopy with delivery of thermal energy), a new CPT code that will be payable under OPPS for CY 2005. We are finalizing our proposal to move HCPCS code C9701, which will be replaced with CPT code 43257, from New Technology APC 1557 to clinical
APC 0422 for CY 2005.

f. Gastrointestinal Tract (GI) Capsule Endoscopy

Comment: Several comments opposed our proposal to move CPT code 91110 (GI Capsule Endoscopy) from New Technology APC 1508 with a payment rate of $650 to clinical APC 0141 (Level I Upper GI Procedures) with a proposed payment rate of $464.52 for CY 2005. (CPT code 91110 (Capsule Endoscopy) replaced HCPCS code G0262 in CY 2004. HCPCS code G0262 was mapped to New Technology APC 1508 in CY 2004.) The commenters explained that
the cost data for CPT code 91110 are unreliable due to multiple coding changes over the last 3 years and, therefore, believed that the data should not be used to set the payment rate. The
commenters indicated that the device costs are $450, and under the proposed payment rate, only $14 would be available to cover the service portion of the procedure. The commenters expressed concern that patient access to care would be hindered by moving the
service into clinical APC 0141. The
commenters also contended that the proposed assignment of this procedure to APC 0141 is inappropriate because
none of the other services that reside in APC 0141 require a device of significant cost and the codes are not clinically homogeneous with CPT code 91110. The commenters urged CMS to maintain CPT code 91110 in New Technology APC 1508 with a payment rate of $650. One commenter suggested that CMS assign a C code to the capsule and instruct providers to bill this C-code along with HCPCS code G0262. One commenter requested that, if CMS does
not maintain CPT code 91110 in new technology APC 1508, CMS consider two additional options: (1) Limiting the rate reduction for CY 2005 to 5 percent of the CY 2004 rate; or (2) assign CPT code 91110 to APC 0142 (Small Intestine Endoscopy), which the
commenter stated would be a compromise because the payment of $503.20 would still ‘‘ underpay ’’ the hospital for the costs of providing the procedure.

Response: Generally, we do not
establish C-codes for devices outside of the pass-through process, so we will not assign a C-code to the capsule. We remind providers that they should include the charges for device costs associated with this capsule within the charges reported for CPT code 91110. We agree with the commenters that CPT code 91110 may not belong in APC 0141 based on clinical homogeneity and resource consumption. We had almost 4,000 single claims, about 90 percent of all CY 2003 claims for capsule endoscopy, available for use in calculating the median cost of the
service. We have confidence that our median reflects hospital resources needed to perform the service. As one commenter recommended, we believe
that the resource costs and clinical
nature of CPT code 91110 are more
consistent with other codes that reside in APC 0142. Therefore, in this final rule with comment period, we are moving CPT code 91110 from New Technology APC 1508 to clinical APC 0142 for CY 2005, as the commenter suggested.

g. Proton Beam Therapy

Comment: Several commenters urged CMS to maintain intermediate (CPT code 77523) and complex (CPT code 77525) proton beam therapies in New Technology APC 1511 at a payment rate of $950 for CY 2005. The commenters indicated that the proposed payment rate of $678.31 for CY 2005 does not capture the significant difference in resource consumption and complexity between the simple and the intermediate/complex procedures. These commenters expressed concern
that the low volume of claims submitted by only two facilities provides volatile
and insufficient data for movement into the proposed clinical APC 0419 (Proton Beam Radiation Therapy) at a payment rate of $678.31. They pointed out that
more than four additional centers are currently under construction or in the planning phases in response to the high demand for this technology. The commenters explained that the extraordinary capital expense of between $70

– $125 million and high operating costs of a proton beam necessitate adequate payment for this service to protect the financial viability of this emerging technology. They feared that a payment reduction would halt diffusion of this technology and negatively impact patient access to this

cancer treatment. Two commenters explained that the CY 2005 proposed payment rates for CPT codes 77523 (intermediate proton beam treatment) and 77525 (complex proton beam treatment) were based on costs derived by applying CCRs from the most recent Medicare cost reports to charges reported on CY 2003 claims submitted by two hospitals, which were the only two proton therapy centers in operation in the United States at the
time. The commenters further indicated that these two hospitals, from which all of the intermediate and complex proton therapies claims were derived, reported the costs and charges of proton therapy along with the costs and charges for all other radiation therapy services on the radiation therapy department line. One
commenter calculated an overall radiation therapy department CCR of 0.2442 using CY 2003 data from one of these hospitals. This commenter then calculated a proton beam therapy CCR of 0.4175 by isolating the costs and charges for proton beam therapy from the costs and charges for the overall radiation therapy department. The commenter applied this proton beam therapy CCR of 0.4175 to calculate the costs based on average CY 2003 charges for intermediate and complex proton beam treatments and reported a cost of $1,105.96 for intermediate proton beam treatment and a cost of $1,216.60 for complex proton beam treatment, significantly above Medicare ’ s proposed payment rate of $678.31 for CY 2005.

Commenters believed that this
understatement of costs in the Medicare cost reports from these two hospitals is largely responsible for the inadequacy of the proposed payment rates for intermediate and complex proton beam treatments. The commenters requested that CMS apply the proton beam therapy CCR of 0.4175, based on proton beam specific cost data provided by one of these commenters, for determining the median costs of proton beam therapy. The commenters believed that the revised costs support the
maintenance of CPT codes 77523 and 77525 in New Technology APC 1511 at a payment rate of $950 for CY 2005. The
commenters also noted the recommendation of the Advisory Panel on APC Groups to maintain intermediate and complex proton beam therapies in New Technology APC 1511 at a payment rate of $950 for CY 2005 and urged CMS to adopt that
recommendation.

Response: We will not apply the

commenter ’ s calculated CCR to determine the median costs of proton beam therapy because we are unable to replicate the commenter ’ s proton beam therapy CCR calculation of 0.4175 by


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isolating the costs and charges for proton beam therapy from the costs and charges for the overall radiation therapy department. However, having
considered the concerns of numerous commenters that patient access to proton beam therapy may be impeded by a significant reduction in OPPS payment, we are setting the CY 2005 payment for CPT codes 77523 and 77525 by calculating a 50

– 50 blend of the median cost of $690.45 derived from
2003 claims and the CY 2004 new technology APC payment rate of $950.
We will use the result of that calculation ($820) to assign intermediate and complex proton beam therapies (CPT codes 77523 and 77525) to New Technology APC 1510 for a blended payment rate of $850 for CY 2005. After consideration of these public comments and based upon our review of the latest claims data available, we are moving the procedures listed in Table 14 from their current new technology APCs to the APCs listed, as we have adequate data on these procedures to enable us to make the necessary APC assignment.

**BILLING CODE 4120**

**– 01** 

**– P** 


### 65721 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

**BILLING CODE 4120**

**– 01** 

**– C** 
4. Public Comments Received Relating to Other New Technology APC Issues

a. Computerized Reconstruction CT of

Aorta

In the August 16, 2004 proposed rule, we proposed to reassign code G0288 (Reconstruction, CTA of aorta for preoperative planning and evaluation post vascular surgery) from New Technology APC 1506 to clinical APC 0417 (Computerized Reconstruction) for

CY 2005.

Comment: Several commenters expressed concern about our proposal to move G0288 from New Technology APC
1506 to clinical APC 0417. The
commenter asserted that the reassignment results in a decreased payment amount from $450 to approximately $247, a rate that
commenters believe is too low to cover the costs of providing the service.

The commenters suggested that CMS
use external data to calculate rates rather than relying on hospital claims data, that CMS maintain G0288 in its current new technology APC assignment until hospital claims are more accurate, or that CMS go ahead with the reassignment to a clinical APC but continue to base payment on a rate that
is consistent with the CY 2004 rate. One commenter provided invoices from hospitals across the country to support its assertion that our proposed payment
will be to low.

One commenter also requested that CMS change the descriptor for code
G0288 to read ‘‘ Three-dimensional preoperative and post-operative computeraided measurement planning and
simulation in accordance with measurements and modeling specifications of the Society for Vascular Surgery ’’ in order to ensurethat the code is only used for true threedimensional preoperative and postoperative computer-aided measurement planning and simulation technologies.

Response: A predecessor C-code to G0288 had a new technology APC assignment in CY 2002, with a payment level of $625. The C-code was deleted for CY 2003, and G0288, a more general treatment planning code, was then assigned to the same new technology APC for CY 2003, with a payment of $625. For CY 2004, we proposed to move G0288 from a new technology
APC to a clinical APC based on over 1,000 claims, with a median cost of $272. Based on hospital data provided by a commenter on the CY 2004 proposed rule and our conclusion that there may have been Medicare claims
that understated the costs of the treatment planning software, we placed G0288 in a new technology APC with a payment of $450 for CY 2004, consistent
with a 50/50 blend of our data with the analysis of a commenter. For CY 2005, we believe we have adequate claims data on which to base payment for G0288 and to reassign the service to its own clinical APC. We had almost 5,000 total claims for code C9703 (first 3
months of CY 2003 when the C-code was still in the grace period) and G0288, and over half of these were single claims
available for APC median calculation.
We are confident that the median cost for APC 0417 reflects hospital resource costs, and we are reassured by the consistency of our median cost data over the past several years for this

service.

Accordingly, we are adopting as final our proposal to assign code G0288 to
APC 0417 for CY 2005.

We are not changing the name of G0288 at this time. However, we will
take the commenter ’ s suggestion into
consideration in the future if the need arises. We revised the descriptor for the code for CY 2004 to clarify that the
service can be used for treatment planning prior to surgery and for postsurgical monitoring. We believe that the current G code descriptor appropriately describes the service.

b. Kyphoplasty

Comment: One commenter, a
manufacturer of medical devices used to restore spinal function and treat vertebral compression fractures, suggested that CMS should place kyphoplasty, a new procedure to treat vertebral compression fractures, into New Technology APC 1535. The commenter stated that kyphoplasty is currently billed using code 22899 (Unlisted procedure of the spine). The commenter claimed that, according to our policy, because CMS received its application before June 2004, the procedure is eligible for new technology APC payments in October 2004. The commenter was surprised that it did not see a proposal to place kyphoplasty into a new technology APC in our proposed
rule or in the October 2004 OPPS update. The commenter stated that using an unlisted code creates problems concerning billing and payment for hospitals.

Response: We have completed our evaluation of the new technology application for kyphoplasty and have assigned new C-codes that describe the procedure. We have assigned these codes to existing clinical APC 0051 rather than to a new technology APC. We believe that APC 0051 is appropriate for kyphoplasty in terms of clinical characteristics and resource costs. Reasonable placement into an existing APC that is appropriate in terms of
clinical characteristics and resource costs is one of our criteria in deciding whether a service should be placed into a new technology APC (66 FR 59900, November 30, 2001).

Concerning the commenter ’ s assertion
that because CMS received its application before June 2004, the procedure is eligible for payment status as a new technology APC in October 2004, we remind the public that the timing of eligibility for payment, if any, is not bound to when an application is
filed with CMS. As we state on the CMS
Web site notice at http://www.cms.gov, if an application is filed by a certain date (for example, by June 1), the
earliest date that such an item or service can be considered for new payment status is the following quarter (for example, October 1). This means that any additional coding and payment, if warranted, could begin later than the following quarter. Because it is important that our payment and coding systems do not impede access by
Medicare beneficiaries to the best available medical care, we review all applications as quickly as possible, given the complexity of the issues and the thoroughness we believe such reviews require. The timing of completion of our evaluation of any specific application depends on such factors as the complexity of the application, the completeness of all materials submitted, whether the review team requires additional information
and the amount of time before we
receive additional materials and information. Of course, the service needs to be otherwise eligible for assignment to a new technology APC (or as a pass-through assignment in the case of a new device, drug, or biological).

We note that while we consider these new codes as final, the codes and the placement of the services are subject to comment within 60 days of the publication of this final rule with comment period, as stated elsewhere in this rule. Moreover, the public may comment on our placement of services to the APC Panel, which often hears comments and testimony concerning the placement of new services brought to us by interested parties.

Accordingly, the codes for kyphoplasty are:

C9718 Kyphoplasty, one vertebral body, unilateral or bilateral injection

C9719 Kyphoplasty, one vertebral body, unilateral or bilateral injection; each additional vertebral body (list separately in addition to code for primary procedure)


### 65722 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

c. Laser Treatment of Benign Prostatic Hyperplasia (BPH)

In the August 16, 2004 proposed rule, HCPCS code C9713 (Non-contact laser vaporization of prostate, including coagulation control of intraoperative and postoperative bleeding) was assigned to New Technology APC 1525 for CY 2005. The assignment of this code to New Technology APC 1525 was a continuation of the new technology APC placement established on April 1,

2004.

Comment: One commenter, the manufacturer of medical equipment used in the treatment of benign prostatic hyperplasia (BPH) stated that its product, the GreenLight Laser, was the only technology available that uses a

532nm or ‘‘ green ’’ wavelength as an energy source and that CMS had assigned code C9713 in response to an application for a new technology APC assignment from Laserscope. The
commenter indicated that other technologies that do not employ the same energy wavelength and the same noncontact vaporization technique
should not be billed with code C9713. The commenter expressed concern that the costs of the other techniques are less than those for GreenLight Laser and thus the other techniques should not be paid under New Technology APC 1525. The commenter requested CMS to revise the descriptor of code C9713 to describe only 532nm laser technologies such as the GreenLight Laser.

Response: We acknowledge that
HCPCS code C9713 was established following our review of the new technology application from Laserscope. We also agree that code C9713 may be used by hospitals to report such procedures using the Laserscope product, the GreenLight PVP, described in the application for new technology assignment. We established code C9713 based on our understanding of the information provided to us that the service may be different from other
services used to treat BPH. We look forward to receiving and assessing the medical review, analysis, and evaluation of the service and technology through the usual AMA coding and payment processes. In general, we do not tailor temporary procedure codes in
the ‘‘ C ’’ series to particular products and have not been persuaded that a redefinition of code C9713 is necessary at this time. With respect to other techniques for treatment of BPH, we would rely on the hospitals to determine which HCPCS code, whether C9713 or one of the CPT codes, most accurately describes the procedure for treatment of BPH for which they are billing. With regards to the commenter ’ s claim that the costs of other techniques described by code C9713 are less than warranted by the New Technology APC 1525, our policy is to review the costs of services assigned to New Technology APCs each year to determine if an alternate placement in another APC is
warranted. We continue to believe that placement of code C9713 in a new technology APC is appropriate for CY

2005.

d. Computerized Tomographic Angiography (CTA)

In the August 16, 2004 proposed rule, we included the APC assignment and the payment rate for computed tomographic angiography (CTA). These procedures, coded using one of several CPT codes, depending on the body region under study, involve acquisition
of a CT scan with and without contrastmaterial, as well as image postprocessing. The assigned CTA CPT codes under APC 0662 had a proposed payment rate of $320.60. That proposed payment rate was slightly lower than that for a CT scan ($323.21) and significantly lower than the sum of the proposed payment for CT scan and image reconstruction, CPT code 76375 ($98), billed separately.

Comment: A number of commenters
were concerned about the lower payment rates for the CTA procedures
and asked CMS to review and revise the proposed payment rate.

The commenters pointed out that, prior to 2001, two codes were used to code for the procedure: one for the CT
scan and another for the 3-D
reconstruction. The commenters indicated that, in 2001, CPT codes were created to enable specific coding forCTA procedures, including image postprocessing in the CTA codes, but those codes were still assigned to the same APC (0333) as CT procedures that did not include image reconstruction. They added that, in CY 2003, the CTA procedures were assigned to their own APC (0662). The commenters asserted that in spite of the creation of an APC specific to CTA procedures, the OPPS payment amounts have not reflected the additional costs for CTA compared to CT. They believed that the low payment rates are due to continuing confusion and conflicting information among providers concerning appropriate billing and charging practices associated with CTA procedures.

One commenter performed a number of analyses in an attempt to understand and address the apparent billing problems. In its investigation, the commenter discovered that, in 2002, only 40 percent of all hospitals that performed both CT and CTA charged
more for CTA than for CT. The commenter also found in its study of hospital charge structures that there is wide variation in methods employed by hospitals and that only 29 percent of hospitals use costs to set charges.

While all commenters recommended that CMS adjust the payment rate for CTA procedures to equal that for APC 0333 plus APC 0282, one commenter recommended that we do this using the adjustment made under the Medicare Physician Fee Schedule for CY 2003 as a model. That commenter suggested that we should ignore CTA claims and instead rely on CT claims (APC 0333) plus reimbursement for image reconstruction (APC 0282) as a basis for setting the rate for CTA services.

Other alternative suggestions provided by the commenter include: use only CTA claims that are ‘‘ logical; ’’ change coding instructions and edits to
allow CTA to be billed in addition to image reconstruction; or make an administrative adjustment to increase CTA payment.

Finally, the commenters encouraged CMS to investigate alternative methods for calculating CCRs in order to achieve
more accurate costs on which to base

our rates.

Response: Although we understand
the commenters ’ points of view and appreciate the comprehensive analyses they shared with us, we cannot identify any action that would be appropriate for
us to take. As the commenters are aware, we rely on hospital claims data to set payment rates and have made clear our intent to rely solely on those claims by CY 2007. If the claims data are inaccurate, especially across a broad spectrum of providers as the
commenters believe is evidenced in this case, we have no way to determine
which claims are more or less accurate than any others.

To implement the commenters ’ suggestion that we make the payment rate for CTA (APC 0662) equal to the sum of the rates for CT alone (APC 0333) plus image reconstruction (APC 0282) would require that we have
accurate cost information about the cost of image reconstruction for CTA specifically and for CT alone, as utilized
with CTA. This is not the case. The image reconstruction code CPT 76375 (coronal, sagittal, multiplanar, oblique, 3-dimensional and/or holographic reconstruction of computed tomography, magnetic resonance imaging, or other tomographic modality) is not limited to image reconstruction performed for CTA and may be used in any number of other procedures. Based on the available CPT codes for CTA, we


### 65723 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

would not expect any current utilizationof CPT code 76375 to be for CTA postimage processing, unless there was no appropriate CTA code to describe the body region imaged. We believe this would be rare. In addition, our current cost data for CT alone do not necessarily
reflect the resources utilized for the CT portion of CTA.

We also do not believe that for the last 3 years there has been conflicting information given to providers concerning appropriate billing and charging practices associated with CTA procedures. The CPT code descriptors clearly include image post-processing for CTA procedures. In response to previous comments, we did provide a separate APC for CTA procedures beginning in CY 2003 in recognition that hospital resources might be different for CTA procedures as compared with CT procedures. From the over 100,000 claims for CTA procedures from CY 2003, we were able to use about 50 percent of the claims to determine hospitals ’ costs for the
services. Our number of claims for CTA procedures increased significantly
between CY 2002 and CY 2003. From the 2003 full year of data, we have calculated that median hospital costs for
the APCs for CT and CTA services were approximately equal, at $329. Because hospitals set their own charges for services, which we then convert to costs, we see no reason why adding the costs for CT alone plus the costs for image reconstruction would necessarily provide a better estimate of costs for CTA than our analysis of our specific
CTA claims.

Similarly, in order to make an adjustment akin to that made for the Medicare Physician Fee Schedule for CY 2003, we would need to have accurately coded cost data for the individual components of CTA, performed in the context of CTA, on which to base that change. We do not have that data, and the OPPS system, unlike the Medicare Physician Fee Schedule, relies upon historical hospital claims data to develop relative costs of

services.

Lastly, we do not agree that we should provide coding guidance that differs
from that embodied in the CPT code descriptors in this case. Our current
edits that do not allow CTA to be billed in addition to image reconstruction are
consistent with the CPT code descriptors for CTA procedures.

We created a separately paid, specific APC for those procedures in an attempt to provide an accurate payment for CTA. Moreover, by creating a unique APC for the procedures, we provided the means for hospitals to bill for all of the costs associated with CTA, entirely separate from their billing for CT. We
cannot now assume that the claims
billed for that APC are incorrect and
that those billed for CT alone are

correct.

We acknowledge the commenters ’
belief that the claims are flawed and that hospitals ’ divergent charge
structures do not result in consistent charging for CT scans, CTAs or image reconstruction, but note that those claims comprise the data on which the OPPS relies for payment of a wide variety of hospital outpatient services. We must rely on hospitals to manage their charge structures in a manner that accurately and best reflects the services provided.

For the reasons stated above, we will not alter the payment rates for CTA, APC 0662, for CY 2005. Once again, we encourage hospitals to take all actions necessary to assure that they are billing accurately and including all resources
utilized to deliver services. As
discussed in detail in section III. of this preamble, we are continuing our work to refine the CCRs used for ratesetting.

e. Acoustic Heart Sound Services

Comment: Several commenters addressed the need to assign a recently
created code for acoustic heart sound services for recording and computer analysis to an APC. One of the
commenters indicated that the acoustic heart sound recording can be performed in the first 5 minutes of an emergency department service, together with an ECG, to enable the earliest possible
detection of acute cardiac conditions.
The commenter related that AMA ’ s CPT
Editorial Panel created three new Category III codes for acoustic heart sound recording that correspond to performing the procedure, physician interpretation of results, and recording and interpretation in combination. The
commenter contended that one of these codes, CPT Category III code 0069T (Acoustic heart sound recording and computer analysis only) could be payable under the OPPS. The
commenters noted that we did not propose an APC assignment for code 0069T in our proposed rule, and they requested an APC assignment effective January 1, 2005. One of the commenters believed that the most appropriate clinical APC to assign this code is APC 0099 (Electrocardiograms).

Response: One of the commenters, a
manufacturer of the acoustic heart sound system, had previously applied for assignment of these codes to new technology APCs and we have previously evaluated the three acoustic heart sound services. We agree that only code 0069T could be payable under the
OPPS. The comment that acoustic heart sound recording can be performed in the first 5 minutes of a visit by an ECG technician, together with an ECG, to enable the earliest possible detection of acute cardiac conditions, demonstrates that there are limited additional facility
resources associated with the acoustic heart sound recording in conjunction
with an ECG. It is also our understanding that the AMA ’ s coding
advice indicates that the acoustic heart
sound services are to be used in conjunction with electrocardiography
services. We believe it is worthwhile to recognize code 0069T under the OPPS to track its utilization and develop cost data. However, because the service may be performed quickly and is always accompanied by an ECG, we are assigning a packaged status to code 0069T for CY 2005. Although not separately payable under the OPPS, charges for the acoustic heart sound service will be packaged with charges for the separately payable services with which it is performed. With regards to the comment that we did not assign an APC in our proposed rule, we note that we do not recognize under the OPPS new CPT codes on a mid-year basis, even though the AMA may assign new tracking codes mid-year, as it did in this case. We assign new CPT codes on an annual basis, effective with our January 1 updates to the OPPS. Because this is a new code assignment that was not proposed in the CY 2005 proposed rule, interested parties will be able to comment on this new payment assignment in response to this final rule with comment period. This code is
included in Addendum B.

f. Laparoscopic Ablation Renal Mass

Comment: Commenters asked that we move CPT code 50542 (Laparoscopic ablation renal mass) out of APC 0131 (Level II Laparoscopy) and place it in new technology APC 1574 (New Technology, Level XXXVII ($9,500

– $10,000) until meaningful data can be obtained for the procedure. The
commenter indicated that the procedure, including required devices, might cost approximately $10,000 because of the cost of the cryosurgery
device. The commenter indicated that because they did not find any claims for
this code that contained the device code for cryoablation probes (C2618), CMS should discard the data as being valid to set the weight for this code.

Response: Code 50542 represents a service that may or may not be performed with cryoablation equipment. Therefore, the absence of the device code for cryoablation probes on the


### 65724 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

claims may be an accurate reflection of the service as it was performed. The median cost for the service appears to be appropriately placed in APC 0131 and the service is clinically coherent with other services in APC 0131. Therefore, we are retaining its placement in APC
0131 for CY 2005.

g. Intrabeam Intra-Operative Therapy

Comment. One commenter, the
manufacturer of the Intrabeam IntraOperative Therapy System, commented that this procedure, a treatment for women diagnosed with early-stage breast cancer, which is currently assigned to APC 0312 (Radioelement Applications) and is billed using CPT code 77776, is currently underpaid in
APC 0312. The commenter claimed that
there is no current APC mechanism to capture the cost information specific to this technology, and there are
insufficient Medicare claims data at this time to make an appropriate clinical APC assignment. The commenter requested that CMS assign the Intrabeam procedure to a new technology APC. In addition, the commenter requested that CMS create
two new level II HCPCS codes with the following descriptors: (1) Surgicalplacement and removal of intraoperative direct application x-ray source using surgical closure techniques; and (2) Administration of radiation therapy by intra-operative direct application of

x-ray source.

Response. We recently received from
the manufacturer of the Intrabeam IntraOperative Radiation Therapy procedure an application for assignment of this procedure to a new technology APC. We are currently engaged in review of that application.

h. New Technology Process Issues

Comment: In response to the OPPS final rule with comment period published November 7, 2003, one
commenter asserted that CMS had failed to establish an acceptable method for evaluating the costs and clinical efficacy of therapeutic medical technologies before assigning a code and New Technology APC payment under the OPPS. The commenter urged CMS to propose evaluation criteria for determining costs and clinical efficacy. In developing such criteria, the commenter encouraged CMS to require that all filings with the FDA be
submitted to CMS for review and for CMS to rely heavily on the predicated device in the FDA application, require all privately held companies to provide CMS with a list of investors/owners, utilize generally accepted accounting principles, seek advice from the Medicare Coverage Advisory Committee (MCAC) or the Medical Technology Council (MTC), consider evaluation methods used by other health insurers,
and consider recommendations from experts in the field. The commenter
believed that if CMS had consulted the MCAC or the MTC, which advise CMS on whether specific medical treatments and technology should receive coverage,
neither the MCAC nor the MTC would have recommended coverage for the CyberKnife technology, as an example.

In response to our August 16, 2004 proposed rule, one commenter, a device manufacturer, urged CMS to make changes to the pass-through and new technology application and evaluation processes to provide disclosure of applications filed with CMS and to create an opportunity for the public to comment on the disposition of proposed or final actions on applications. The commenter believed that public processes can be adopted, while retaining CMS ’ quarterly update capability for coding and payment.

Response: As required by section 942(a) of Pub. L. 108

– 173, we recently established the Council on Technology and Innovation (CTI) which brings together CMS senior leadership to better coordinate coverage, coding and payment policy to support the goal of high quality, high value care. The CTI aims to provide CMS with improved methods for developing practical
information about the clinical benefits of new medical technologies to aid in achieving more efficient coverage and payment of these medical technologies. The CTI will also help identify and develop study methods for gathering
reliable evidence about the risks and benefits of new and existing medical technologies that can be carried out more easily on a regular basis, such as simple protocols, registries, and other study methods.

The CTI will support CMS ’ efforts to develop better evidence on the safety, effectiveness, and cost of new and approved technologies to help promote
their more effective use. As directed in section 942(a) of Pub. L. 108

– 173, the
CMS Council coordinates the activities of Medicare coverage, coding, and payment for new technologies and the exchange of information on new technologies between CMS and other entities charged with making similar
considerations and decisions.

G. Changes to the Inpatient List

At the APC Panel ’ s February 2004 meeting, we advised the APC Panel of a request that we had received to move four codes for percutaneous abscess drainage 44901 (Drain append. abscess, percutaneous), 49021 (Drain abdominal abscess), 49041 (Drain percutaneous abdominal abscess), 49061 (Drain, percutaneous, retroper. abscess)) from the inpatient list and to assign them to appropriate APCs. The APC Panel also
recommended that we evaluate other codes on the inpatient list for possible APC assignment and that we consider eliminating the inpatient list.

In the August 16, 2004 proposed rule,we proposed to remove the four abovecited codes and assign them to clinically appropriate APCs, as recommended by the APC Panel. We also proposed to assign code 44901 to APC 0037, code 49021 to APC 0037; code 49041 to APC 0037; and code 49061 to APC 0037. We
discuss in section VII.E. of this final rule with comment period our response to
the APC Panel ’ s recommendation that we either abolish the inpatient list or evaluate it for any appropriate changes, the public comments we received on our proposal, and our responses to those public comments.

H. Assignment of ‘‘ Unlisted ’’ HCPCS
Codes

1. Background

Some HCPCS codes are used to report services that do not have descriptors
that define the exact service furnished. They are commonly called ‘‘ unlisted ’’ codes. The code descriptors often contain phrases such as: ‘‘ unlisted procedure, ’’ ‘‘ not otherwise classified, ’’

or ‘‘ not otherwise specified. ’’ The unlisted codes typically fall within a clinical or procedural category, but they lack the specificity needed to describe
the resources used in the service. For example, CPT code 17999 is defined as

‘‘ Unlisted procedure, skin, mucous
membrane and subcutaneous tissue. ’’ The unlisted codes provide a way for providers to report services for which there is no HCPCS code that specifically
describes the service furnished. However, the lack of specificity in describing the service prevents us from assigning the code under the Medicare OPPS to an APC group based on clinical homogeneity and median cost.

In the August 16, 2004 proposed rule, we listed in Table 15 our proposed APC reassignments of unlisted HCPCS codes. In most cases, the unlisted codes are assigned to the lowest level, clinically appropriate APC group under the
Medicare OPPS. This creates an incentive for providers to select the appropriate, specific HCPCS code to
describe the service if one is available. In addition, if there is no HCPCS code that accurately describes the service, placing the unlisted code in the lowest level APC group provides an incentive


### 65725 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

for interested parties to secure a code through the AMA ’ s CPT process that
will describe the service. Once a code that accurately describes the service is created, we can collect data on the service and place it in the correct APC
based on the clinical nature of the
service and its median cost.

We do not use the median cost for the
unlisted codes in the establishment of the weight for the APC to which the code is assigned because, by definition of the code, we do not know what
service or combination of services is reflected in the claims billed using the
unlisted code.

Our review of HCPCS code assignments to APCs has revealed that
there are a number of unlisted codes that are not assigned to the lowest level

APC.

2. Proposed and Final Policy for CY

2005

In the August 16, 2004 proposed rule, we proposed to reassign specified
unlisted HCPCS codes for CY 2005
OPPS to the lowest level APC in the clinical grouping in which the unlisted code is located. We displayed a listing of our proposed reassignment of the
unlisted HCPCS codes in Table 15 of the proposed rule.

We received a number of public comments on our proposals.

Comment: Some commenters supported placing all unlisted codes in the lowest paid APC and noted that they believed that there are others, such as CPT code 43999 (Unlisted procedure stomach), which is now in APC 0141,
that should be added to the list of those to be placed in the lowest APC. They
recommended that CMS review the
entire list of CPT codes to find others
that should be moved to the lowest level

APC.

Some commenters opposed placing

‘‘ unlisted ’’ or ‘‘ not otherwise classified ’’ codes in the lowest APC applicable to the category of service. They believed that it is inappropriate for CMS to develop payment policies aimed at forcing stakeholders to seek new HCPCS codes for the services being performed. They indicated that moving these codes to the lowest paying APC would decrease payment for 18 of the 20 procedures by more than 70 percent and
would create a barrier to new technology. They indicated that CMS should analyze the costs associated with particular unlisted codes and assign them to APCs that appropriately reflect the cost to perform the services but in the meantime, should retain them in the existing APCs in which they are placed. One commenter urged us to follow the process that is followed for physician payment when unlisted codes are used, with fiscal intermediaries negotiating payment for the unlisted code depending on the actual service provided each time. One commenter indicated that putting the unlisted codes in the lowest level APC provides a disincentive for facilities to adopt new technology because it will not be paid adequately.

Response: We appreciate the support of the commenters who agreed with placing unlisted codes in the lowest APC for the clinical category. With respect to the comment that CPT code
43999 should be moved out of APC 0141 and should be placed in the lowest APC for gastrointestinal procedures, we
have not moved it from APC 0141
because we believe that APC 0141 is the lowest APC appropriate to the clinical category of services for CPT code 43999.

We have reviewed again the proposed
list of unlisted or ‘‘ not otherwise
classified ’’ codes being moved to the
lowest APC and based on that re-review
have determined that we do not need to make any additional changes to that proposed list in this final rule with comment period.

By definition, ‘‘ unlisted ’’ or ‘‘ not otherwise classified ’’ codes do not describe the services being performed, and the services coded using ‘‘ unlisted ’’ codes vary over time as new CPT and HCPCS codes are developed. Therefore, it is impossible for any level of analysis of past hospital data to result in appropriate placement of the service for the upcoming year in an APC in which there is clinical integrity of the groups and weights. Therefore, we believe that the appropriate default, in the absence
of a code that describes the service being furnished, is placement in the
lowest level APC within the clinical category in which the unlisted code falls. We see no need to expand the process that is followed for physician payment of unlisted codes to the outpatient hospital setting. The assignment of the unlisted codes to the lowest level APC in the clinical category specified in the code provides a reasonable means for interim payment
until such time as there is a code that specifically describes what is being paid. It encourages the creation of codes where appropriate and mitigates against overpayment of services that are not clearly identified on the bill. For new technologies that are complete services but may not have yet been granted a specific CPT code, the new technology payment mechanism is available under OPPS. Outlier payments may also be
available under the OPPS in a case of an expensive new technology for which a specific code is not available and for which the costs of the new procedure
exceed the outlier threshold.

Comment: One commenter indicated that the principal problem behind the
use of unlisted or not otherwise
classified codes is the AMA ’ s bias against giving CPT codes for new services and technologies unless a physician group requests the code to provide a mechanism for increased physician payment for the service. The commenter asked that CMS, as the largest and most powerful licensee of CPT, influence the AMA to reduce the
amount of time it takes to release new
CPT codes for use in the OPPS so that
the need for use of unlisted codes will
diminish and the new services can be paid appropriately more quickly after they come onto the market. The
commenter also asked that CMS reduce

its ‘‘ barriers ’’ to placement of new services that require new technologies into new technology APCs or to granting of pass through payment status. The commenter indicated that lowering
these ‘‘ barriers ’’ also would eliminate
much of the use of the unlisted codes.

Response: An individual, a physician group, or a manufacturer may submit a request for a new CPT code. CMS works collaboratively with the AMA to establish new CPT codes, recognizing that the process is governed and controlled by the AMA. The AMA CPT process involves methodical consideration of new coding proposals, which may be time consuming. In addition, the payment system changes required by new codes take some time to implement. Under the OPPS, we make available the pass-through and new technology payment mechanisms, using C-codes and G-codes to allow new services, devices, and technologies to be available to clinicians and providers to facilitate appropriate payment for such
services. The commenter did not
indicate what ‘‘ barriers ’’ to placement of new services exist. However, to assist the public, we provide further guidance in section IV.C. of the preamble concerning additional comments on the topic of the surgical insertion orimplantation criterion for the passthrough device payment mechanism.

In this final rule with comment period, we are adopting as final, without modification, the proposed reassignment of unlisted HCPCS codes
to move all unlisted or ‘‘ not otherwise
classified ’’ codes to the lowest level APC that is appropriate to the clinical nature of the service, as displayed in
Table 15.


### 65726 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

I. Addition of New Procedure Codes

During the first two quarters of CY 2004, we created 85 HCPCS codes that were not addressed in the November 7, 2003 final rule with comment period that updated the CY 2004 OPPS. We have designated the payment status of those codes and added them to the April and July updates of the 2004 OPPS (Transmittals 3144, 3154, 3322, and 3324). We showed these codes in Table 16 of the proposed rule. Thirty of the
new codes were created to enable providers to bill for brand name drugs and to receive payments at a rate that differs from that for generic equivalents, as mandated in section 1833(t)(14)(A)(i) of the Act as added by Pub. L. 108

– 173. In the August 16, 2004 proposed rule,
we solicited comment on the APC assignment of these services. Further,
consistent with our annual APC updating policy, we proposed to assign
the new HCPCS codes for CY 2005 to the appropriate APCs.

We did not receive any public comments on our proposal. Accordingly, in this final rule with comment period, we are adopting as final our proposal to assign the new
HCPCS codes for CY 2005 to the appropriate APCs, as shown in
Addendum B of this final rule with comment period, without modification.

J. OPPS Changes Relating to Coverage of Initial Preventive Physical Examinations and Mammography Services Under Pub.

L. 108

– 173

1. Payment for Initial Preventive Physical Examinations (Section 611 of
Pub. L. 108

– 173)

a. Background

Section 611 of Pub. L. 108

– 173 provides for coverage under Medicare Part B of an initial preventive physical examination for new beneficiaries,
effective for services furnished on or after January 1, 2005. This provision applies to beneficiaries whose coverage period under Medicare Part B begins on or after January 1, 2005, and only for an initial preventive physical examination performed within 6 months of the beneficiary ’ s initial coverage date.

Current Medicare coverage policy does not allow for payment for routine physical examinations (or checkups) that are furnished to beneficiaries.
Before the enactment of Pub. L. 108

– 173, all preventive physical
examinations had been excluded from coverage based on section 1862(a)(7) of the Act, which states that routine physical checkups are excluded services. This exclusion is specified in regulations under § 411.15(a). In addition, preventive physical
examinations had been excluded from coverage based on section 1862(a)(1)(A)
of the Act. This section of the Act provides that items and services must be reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member (as implemented in regulations under § 411.15(k)).

Coverage of initial preventive physical examinations is provided only under Medicare Part B. As provided in the statute, this new coverage allows payment for one initial preventive physical examination within the first 6 months after the beneficiary ’ s first Part B coverage begins, although that coverage period may not begin before


### 65727 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

January 1, 2005. We also note that Pub.

L. 108

– 173 did not make any provision
for the waiver of the Medicare
coinsurance and Part B deductible for the initial preventive physical examination. Payment for this service would be applied to the required Medicare Part B deductible, which is $110 for CY 2005, if the deductible has not been met, and the usual coinsurance provisions would apply.

b. Amendments to Regulations

In the August 16, 2004 proposed rule, we proposed to amend our regulations
to add a new § 410.16 that would provide for coverage of initial preventive physical examinations in various settings, including the hospital outpatient department, as specified in the statute, and specify the condition for coverage and limitation on coverage. In addition, we proposed to conform our regulations on exclusions from coverage
under § 411.15(a)(1) and § 411.15(k) to the provisions of section 611 of Pub. L.

108

– 173. Specifically, we proposed to specify an exception to the list of examples of routine physical checkups that are excluded from coverage under § 411.15(a) and to add a new exclusion
under § 411.15(k)(11).

We proposed to amend § 419.21 of the OPPS regulations to add a new paragraph (e) to specify payment for an initial preventive physical examination
as a Medicare Part B covered service
under the OPPS if the examination is
furnished within the first 6 months of the beneficiary ’ s first Medicare Part B

coverage.

We noted that the initial preventive physical examination was also addressed in detail in our proposed rule to update the Medicare Physician ’ s Fee Schedule for CY 2005 (69 FR 47487, August 5, 2004). However, because we
believe the same elements of the initial physical examination furnished in a physician ’ s office would also apply when the examination is performed in a hospital outpatient clinic, we proposed to revise the applicable regulations to reflect this requirement.

Section 611(b) of Pub. L. 108

– 173 defines an ‘‘ initial preventive physical

examination ’’ to mean physicians ’’ services consisting of

— (1) A physical examination (including measurement of height, weight, blood pressure, and an electrocardiogram (EKG), but excluding clinical laboratory tests) with the goal of health promotion and disease detection; and

(2) Education, counseling, and referral with respect to screening and other preventive coverage benefits separately authorized under Medicare Part B, excluding clinical laboratory tests. Specifically, section 611(b) of Pub. L.

108

– 173 provides that the education, counseling, and referral services with respect to the screening and other preventive services authorized under Medicare Part B include the following:

(1) Pneumococcal, influenza, and hepatitis B vaccine and their administration;

(2) Screening mammography; (3) Screening pap smear and screening pap smear and screening pelvic examination;

(4) Prostate cancer screening tests; (5) Colorectal cancer screening tests;(6) Diabetes outpatient selfmanagement training services;

(7) Bone mass measurements; (8) Screening for glaucoma; (9) Medical nutrition therapy services
for individuals with diabetes and renal disease;

(10) Cardiovascular screening blood tests; and

(11) Diabetes screening tests. Section 611(d)(2) of Pub. L. 108

– 173 amended sections 1861(s)(2)(K)(i) and (s)(2)(K)(ii) of the Act to specify that the services identified as physicians ’
services and referred to in the definition of initial preventive physical
examination include services furnished by a physician assistant, a nurse practitioner, or a clinical nurse specialist. We refer to these professionals as ‘‘ qualified nonphysician practitioners. ’’

Based on the language of the statute, our review of the medical literature, current clinical practice guidelines, and
United States Preventive Services Task Force recommendations, we proposed (under proposed new § 410.16(a), Definitions) to interpret the term ‘‘ initial preventive physical examination ’’ for purposes of this new benefit to include all of the following services furnished by a doctor of medicine or osteopathy or a qualified nonphysician practitioner:

(1) Review of the beneficiary ’ s comprehensive medical and social history. We proposed to define ‘‘ medical history ’’ to include, as a minimum, past medical and surgical history, including experience with illnesses, hospital stays, operations, allergies, injuries, and treatments; current medications and supplements, including calcium and vitamins; and family history, including
a review of medical events in the patient ’ s family, including diseases that may be hereditary or place the individual at risk. We proposed to
define ‘‘ social history ’’ to include, at a minimum, history of alcohol, tobacco, and illicit drug use; work and travel history; diet; social activities; and physical activities. (2) Review of the beneficiary ’ s potential (risk factors) for depression (including past experiences with depression or other mood disorders) based on the use of an appropriate screening instrument that the physician or qualified nonphysician practitioner may select from various available standardized screening tests for this purpose, unless the appropriate screening instrument is defined through the national coverage determination (NCD) process.

(3) Review of the beneficiary ’ s functional ability and level of safety (that is, at a minimum, a review of the following areas: Hearing impairment, activities of daily living, falls risk, and home safety), based on the use of an appropriate screening instrument, which the physician or qualified nonphysician practitioner may select
from various available standardized screening tests for this purpose, unless the appropriate screening instrument is further defined through the NCD

process.

(4) An examination to include measurement of the beneficiary ’ s height, weight, blood pressure, a visual acuity screen, and other factors as deemed appropriate, based on the beneficiary ’ s comprehensive medical and social history and current clinical standards.

(5) Performance of an electrocardiogram and interpretation.

(6) Education, counseling, and referral, as deemed appropriate, based on the results of elements (1) through (5) of the definition of the initial preventive physical examination.

(7) Education, counseling, and referral, including a written plan for obtaining the appropriate screening and other preventive services, which are also covered as separate Medicare Part B benefits; that is, pnuemococcal, influenza, and hepatitis B vaccines and their administration, screening mammography, screening pap smear and screening pelvic exams, prostate cancer screening tests, diabetes outpatient self-management training services, bone mass measurements, screening for glaucoma, medical nutrition therapy services, cardiovascular screening blood tests, and diabetes screening tests.

As we indicated in the OPPS proposed rule, we are addressing the public comments that we received on our proposal to revise our regulations to include specific coverage of initial preventive physical examinations under Medicare Part B and finalizing our coverage policy for initial preventive physical examinations in the final rule for the CY 2005 Medicare Physician Fee


### 65728 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

Schedule published elsewhere in this

issue.

c. Assignment of New HCPCS Codes for Payment of Initial Preventive Physical

Examinations

There was no CPT code that contained the specific elements included in the initial preventive physical examination. Therefore, in the August 16, 2004 proposed rule, we proposed to establish a new HCPCS
code to be used to bill for the new
service under both the Medicare Physician Fee Schedule and the OPPS. We proposed a code, GXXXX, for the full service, including an EKG, but not including the other previously mentioned preventive services that are currently separately covered and paid under the Medicare Part B screening benefits. When these other preventive services are performed, they should be billed using the existing appropriate
HCPCS and CPT codes.

For payment under the Medicare Physician Fee Schedule, relative value units were proposed for the new HCPCS code for the initial preventive physical based on equivalent resources and work intensity to those contained in CPT evaluation and management code 99203 (New patient, office or other outpatient visit) and CPT 93000 (Electrocardiogram, complete) (69 FR 47487, August 5, 2004). The ‘‘ technical component ’’ of the Medicare Physician Fee Schedule (the costs other than those allocated for the physician ’ s professional services and professional liability insurance which are billed and paid for separately, when appropriate) is the portion of the fee schedule payment that is most comparable to what Medicare pays under the OPPS. The
estimated ‘‘ technical component ’’ of the Medicare Physician Fee Schedule payment for GXXXX was between $50 and $100.

d. APC Assignment of Initial Preventive Physical Examination

Given our lack of cost data to guide assignment of the new code to a clinically appropriate APC, in our proposed rule, we proposed assignment of the new code GXXXX (Initial preventive physical examination) to New Technology APC 1539 (New Technology, Level II) with a payment level between $50 and $100. We believed that the proposed temporary assignment to a new technology APC would allow us to pay for the new benefit provided in the OPD while we accrued claims data and experience on which to base a clinically relevant APC assignment in the future. We received a number of public comments regarding the proposed payment for the initial preventive physical examination and its proposed APC placement.

Comment: A number of commenters highlighted billing and operational concerns with the definition of a single HCPCS code, GXXXX, for the initial preventive physical examination. The commenters explained that, in hospitals where the EKG was performed in a separate department from the location of the physical examination, the technician charging for the service would have no way of distinguishing an EKG related to the initial preventive physical examination from other EKG tracings performed for diagnostic purposes, for which the hospital would bill for that specific service. The commenters noted that physicians often send their patients to hospitals for the EKG tracing, and if hospitals performed
the EKG associated with the initial preventive physical examination in this context, they would have no way to bill for the EKG. The commenters presented various alternative coding possibilities
for our consideration to address these

situations.

Response: Section 611 of Pub. L. 108

– 173 does require a screening EKG to be performed as part of the initial preventive physical examination visit.
In view of the different circumstances that may occur when performing the full initial preventive physical examination, we are establishing four new G codes for the initial preventative physical
examination for CY 2005.

• G0344: Initial preventive physical examination; face-to-face visit, services limited to new beneficiary during the
first 6 months of Medicare Part B enrollment. This code is assigned a
status indicator ‘‘ V ’’ for the OPPS.

• G0366: Electrocardiogram, routine EKG with at least 12 leads; performed as a component of the initial preventive physical examination with interpretation and report. This code is assigned a status indicator ‘‘ B ’’ for the

OPPS.

• G0367: Electrocardiogram, tracing only, without interpretation and report, performed as a component of the initial preventive physical examination. This code is assigned status indicator ‘‘ S ’’ for
the OPPS.

• G0368: Electrocardiogram, interpretation and report only, performed as a component of the initial preventive physical examination. This code is assigned status indicator ‘‘ A ’’ for
the OPPS.

In the hospital, performance of the complete initial preventive physical
examination service would be coded using both the G0344 and G0367 codes. As required by the statute, the new codes describe the visit and the EKG, but not the other previously mentioned preventive services that are currently separately covered and paid under the Medicare Part B screening benefits. When these other preventive services are performed, they should be billed using the existing appropriate HCPCS
and CPT codes.

To comply with Pub. L. 108

– 173, the initial preventive physical examination must include the EKG, regardless of whether a diagnostic EKG had previously been performed. Both components of the initial preventive physical examination, the examination and the EKG, must be performed to fulfill the statutory benefit for either of the components to be paid. Billing instructions for providers will be issued.

In addition to our decision to create two codes for hospitals to report for performance of the initial preventive physical examination service, we are assigning the codes to appropriate APCs as follows: G0344 is assigned to APC 0601 (Mid Level Clinic Visits), and G0367 is assigned to APC 0099 (Electrocardiograms). These APC assignments result in a total payment of approximately $78, slightly more than the $75 payment rate proposed for the comprehensive initial preventive physical examination service in the proposed rule.

Comment: A few commenters requested that CMS increase the payment for the initial preventive physical examination benefit and stated that the payment rate set is too low to cover the required clinical resources.

Response: As stated in our proposed rule, the payment rate for the comprehensive initial preventive physical examination service under the OPPS was based on the rate proposed under the Medicare Physician Fee Schedule, which utilized estimates of necessary resources for the initial preventive physical examination benchmarked against the resources required to deliver existing evaluation and management and electrocardiogram services in the physician office. Based on comments concerning the adequacy of our proposed payment for the comprehensive initial preventive physical examination service and our decision to separate the examination service from the EKG for coding and payment purposes, we explicitly compared the resources we anticipated
for the examination service delivered in the hospital to the OPPS median cost for the existing new office or other outpatient visit service which was used as a crosswalk. CPT code 99203 (Office


### 65729 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

or other outpatient visit for a new patient) is in APC 0601, which has a median cost of $57.66. The AMA/ Specialty Society RVS Update Committee survey data for code 99203 showed 51 minutes of staff time, and we believe the initial preventive physical examination will reflect comparable time and consumption of hospital resources. As we expect the hospital
resources utilized for code G0344 to be
similar to those needed for clinic visits for which we have historical hospital cost data, we will place G0344 in APC 0601 rather than in a new technology APC as we proposed for the initial preventive physical examination comprehensive service. We expect the hospital resources utilized for the screening EKG tracing, code G0367, to be very similar to those necessary for a diagnostic EKG tracing, code 93005 and assigned to APC 0099. Together these APCs (0601 and 0099) will pay approximately $78, several more dollars than we proposed for the comprehensive service. We will monitor our claims data for the initial preventive physical examination services as hospitals gain experience delivering the services. We are finalizing our placement of code G0344 in APC 0601
for CY 2005 and code G0367 in APC
0099 for 2005.

Comment: Several commenters asked that CMS provide explicit instructions and guidelines, respectively, to providers and beneficiaries regarding
the details of what will be included in the new initial preventive physical examination benefit, the eligibility requirements, and how providers
should bill Medicare for the new
service. One commenter asked if the preventive physical examination will be subject to the evaluation and management guidelines.

Response: We will release appropriate
manual and transmittal instructions and
information from the CMS educational components for the medical community, including a MedLearn Matters article
and fact sheets such as the ‘‘ 2005 Payment Changes for Physicians and
Other Providers: News From Medicare
for 2005 ’’ . The medical community can join this effort in educating physicians and beneficiaries by their own communications, bulletins, or other publications. In addition, we have specifically included information on the new initial preventive physical
examination benefit in the 2005 version
of the Medicare and You Handbook and revised booklet, Medicare ’ s Preventive

Services . A new 2-page fact sheet on all of the new preventive services, including the initial preventive physical examination benefit, will be available this Fall, and a bilingual brochure for Hispanic beneficiaries will also be
available in the near future. Information will be disseminated by CMS regional offices, State Health Insurance Assistance Programs (SHIPs), and various partners at the national, State,
and local levels. Information on the new
benefit will also be made available to the public through Web site, http:// www.medicare.gov , the partner Web site

to http://www.cms.hhs.gov , the toll free
number 1

– 800

– MEDICARE, numerous forums hosted by CMS, and conference exhibits and presentations.

The initial preventive physical examination will not be subject to each hospital ’ s internal set of evaluation and management guidelines that hospitals were instructed to develop at the implementation of the OPPS in the August 7, 2000 final rule (65 FR 18451) because we have defined one explicit service, without levels.

Comment: Several commenters asked how providers of initial preventive physical examination services will know if a particular beneficiary is eligible to receive the new benefit due to the statutory time and coverage frequency (one-time benefit) limitations.

Response: The statute provides for coverage of a one-time initial preventive physical examination that must be performed for new beneficiaries by qualified physicians or certain specified nonphysician practitioners within the first 6 month period following the effective date of the beneficiary ’ s first Medicare Part B coverage. Because physicians or qualified nonphysician practitioners may not have the complete medical history for a particular new beneficiary, including information on possible use of the one-time benefit, these clinicians are largely relying on
their own medical records and the information the beneficiary provides to them in establishing whether or not the initial preventive physical examination benefit is still available to a particular individual and has not been performed by another qualified practitioner. Because a second initial preventive physical examination will always fall
outside the definition of the new Medicare benefit, an advance beneficiary notice (ABN) need not be
issued in those instances where there is doubt regarding whether the beneficiary has previously received an initial preventive physical examination. The beneficiary will always be liable for a second initial preventive physical examination, no matter when it is conducted. However, for those instances
where there is sufficient doubt as to whether the statutory 6-month period has lapsed, the physician or qualified nonphysician practitioner should issue an ABN to the beneficiary that indicates that Medicare may not cover and pay for the service. If the physician or qualified nonphysician practitioner does not issue an ABN to the beneficiary and Medicare denies payment for the service because the statutory time limitation for conducting the initial preventive physical examination has expired, the physician or qualified nonphysician practitioner may be held financially
liable.

Comment: One commenter recommended that CMS compare the requirements of the initial preventive physical examination to the contemplated requirements for similar but not-yet-disclosed facility-specific evaluation and management level
definitions. The commenter wanted to ensure that the technical requirements are comparable between the new benefit and similar evaluation and management service definitions being contemplated by CMS.

Response: We will take the

commenter ’ s recommendation into consideration in our ongoing work to develop new evaluation and management codes for the OPPS.

2. Payment for Certain Mammography Services (Section 614 of Pub. L. 108

– 173)

Section 614 of Pub. L. 108

– 173 amended section 1833(t)(1)(B)(iv) of the Act to provide that screening mammography and diagnostic mammography services are excluded from payment under the OPPS. This amendment applies to screening mammography services furnished on or after December 8, 2003 (the date of the
enactment of Pub. L. 108

– 173), and in the case of diagnostic mammography, to services furnished on or after January 1, 2005. As a result of this amendment, both screening mammography and diagnostic mammography will be paid under the Medicare Physician Fee
Schedule.

In the August 16, 2004 proposed rule, we proposed to amend § 419.22 of the regulations by adding a new paragraph(s) to specify that both screening mammography and diagnostic mammography will be excluded from payment under the OPPS, in accordance
with section 614 of Pub. L. 108

– 173. We received a few public comments on our proposal.

Comment: A few commenters expressed support for the movement of payment for diagnostic mammograms
from the OPPS to the Medicare Physician Fee Schedule.

Response: We appreciate the

commenters ’ support. Additional


### 65730 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

discussion of section 614 of Pub. L.

108

– 173 can be found in the final rule for the CY 2005 Medicare Physician Fee Schedule published elsewhere in this

issue.

Comment: A few commenters recommended that the payment rates for mammography be increased. The commenters stated that beneficiary access to mammography is being limited due to a growing number of radiologists who refuse to read mammograms due to low payment and high malpractice rates and recent closure of a large number of centers across the country.

Response: We set the payment rates for diagnostic mammography based on hospital claims data, consistent with the payment methodology for OPPS services. In fact, in accordance with
section 614 of Pub. L. 108

– 173, which requires that diagnostic mammography be paid now under the Medicare Physician Fee Schedule, payment is set using an entirely different process. This statutory change in the payment process
results in a somewhat increased payment for mammography procedures
from that under the OPPS.

Comment: One commenter asked CMS to clarify that the increase in payment for diagnostic mammography furnished in the hospital outpatient department does not ‘‘ come out of the [Medicare Physician Fee Schedule] budget. ’’

Response: The increase in payment for diagnostic mammography furnished in the hospital outpatient department has no effect on payment for Medicare Physician Fee Schedule services. We are using the Medicare Physician Fee Schedule rate to set Medicare payment for diagnostic mammography furnished in the hospital outpatient department, as required by statute. Further, we are not including diagnostic mammography in our model for setting the relative weights under the OPPS. Thus, the increase in payment for diagnostic mammography furnished in the hospital outpatient department also has no effect on payment for any other OPPS

services.

In this final rule, we are adopting, as final without modification, our proposed revision of § 419.22 to incorporate the provisions of section
614 of Pub. L. 108

– 173.

III. Recalibration of APC Relative Weights for CY 2005

A. Database Construction

Section 1833(t)(9)(A) of the Act requires that the Secretary review and revise the relative payment weights for APCs at least annually, beginning in CY 2001 for application in CY 2002. In the April 7, 2000 OPPS final rule (65 FR 18482), we explained in detail how we calculated the relative payment weights that were implemented on August 1, 2000, for each APC group. Except for some reweighting due to APC changes, these relative weights continued to be in effect for CY 2001. This policy is discussed in the November 13, 2000 interim final rule (65 FR 67824 through 67827).)

In the August 16, 2004 OPPS proposed rule, we proposed to use the same basic methodology that we described in the April 7, 2000 final rule to recalibrate the relative APC weights
for services furnished on or after January 1, 2005, and before January 1, 2006. That is, we proposed to recalibrate the weights based on claims and cost report data for outpatient services. We proposed to use the most recent
available data to construct the database for calculating APC group weights. We provide a complete description of the data processes we proposed to use for
the creation of the CY 2005 OPPS payment rates in the August 16, 2004 proposed rule (69 FR 50448).

For the purpose of recalibrating APC relative weights for CY 2005 displayed in this final rule with comment period,
we used the most recent available claims data, which were the approximately 132 million final action claims for hospital OPD services furnished on or after January 1, 2003, and before January 1, 2004. Of the 132
million final action claims for services provided in hospital outpatient settings, 106 million claims were of the type of bill potentially appropriate for use in setting rates for OPPS services (but did not necessarily contain services payable under the OPPS). Of the 106 million claims, we were able to use 51 million whole claims (from which we created 84 million single procedure claim records)
to set the final OPPS CY 2005 APC relative weights. We used claims from this period that had been processed before June 30, 2004, to calculate the APC weights and payments contained in
Addenda A and B of this final rule with comment period.

We received one general public comment on our proposed OPPS
database construction for CY 2005 discussed in the August 16, 2004 proposed rule.

Comment: One commenter suggested that CMS use a nationally representative sample of hospitals from which cost data could be collected for purposes of setting relative weights. The commenter suggested that such a sample could be used to validate findings from the larger
claims data set or to establish median costs that more accurately reflect the costs of providing device-related procedures and other outpatient services, or both. As an alternative, the commenter suggested conducting a demonstration project using a sample of hospitals that would receive small grants for set up and training to test the feasibility of collecting a valid reliable and manageable data set from which to develop payment rates.

Response: We believe that the Medicare hospital outpatient claims and hospital cost reports are the best, nationally representative database of such information at present. Nevertheless, we acknowledge that an approach that would involve the collection of additional hospital data from a representative sample could have some merit. However, in addition to the resources that would be required for us to pursue such an approach, we also are concerned about the costs to hospitals
associated with such an additional data collection effort. Nevertheless, we
remain interested and invite additional suggestions from hospitals and other stakeholders on ways to enhance the data we now use to set relative weights for services paid under the OPPS.

1. Treatment of Multiple Procedure
Claims

For CY 2005, we proposed to continue to use single procedure claims to set the medians on which the weights would be based (69 FR 50474). As indicated in the August 16, 2004 proposed rule, we received many requests that we ensure
that the data from claims that contain charges for multiple procedures were
included in the data from which we calculate the CY 2005 relative payment weights (69 FR 50474). Requesters believe that relying solely on single procedure claims to recalibrate APC relative weights fails to take into account data for many frequently performed procedures, particularly those commonly performed in combination with other procedures. They believe that, by depending upon single procedure claims, we base relative payment weights on the least costly services, thereby introducing
downward bias to the medians on which the weights are based.

We agree that, optimally, it is desirable to use the data from as many claims as possible to recalibrate the relative payment weights, including those with multiple procedures. As discussed in the explanation of single procedure claims below, we have used
the date of service on the claims and a list of codes to be bypassed to create

‘‘ pseudo ’’ single claims from multiple procedure claims. We refer to these newly created single procedure claims


### 65731 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

as ‘‘ pseudo ’’ singles because they were submitted by providers as multiple procedure claims.

2. Use of Single Procedure Claims

We use single procedure claims to set
the median costs for APCs because we are, so far, unable to ensure that packaged costs can be correctly allocated across multiple procedures performed on the same date of service. However, bypassing specified codes that we believe do not have significant packaged costs enables use of more data from multiple procedure claims. For CY 2003, we created ‘‘ pseudo ’’ single claims by bypassing HCPCS codes 93005 (Electrocardiogram, tracing),71010 (Chest x-ray), and 71020 (Chest xray) on a submitted claim. However, we did not use claims data for the bypassed
codes in the creation of the median
costs for the APCs to which these three codes were assigned because the level of packaging that would have remained on the claim after we selected the bypass code was not apparent and, therefore, it
was difficult to determine if the
medians for these codes would be

correct.

For CY 2004, we created ‘‘ pseudo ’’ single claims by bypassing these three codes and also by bypassing an
additional 269 HCPCS codes in APCs.
We selected these codes based on a
clinical review of the services and because it was presumed that these codes had only very limited packaging and could appropriately be bypassed for the purpose of creating ‘‘ pseudo ’’ single
claims. The APCs to which these codes were assigned were varied and included mammography, cardiac rehabilitation, and level I plain film x-rays. To derive

more ‘‘ pseudo ’’ single claims, we also broke claims apart where there were
dates of service for revenue code charges on that claim that could be matched to a single procedure code on
the claim on the same date.

As in CY 2003, we did not include the claims data for the bypassed codes in
the creation of the APCs to which the 269 codes were assigned because, again,
we had not established that such an approach was appropriate and would aid in accurately estimating the median cost for that APC. For CY 2004, from
about 16.3 million otherwise unusable claims, we used about 9.5 million multiple procedure claims to create
about 27 million ‘‘ pseudo ’’ single
claims. For the CY 2005 OPPS rates in this final rule with comment period,
from about 24 million otherwise unusable claims, we used about 18 million multiple procedure claims to
create about 52 million ‘‘ pseudo ’’ single
claims. For CY 2005, we proposed to continue using date of service matching as a tool
for creation of ‘‘ pseudo ’’ single claims and take a more empirical approach to creating the list of codes that we would bypass to create ‘‘ pseudo ’’ single claims. The process we proposed for CY 2005 OPPS resulted in our being able to use some part of 89 percent of the total claims eligible for use in OPPS ratesetting and modeling in developing this final rule with comment period. In CY 2004, we used some part of the data from 82 percent of eligible claims. This process enabled us to use, for CY 2005, 84 million single bills for ratesetting: 52
million ‘‘ pseudo ’’ singles and 33 million

‘‘ natural ’’ single bills.

We proposed to bypass the 383 codes, which we published in Table 17 of the proposed rule (69 FR 50476 through 50486), to create new single claims and
to use the line-item costs associated with the bypass codes on these claims
in the creation of the median costs for the APCs into which they are assigned (69 FR 50474 through 50486). Of the codes on this list, only 123 (32 percent) were used for bypass in CY 2004.

We developed the proposed bypass list using four criteria:

a. We developed the following empirical standards by reviewing the frequency and magnitude of packaging in the single claims for payable codes other than drugs and biologicals. We proposed to use these standards to determine codes that could be bypassed

to create ‘‘ pseudo ’’ single claims for median setting. (More explanation regarding the use of these standards is provided in our August 16, 2004 OPPS proposed rule (69 FR 50475).)

• There were 100 or more single
claims for the code.

• Five percent or fewer of the single claims for the code had packaged costs on that single claim for the code.

• The median cost of packaging observed in the single claim was equal to or less than $50.

• The code is not a code for an
unlisted service.

b. We examined APCs relying on a low volume of single claims, and it became apparent that several radiological supervision and interpretation codes were commonly billed with the procedural codes in the APCs. We then reviewed all radiological supervision and interpretation codes to assess their viability as bypass codes. For the codes included on the proposed list published in Table 17, we determined that, generally, the packaging on claims, including these radiological supervision and interpretation codes, should be associated with the procedure performed.

c. We examined radiation planning and related codes provided by a professional organization. In the organization ’ s opinion, the codes could safely be bypassed and used without packaging to set medians for the APCs into which these codes are assigned. Many of the codes the organization
recommended met our criteria under item a., and the remaining codes were close. Therefore, after reviewing such codes, we proposed to adopt as bypass codes all radiation planning and related codes as provided by the organization.

d. We included HCPCS codes 93005
and 71010. These codes have been bypassed for the past 3 years and generate a significant amount of new single claims because they are very commonly done on the same date of surgery. They have low median packaged costs and a low percentage of single claims with any packaged costs, 6 percent and 18 percent, respectively.

In the August 16, 2004 proposed rule, we invited public comment on the

‘‘ pseudo ’’ single process, including the bypass list and the criteria. We received a number of public comments on our proposals.

Comment: Some commenters stated that CMS should provide an impact analysis by medical specialty and APC for the bypass list. Commenters indicated that 26 radiation oncology codes, which represent over 40 percent of the radiation oncology codes, are on the proposed list and that it is not clear what impact the inclusion of these codes will have on payment for radiation oncology procedures.

Response: The OPPS pays hospitals for the hospital services they furnish and, therefore, we focus our impact analysis on the providers who provide services and to whom the payment is made. It is impractical to do an impact analysis by hospital category, much less medical specialty and APC, for each and every step of the process we use to
establish medians on which we base our payment rates.

However, to facilitate the public ’ s ability to do specialized detailed analyses beyond what is practical for us to do, we make available the claims we use to set median costs. Specifically, the claims we used to set the payment rates
for CY 2004 OPPS and CY 2005 OPPS are available to the public for public use in extended and focused analysis at any level of interest. Moreover, exhaustive discussion of our process is contained
in both the CY 2004 and CY 2005 OPPS final rule with comment period claims accounting documents that are available

on www.cms.hhs.gov/providers/


### 65732 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

hopps.asp, to facilitate the use of such claims for further analysis. Therefore, we provide to the public the data
needed for a focused exhaustive analysis of impact by medical specialty or on any basis on which any party with a special interest has a particular

concern.

The 383 bypass codes presented in Table 17 of the proposed rule represent the result of an empirical and clinical analysis that identified HCPCS codes for which we could not observe significant packaged costs in the CY 2003 claims
data and for which there was no clinical reason that a procedure or service should have significant packaged costs.
These criteria are detailed in the proposed rule and were carefully
chosen to avoid the inaccurate redistribution of packaged costs (69 FR 50474 through 50475). Inclusion of a HCPCS code on the bypass list is not predicated on the median impact, but rather empirical evidence or clinical arguments that these procedures do not contain significant packaged costs that would call into question their appropriateness for inclusion on the bypass list.

Comment: Most commenters supported the use of a bypass list and date of service matching as a way to use more data from multiple claims. One
commenter was concerned that the bypass list may inappropriately break multiple claims into single procedure claims by assuming that the amount and frequency of packaging on procedures found on single bills was the same as would exist on multiple procedure
claims. The commenter stated that claims involving multiple APCs are by their nature the most complex combinations of services requiring many more resources than if they were performed singly and that, therefore, CMS may be incorrect to generalize that the packaging found on single bills would also be present for the same procedure done as a multiple procedure. Another commenter opposed the use of the bypass list, citing it as a ‘‘ bandaid ’’ and as not a satisfactory way to deal with the presence of multiple procedure claims over the long run. The commenter indicated that, given the OPPS experience gained over the past years, CMS should be able to perform a study of multiple procedure claims that provides a mechanism for using them.

Response: We have retained and used the proposed bypass methodology in creating the median costs used to set the CY 2005 OPPS relative payment weights in this final rule with comment period. We believe that the use of the bypass list gives us considerably more single claims for ratesetting than had we not used it and that it is a valid representation of codes for which there is seldom any packaging and for which the packaging that exist, is minimal. Given the inability of any concrete processes that provide a way to attribute packaging on multiple bill claims, we believe that the best and only alternative available is for us to use the packaging on single bill claims to determine whether a code can be safely bypassed
in the creation of ‘‘ pseudo single ’’ claims for median setting. We continue to examine the means by which we could use all multiple procedure claims
and to invite additional recommendations from the public on how we might do so.

Comment: One commenter strongly objected to any method of using multiple procedure claims that would rely in any way on payment weights
because the commenter believed that any such method would compound problems in the data by carrying them forward into future years.

Response: We expect to examine a number of different ways of using the data from multiple procedure claims and will evaluate each carefully before we discard any particular process. As we have in the past for updating the OPPS, if we decide to pursue any particular process change, we will discuss our findings and any proposed changes to the OPPS median development process in the proposed rule and consider public comments on the proposal before we change the

process.

Comment: Some commenters indicated that the use of single procedure claims means that the most typical correctly coded claims are not used for many services. They added that many of the procedures that implant a device are actually replacing an existing device, which means that the removal of
the device is billed with one code while the implant is billed with another code
on the same claim on the same date of service, thereby creating a multiple procedure claim that will become two

‘‘ pseudo ’’ single claims under the CMS process. The commenters also stated that services that are provided only in addition to other services, such as noncoronary intravascular ultrasound, can never be correctly coded as a single procedure claim. They contended that such correctly coded claims will be multiple major procedure claims and
thus will not be used for median cost setting. The commenters stated that the nature of some services being routinely performed in combination with other services means that, under the current CMS methodology, only small percentages of the claims will be used to set the medians and that those claims are likely to be the incorrectly coded
claims.

Response: We recognize that there are categories of service that are typically
done in combination with other services at such frequency that acquiring valid single procedure claims is very difficult, if not impossible. We are planning to explore these services for which the
medians are set based on a small percentage of the claims that are
submitted with the APC Panel in the future to determine what methods may be available to deal effectively with
these situations.

In the August 16, 2004 proposed rule, we also discussed suggestions that we had received for creating ‘‘ pseudo ’’ single claims, which included
recommendations that the costs in packaged revenue codes and packaged HCPCS codes be allocated separately to paid HCPCS codes based on the prior

year ’ s payment weights or payment rates for the single procedures. Still other suggestions recommended that we allocate the packaged costs in proportion to the charges or to the costs for the major procedures based on the current year ’ s claims. We are concerned that using a prior year ’ s median costs, relative weights or payment rates as the basis to allocate current year ’ s packaged costs to current year costs for payable HCPCS codes may not be appropriate. For example, if two procedures are performed and one uses an expensive device, this methodology would split
the costs of the device between the
service that uses the device and a service that does not use the device, thus resulting in an incorrect allocation of the packaged costs. For this reason, we did not propose to incorporate these suggestions in our ratesetting methodology. However, we stated in our proposed rule that we intended to examine them more thoroughly.

We did not propose a methodology beyond use of dates of service and the expanded bypass list. However, we solicited specific proposals that would be provided as comments on how multiple procedure claims can be better used in calculating the relative payment weights.

Comment: One commenter asked that CMS clarify whether the ‘‘ pseudo ’’ single claims data for CPT codes 93307 (Echo exam of heart), 93303 (Echo transthoracic), and 93320 (Doppler echo exam, heart) were used in setting APC relative weights and, if so, the impact of this proposal. Another commenter asked that CMS clarify whether HCPCS codes for drugs, radiopharmaceuticals, and blood products were bypassed to create

‘‘ pseudo ’’ singles. The commenter


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believed that packaged costs are never associated with these items; therefore, they should always be bypassed.

Response: The claims data for the
three referenced CPT codes were used in setting the APC relative weights for these services. They were included in the list of bypass codes because they met the criteria for inclusion, which focused on selecting only claims that often did not include packaged services and for which packaging on the single bills was very modest.

We agree with the commenter that drugs, radiopharmaceuticals, and blood products would rarely be expected to have associated packaged costs.
Presence of codes for these items on a claim does not result in a multiple claim, as we do not consider the items to be major procedures.

Comment: One commenter asked that CMS add CPT codes 76362 (Computed tomography guidance for, and monitoring of, visceral tissue ablation), 76394 (Magnetic resonance guidance for, and monitoring of, visceral tissue ablation), and 76940 (Us guide, tissue ablation) to the bypass list because they
are often billed with CPT code 47382 (Radiofrequency ablation procedures of the liver) and CPT code 20982 (Radiofrequency ablation procedures of the bone). The commenter believed that this approach would create more single
claims for those codes.

Response: The three CPT codes that the commenter requested we add to the bypass list did not have sufficient claims volume at the time the bypass
list was created to meet the criteria for
inclusion. When we next review the bypass list, we will examine these codes for inclusion on any future bypass list.

Comment: One commenter objected to use of data-based criteria as the only determinant of whether services are included on the bypass list. Specifically, the commenter objected to the inclusion of CPT evaluation and management codes 99213 and 99214 on the bypass list even though CPT codes 99211, 99212, and 99215 are not included on
the list. The commenter believed that
CMS should not assume that these codes do not typically have packaged
costs associated with them because less than 5 percent of the claims with the code appeared on a claim with packaged charges. The commenter believed that
all codes that ‘‘ meet the 5 percent data

test ’’ should be qualitatively reviewed to determine whether clinical practice and charging methods support the assertion that packaged dollars are not related to the service proposed for the bypass list.
The commenter also recommended that CMS include on the bypass list ‘‘ addon ’’ CPT codes that have a status
indicator of ‘‘ N ’’ so that the remaining packaged services on the claim would be packaged to the main procedure if that were the only other APC reported
on the claim. The commenter
recommended that ‘‘ add-on ’’ CPT codes with APC payment should be accepted as bypass codes if the only other CPT
code on the claim is the main procedure.

Response: The commenter is incorrect in believing that the only criterion used
to determine if a code were suitable for inclusion on the bypass list was whether 5 percent of the claims for the code appeared with packaged charges. As we discussed above, there were a
number of criteria that had to be met which were focused on ensuring that packaging did not occur often or in significant amounts when it did occur.
We reviewed the clinical appropriateness of the codes that were derived from applying the criteria, and did not remove any as a result of the review. Given the large volume of evaluation and management services,
we believe that the evaluation and management codes we included on the bypass list were appropriate for inclusion. As we discussed with regard to the radiological supervision and evaluation codes and the simple EKG and chest x-ray codes, clinical practice and charging methods were also factors in determining inclusion on the bypass
list.

With respect to the add-on codes,
those that have a status indicator of ‘‘ N ’’ would not cause a claim to be a multiple procedure claim (because they are not separately paid). Thus it would not be useful to add them to the bypass list (which is intended to break multiple procedure claims into two single claims). Those add-on codes that are paid separately may or may not have packaging associated with them. Thus,
it would be incorrect to assume that all packaging on the claim would be associated with the core procedure to which the add-on code is an appendage. For example, insertion of a left ventricular pacing lead as an add-on procedure to the insertion of a
cardioverter-defibrillator carries considerable packaged costs with the add-on service, such as the device, significant additional operating room time, and extra drugs and medical supplies, and, therefore, it would not be suitable for inclusion on the bypass list.

After carefully reviewing all public comments received, we are adopting as final the bypass codes listed in Table 16
below.

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B. Calculation of Median Costs for CY

2005

In this section of the preamble, we
discuss the use of claims to calculate the OPPS payment rates for CY 2005. (The hospital outpatient prospective payment page on the CMS Web site on which this final rule with comment period is posted provides an accounting of claims used in the development of the final

rates: http://www.cms.hhs.gov/hopps.) The accounting of claims used in the development of the final rule with comment period is included under supplemental materials for this final rule with comment period. That accounting provides additional detail regarding the number of claims derived at each stage of the process. In addition,
we note that below we discuss the files of claims that comprise the data sets that are available for purchase under a
CMS data user contract. Our CMS Web site, http://www.cms.hhs.gov/providers/ hopps includes information about purchasing the following two OPPS data
files: ‘‘ OPPS limited data set ’’ and

‘‘ OPPS identifiable data set. ’’

In this final rule with comment period, we are using the same methodology as proposed in the August 16, 2004 proposed rule to establish the relative weights that we used in calculating the OPPS payment rates for
CY 2005 shown in Addenda A and B to this final rule with comment period. This methodology is as follows:

We used outpatient claims for full CY 2003 to set the relative weights for CY 2005. To begin the calculation of the relative weights for CY 2005, we pulled all claims for outpatient services
furnished in CY 2003 from the national claims history file. This is not the population of claims paid under the OPPS, but all outpatient claims (for example, critical access hospital (CAH) claims, and hospital claims for clinical laboratory services for persons who are neither inpatients nor outpatients of the hospital).

We then excluded claims with condition codes 04, 20, 21, and 77. These are claims that providers submitted to Medicare knowing that no payment will be made. For example, providers submit claims with a
condition code 21 to elicit an official
denial notice from Medicare and
document that a service is not covered.
We then excluded claims for services furnished in Maryland, Guam, and the U.S. Virgin Islands because hospitals in those geographic areas are not paid
under the OPPS.

We divided the remaining claims into the three groups shown below. Groups


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2 and 3 comprise the 106 million claims that contain hospital bill types paid
under the OPPS.

1. Claims that were not bill types 12X, 13X, 14X (hospital bill types), or 76X (CMHC bill types). Other bill types, such as ASCs, bill type 83, are not paid under the OPPS and, therefore, these
claims were not used to set OPPS payment.

2. Bill types 12X, 13X, or 14X (hospital bill types). These claims are hospital outpatient claims.

3. Bill type 76X (CMHC). (These claims are later combined with any
claims in item 2 above with a condition code 41 to set the per diem partial hospitalization rate determined through a separate process.)

In previous years, we have begun the CCR calculation process using the most recent available cost reports for all hospitals, irrespective of whether any or all of the hospitals included actually filed hospital outpatient claims for the data period. However, in developing the proposed rule and this final rule with comment period, we first limited the population of cost reports to only those for hospitals that filed outpatient claims in CY 2003 before determining whether the CCRs for such hospitals were valid. This initial limitation changed the distribution of CCRs used during the trimming process discussed below.

We then calculated the CCRs at a departmental level and overall for each hospital for which we had claims data. We did this using hospital specific data from the Hospital Cost Report Information System (HCRIS). As indicated in the proposed rule, we used
the same CCRs as those used in calculating the relative weights that we used in developing the proposed rule.
We did not recalculate CCRs to reflect updated cost report data.

We then flagged CAHs, which are not paid under the OPPS, and hospitals
with invalid CCRs. These included claims from hospitals without a CCR;those from hospitals paid an allinclusive rate; those from hospitals with obviously erroneous CCRs (greater than 90 or less than .0001); and those from hospitals with CCRs that were identified as outliers (3 standard deviations from the geometric mean after removing error CCRs). In addition, we trimmed the CCRs at the departmental level by removing the CCRs for each cost center as outliers if they exceeded +/

¥ 3 standard deviations of the geometric mean. In prior years, we did not trim CCRs at the departmental level. However, for CY 2005, as proposed, we trimmed at the departmental CCR level to eliminate aberrant CCRs that, if found in high volume hospitals, could skew the medians. We used a four-tiered hierarchy of cost center CCRs to match
a cost center to a revenue code with the top tier being the most common cost center and the last tier being the default CCR. If a hospital ’ s departmental CCR was deleted by trimming, we set the departmental CCR for that cost center to

‘‘ missing, ’’ so that another departmental CCR in the revenue center hierarchy could apply. If no other departmental CCR could apply to the revenue code on the claim, we used the hospital ’ s overall CCR for the revenue code in question.

We then converted the charges on the claim by applying the CCR that we
believed was best suited to the revenue
code indicated on the line with the charge. (We discussed in greater detail
the allowed revenue codes in the proposed rule (69 FR 50487).) If a hospital did not have a CCR that was appropriate to the revenue code reported for a line-item charge (for example, a visit reported under the clinic revenue code but the hospital did not have a clinic cost center), we applied the hospital-specific overall CCR, except as discussed in section V.H. of this final rule with comment period,
for calculation of costs for blood.

Thus, we applied CCRs as described above to claims with bill types 12X, 13X, or 14X, excluding all claims from CAHs and hospitals in Maryland, Guam, or the U.S. Virgin Islands, and flagged hospitals with invalid CCRs. We excluded claims from all hospitals for which CCRs were flagged as invalid.

We identified claims with condition code 41 as partial hospitalization
services of CMHCs and removed them to
another file. These claims were
combined with the 76X claims identified previously to calculate the partial hospitalization per diem rate.

We then excluded claims without a
HCPCS code. We also removed claims
for observation services to another file.
We removed to another file claims that contained nothing but flu and pneumococcal pneumonia ( ‘‘ PPV ’’ )
vaccine. Influenza and PPV vaccines are paid at reasonable cost and, therefore,
these claims are not used to set OPPS
rates. We note that the two above mentioned separate files containing partial hospitalization claims and the
observation services claims are included
in the files that are available for purchase as discussed above.

We next copied line-item costs for drugs, blood, and devices (the lines stay on the claim but are copied off onto another file) to a separate file. No claims were deleted when we copied these
lines onto another file. These line-items are used to calculate the per unit median for drugs, radiopharmaceuticals, and blood and blood products. The lineitem costs were also used to calculate the per administration cost of drugs, radiopharmaceuticals, and biologicals (other than blood and blood products) for purposes of determining whether the cost of the item would be packaged or paid separately. Section 1833(t)(16)(B) of the Act, as added by section 621(a)(2)
of Pub. L. 108

– 173, requires the Secretary to lower to $50 the threshold for separate payment of drugs and biologicals and the per administration cost derived using these line-item cost
data would be used to make that
decision for CY 2005. As discussed in the November 7, 2003 OPPS final rule with comment period (68 FR 63398), we had also applied a $50 threshold to these items for the CY 2004 update to
the OPPS.

We then divided the remaining claims into five groups.

1. Single Major Claims: Claims with a single separately payable procedure, all
of which would be used in median setting.

2. Multiple Major Claims: Claims with more than one separately payable procedure or multiple units for one payable procedure. As discussed below,
some of these can be used in median setting.

3. Single Minor Claims: Claims with a single HCPCS code that is not separately payable. These claims may have a single packaged procedure or a drug code.

4. Multiple Minor Claims: Claims with multiple HCPCS codes that are not separately payable without examining dates of service. (For example, pathology codes are packaged unless they appear on a single bill by themselves.) The multiple minor file has claims with multiple occurrences of pathology codes, with packaged costs that cannot be appropriately allocated across the multiple pathology codes. However, by matching dates of service for the code and the reported costs through the ‘‘ pseudo ’’ single creation process discussed earlier, a claim with multiple pathology codes may become
several ‘‘ pseudo ’’ single claims with a unique pathology code and its associated costs on each day. These

‘‘ pseudo ’’ singles for the pathology
codes would then be considered a separately payable code and would be used like claims in the single major
claim file.

5. Non-OPPS Claims: Claims that contain no services payable under the
OPPS are excluded from the files used
for the OPPS. Non-OPPS claims have codes paid under other fee schedules, for example, durable medical equipment or clinical laboratory.


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We note that the claims listed in numbers 1, 2, and 4 above are included in the data files that can be purchased
as described above.

We set aside the single minor claims and the non-OPPS claims (numbers 3 and 5 above) because we did not use either in calculating median cost.

We then examined the multiple major and multiple minor claims (numbers 2 and 4 above) to determine if we could convert any of them to single major claims using the process described previously. We first grouped items on the claims by date of service. If each major procedure on the claim had a
different date of service and if the lineitems for packaged HCPCS and packaged revenue codes had dates of service, we broke the claim into multiple ‘‘ pseudo ’’ single claims based
on the date of service.

After those single claims were created, we used the list of ‘‘ bypass
codes ’’ in Table 16 of this final rule with comment period to remove separately payable procedures that we determined contain limited costs or no packaged costs from a multiple procedure bill. A
discussion of the creation of the list of bypass codes used for the creation of

‘‘ pseudo ’’ single claims is contained in section III.A.2. of this preamble.

When one of the two separately payable procedures on a multiple procedure claim were on the bypass code list, the claim was split into two single procedure claims records. The single procedure claim record that contained the bypass code did not retain packaged services. The single procedure
claim record that contained the other separately payable procedure retained the packaged revenue code charges and the packaged HCPCS charges.

We excluded those claims that we were not able to convert to singles even after applying both of the techniques for
creation of ‘‘ pseudo ’’ singles. We then packaged the costs of packaged HCPCS (codes with status indicator ‘‘ N ’’ listed
in Addendum B to this final rule with comment period) and packaged revenue codes into the cost of the single major procedure remaining on the claim. The list of packaged revenue codes is shown
in Table 17 below.

After removing claims for hospitals with error CCRs, claims without HCPCS codes, claims for immunizations not covered under the OPPS, and claims for services not paid under the OPPS, 56
million claims were left. This subset of claims is roughly one-half of the 106 million claims for bill types paid under the OPPS. Of these 56 million claims, we were able to use some portion of 52 million (91 percent) whole claims to create the 84 million single and ‘‘ pseudo ’’ single claims for use in the CY 2005 median payment ratesetting.

We also excluded claims that either had zero costs after summing all costs
on the claim or for which CMS lacked an appropriate provider wage index. For the remaining claims, we then wage adjusted 60 percent of the cost of the claim (which we determined to be the labor-related portion), as has been our policy since initial implementation of the OPPS, to adjust for geographic
variation in labor-related costs. We made this adjustment by determining the wage index that applied to the hospital that furnished the service and dividing the cost for the separately paid HCPCS code furnished by the hospital by that wage index. As proposed, we used the final pre-reclassified wage indices for IPPS and any subsequent corrections. We used the pre-reclassified wage indices for standardization because we believe that they better
reflect the true costs of items and
services in the area in which thehospital is located than the postreclassification wage indices, and would result in the most accurate adjusted
median costs.

We then excluded claims that were
outside 3 standard deviations from the geometric mean cost for each HCPCS code. We used the remaining claims to
calculate median costs for each separately payable HCPCS code; first, to determine the applicability of the ‘‘ 2
times ’’ rule, and second, to determine
APC medians as based on the claims containing the HCPCS codes assigned to each APC. As stated previously, section 1833(t)(2) of the Act provides that, subject to certain exceptions, the items and services within an APC group cannot be considered comparable with respect to the use of resources if the highest median (or mean cost, if elected by the Secretary) for an item or service in the group is more than 2 times greater
than the lowest median cost for an item or service within the same group ( ‘‘ the
2 times rule ’’ ). Finally, we reviewed the medians and reassigned HCPCS codes to different APCs as deemed appropriate. Section III.B. of this preamble includes
a discussion of the HCPCS code assignment changes that resulted from
examination of the medians and for
other reasons. The APC medians were recalculated after we reassigned the
affected HCPCS codes.

A detailed discussion of the medians for blood and blood products is provided at section V.I. of this preamble. We provide a discussion of the medians for APC 0315 (Level II Implantation of Neurostimulator), and APC 0651 (Complex Interstitial Radiation Application), at sections III.C.2.a. and III.C.2.b., respectively, of this preamble.

A discussion of the medians for APCs that require one or more devices when the service is performed is provided at section III.C. of this preamble. A
discussion of the median for observation services is provided at section VII.D. of this preamble and a discussion of the median for partial hospitalization is provided at section X.C. of this preamble.

We received a number of public comments concerning our proposed data processes for calculating the CY 2005 OPPS relative weights and median

costs.

Comment: Some commentersrequested that CMS provide specialtyspecific and APC-specific impact tables that provide additional information and analysis of its proposal to trim CCRs on a departmental basis. The commenters stated that CMS should justify why it trimmed departmental CCRs at ± 3 standard deviations from the geometric mean and explain the impact of the change.

Response: We chose to trim at ± 3 standard deviations from the geometric mean because cost and charge data are traditionally log normal distributed and
because the 3 standard deviations threshold is standard policy for identifying outliers in CMS ’ payment systems. We do not believe that animpact analysis for the departmentallevel CCR trim is necessary because the
overall number of cost-centers trimmed
were minimal relative to the number of hospitals and because this trim only removed extreme department CCRs, both low and high. We fully expect that,
had we chosen not to trim at the department-level, extreme cost
estimates would have been removed during our trim at the HCPCS-level performed later in the data development

process.

For example, we trimmed the most department CCRs, 68, from cost center 5500, Medical Supplies Charged to
Patients. The low CCRs that were trimmed ranged from 0.00008 to 0.0281. The high CCRs that were trimmed ranged from 0.39530 to 6069.17. Even after the department-level trim, only 7 percent of the hospitals in our data set
defaulted to the overall CCR for services mapped to this cost center.

Comment: One commenter stated that
the CCRs fell between 1996 and 2002 because charges were increasing faster than costs and that this change resulted in a significant payment decrease for hospitals for which we used the default CCR. The commenter urged CMS to
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CCRs that will provide accurate cost

estimates.

Response: The commenter
misunderstood the source of the CCRs used to adjust hospital costs to charges for OPPS median setting. We do not use
the CCRs that fiscal intermediaries calculate for purposes of outlier payments, and cost reimbursement. Instead, we use hospital specific data from the health care cost reporting information system and independently
calculate CCRs for each standard and
nonstandard cost center in which the costs of outpatient services are to be
found as well as an overall CCRs for the costs of outpatient care. Hence,
intermediaries have no role in the
calculation of the CCRs used to reduce charges to approximate costs for OPPS median cost setting.

Comment: One commenter asked thatCMS justify why did it not use cost-tocharge data from all hospitals for CY 2005 OPPS calculations when, in the past, CMS used cost report data from all hospitals without regard to whether the hospital had filed data during a specified period.

Response: In the past, we first calculated CCRs for all providers, trimmed the overall hospital CCRs, and then compared the providers for which we had valid CCRs to the providers for
which we had claims data. For CY 2005 OPPS, we first determined the providers
for which we had claims data and we
then calculated the CCRs for those hospitals so that the trimming would occur only across the hospitals for
which we had claims data because a CCR is of value only if there are claims to which to apply it.

Comment: One commenter urged CMS to greatly expand the outpatient code editor (OCE) edits to return to providers claims that fail edits that are appropriate to the type of service being
billed. The commenter cited as examples, the creation of edits that return claims for chemotherapyadministration procedures if antineoplastics (cancer chemotherapy) are not also billed on the same day and
edits that return claims for services that require the use of contrast agents if no contrast agent were billed. The
commenter believed that this would greatly improve the data on which
median costs are set.

Response: We do not intend, at this time, to greatly expand the OCE edits to force correct coding as the commenter recommends beyond the edits for correct coding of device procedures that
are discussed in section III.C.4 of this final rule with comment period. While we recognize that these kinds of edits would likely result in better coding, they would also impose a significant burden on hospitals. We do, however, encourage hospitals to review their claims completion processes carefully and to edit their claims before they are
submitted to maximize the likelihood that the claims are correct and complete. Such a practice would both assist us in developing better OPPS rates, but more importantly, ensure that hospitals are being correctly paid for all of the services they furnish to our
beneficiaries.

Comment: One commenter noted the prevalence of drug billing and charging
errors and recommended that CMS revise its median trimming methodology for drugs from ± 3 standard deviations from the geometric mean to a trim by provider by drug based on the correlation of units and charges. This approach assumes that hospitals engaged in accurate and consistent unit coding and billing will demonstrate a strong correlation between units and per unit charges. The commenter noted that

CMS ’ current trim is very conservative, especially for low costs per unit because it will only eliminate negative cost values, which do not exist in the data. The commenter further suggested that

CMS ’ trim of department-level CCR ’ s and the use of C-code only claims to set device medians are comparable to this proposal.

Response: We agree that billing accurate units has proven challenging for some hospitals in light of various differences in packaged versus delivered units, changing drug pricing, and unit changes in HCPCS codes. Clearly, our goal in conducting the current trim at ± 3 standard deviations from the geometric mean is to remove aberrant per unit costs, or costs that are so far removed from the geometric mean that the probability of their occurrence is less than 1 percent. However, even after this trim is conducted, we remain concerned about the per unit cost estimates for some drug codes.

We believe, however, that the current trim of drug costs, while conservative, is not as limiting as suggested in the comment. The natural logarithm of costs per unit less than $1 will be negative. The trim compares the natural logarithm of the cost to the geometric mean, ± 3 standard deviations and removes low and high cost observations. The low trim threshold may also be negative if costs are less than $1. In addition to using a trim, we also rely on a median cost rather than an average cost. Averages are subject to the influence of extreme outliers. Using a median
instead of a mean eliminates this concern. Assuming most line-items for any given drug are coded correctly, using a trim and the median should provide a robust per unit cost estimate. Nonetheless, we do recognize that for selected low-volume or complex products, this approach is still not
sufficient to remove all errors.

We are concerned, however, about implementing systematic trimming at the provider-level as suggested by the commenter for several reasons. First, this approach would remove the data for multiple providers from any given median calculation, making the assumption that their data were inaccurate, when, in fact, a few instances of poor coding may adversely impact the provider ’ s correlation coefficient. Thus, a provider may actually be coding and charging accurately in many cases. In rare instances, we have removed a specific provider when it is more than obvious that the data are erroneous, but we only
do this after a careful review of the provider ’ s claims data. It is our preference to remove aberrant line-items rather than a provider ’ s entire data for any given drug. Second, correlation coefficients for a provider may fluctuate if they are based on very low-volume, even if the majority of line-items appear accurate. Third, the commenter ’ s proposed correlation coefficient approach lacks a generally accepted threshold when a providers ’ data should be removed, unlike the widely accepted
trim of 3 standard deviations from the mean. Finally, this approach assumes that a negative correlation coefficient implies that a provider erred in setting its charging practices.

While we agree that the proposed trim seeks to improve the accuracy of the claims data, which is the goal of all trimming, we disagree that the

commenter ’ s proposed trim is necessarily comparable to the use of a department-level CCR trim and the
limitation of claims to those with Ccodes for estimating medians for devicedependent APCs. The department-level trim does not eliminate a providerentirely, it eliminates the departmentlevel CCR for a specific hospital and replaces this CCR with the overall CCR for that hospital. Relying on C-coded claims to calculate device-dependent
medians assures us that the device was used with the device-dependent procedure. The specific cost associated
with the device code is not considered in subsetting claims and the subsetting is done by claim, not by provider. While
the commenter ’ s proposed methodology is not appropriate for use at this time,
we nonetheless believe that the

commenter ’ s suggested approach can serve as a useful tool in helping us begin the process of identifying providers

Comment: One commenter indicated that using the overall CCR where the


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departmental CCR cannot be used may skew the costs derived from application of CCRs to charges. The commenter suggested that CMS develop a method for replacing departmental CCRs similar
to that used for blood and blood products whereby the CCR that would apply would not be the overall CCR but
a national CCR calculated based on the departmental CCRs of hospitals that do report the more pertinent specific cost centers on their cost reports.

Response: We will consider whether doing so is practical and whether it would yield more accurate cost estimates. However, there were very specific characteristics of the reporting of blood such as a very specific cost center and very specific revenue codes that may not exist for other services.

Comment: One commenter asked that CMS undertake a study to improve the reporting of costs in conjunction with the CCR development. The commenter stated that a more timely process should be implemented so that currently
accurate CCRs are used to translate hospital charges to costs and that consideration should be given to attaining greater detail from the hospitals to calculate the CCRs to better reflect the full line of services being offered by hospitals.

Response: We study means by which we could improve the development of cost-to-charge ratios annually. We also use the most current cost report data from the HCRIS system to calculate the cost to-charge-ratios and we use charges
from the most current claims data. However, hospitals have great latitude in the way they organize their costs and complete their cost reports. We have no plans to alter the existing instructions to require cost report detail that is not currently provided. We will, instead,
continue to examine how the data currently submitted by hospitals can be
used to secure the most accurate estimates of cost for the full range of services furnished by hospitals.

After carefully reviewing all comments, we are adopting as final, for
OPPS services furnished on or after January 1, 2005, the process for calculating median costs that we
described in this section and the list of packaged services shown in Table 17
below. This table contains the list of packaged services by revenue code that we used in developing the APC weights
and medians listed in Addenda A and
B of this final rule with comment period.

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C. Adjustment of Median Costs for CY

2005

1. Device-Dependent APCs

Table 19, which we published in the proposed rule (69 FR 50492), contains a list of APCs consisting of HCPCS codes that cannot be provided without one or more devices. For CY 2002 OPPS, we used external data in part to establish the medians used for weight setting. At that time, many devices were eligible for pass-through payment. For that year, weestimated that the total amount of passthrough payments would far exceed the limit imposed by statute. To reduce the amount of a pro rata adjustment to all pass-through items, we packaged 75 percent of the cost of the devices (using external data furnished by commenters on the August 24, 2001 proposed rule)
into the median cost for the APCs associated with these pass-through devices. The remaining 25 percent ofthe cost was considered to be passthrough payment. (Section VI. of this preamble includes a discussion of the pro rata adjustment.)

For CY 2003 OPPS, which was based on CY 2001 claims data, we found that
the median costs for certain devicedependent APCs when all claims were used were substantially less than the
median costs used for CY 2002. We were concerned that using the medians
calculated from all claims would result in payments for some APCs that would not compensate the hospital even for the cost of the device. Therefore, we calculated a median cost using only claims from hospitals that had separately billed the pass-through device in CY 2001 (that is, hospitals
whose claims contained the C-code for the pass-through device). Furthermore, for any APC (whether device-dependent or not) where the median cost would have decreased by 15 percent or more from CY 2002 to CY 2003, we limited decreases in median costs to 15 percent plus half of the amount of any reduction beyond 15 percent (68 FR 47984). For a few particular device-dependent APCs
for which we believed that access to the service was in jeopardy, we blended external data furnished by commenters on the August 9, 2002 proposed rule (67 FR 57092) with claims data to establish the median cost used to set the payment rate. For CY 2003, we also eliminated
the HCPCS C-codes for the devices and returned to providers those claims on
which the deleted device codes were used. (The November 1, 2002 OPPS final rule (67 FR 66750) and section III.C.4 of this preamble contain a discussion regarding the required use of C-codes for specific categories of devices.)

For CY 2004 OPPS, which was based on CY 2002 claims data, we used only claims on which hospitals had reported
devices to establish the median cost for the device-dependent APCs in Table 18.
We did this because we found that the
median costs calculated when we used
all claims for these services were inadequate to cover the cost of the device if the device was not separately coded on the claim. Using only claimscontaining the code for the device (a Ccode) provided costs that were closer to
those used for CY 2002 and CY 2003 for these services. For a few particular
APCs in which we believed that access to the service was in jeopardy, we used external data provided by commenters on the August 12, 2003 proposed rule in a 50 percent blend with claims data to establish the device portion of the median cost used to set the payment rate (68 FR 63423). We also reinstated for CY 2004, but on a voluntary basis, the reporting of C-codes for devices.

Thus, in developing the median costs for device-dependent APCs for CYs 2002, 2003, and 2004, we applied certain adjustments to our claims data as provided under the authority of section 1833(t)(9)(A) of the Act to ensure equitable payments to the hospitals for the provision of such services. As stated in the August 16, 2004 proposed rule, we have continued
to receive comments from interested parties as part of the APC Panel process urging us to determine whether the
claims data that would be used incalculating the median costs for devicedependent APCs for payment in CY 2005 would represent valid relative costs for these services (69 FR 50490). Careful analysis of the CY 2003 data that we used in calculating the median costs for the CY 2005 OPPS payment rates revealed problems similar to thosediscussed above in calculating devicedependent APC median costs based solely on claims data. Calculation of the
CY 2005 median costs for the devicedependent APCs indicated that some of the medians appeared to appropriately reflect the costs of the services, including the cost of the device, and
others did not. Of the 41 devicedependent APCs analyzed, 27 have
median costs that are lower than the medians on which the OPPS payments were based in CY 2004. In contrast, 14 device-dependent APCs have median costs that are higher than the medians on which OPPS payments were based in

CY 2004.

The differences between the CY 2004 payment medians and the proposed CY 2005 median costs using CY 2003
claims data are attributable to several factors. As discussed above, the CY 2004 payment medians were based on a
subset of claims that contained the
codes for the devices without which the procedures could not be performed, and several APCs were adjusted using
external data. The CY 2005 OPPS median costs on which the proposed payment rates in the August 16, 2004 proposed rule were based, were calculated based on all single bills, including ‘‘ pseudo ’’ single bills, for the services in the APCs and (not a subset


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of claims containing device codes) and were not adjusted using external data. In fact, as stated previously, we eliminated device coding requirements for hospitals in CY 2003. Consequently, there were no device codes reported for
almost all devices in the CY 2003 claims data. Thus, it was not possible to use only the CY 2003 claims data containing
device codes to calculate APC devicedependent medians as was done in CY 2004. Similarly, it was not possible to calculate a percentage of the APC cost
attributed to device codes based on CY
2003 claims data.

In light of these data issues for CY 2005, we examined several alternatives to using CY 2003 claims data to calculate the proposed median costs for device-dependent APCs. As discussed in the August 16, 2004 proposed rule, we considered using CY 2004 OPPS medians with an inflation factor, as recommended by the APC Panel and by several outside organizations. We rejected this option because it would not recognize any changes in relative
costs for these APCs and would not direct us towards our goal of using all single claims data as the basis for payment weights for all OPPS services.

We also considered using the medians we calculated from all single bills with no adjustments. However, the results of using this approach without increasing the payments for some important high
cost services for CY 2005 could result in the closing of hospital programs that provide these services thus, jeopardizing access to needed care. Therefore, we did not adopt this approach.

In addition, we considered subsetting claims based on the presence of charges
in certain revenue codes. These revenue codes include: 272, sterile supplies; 275, pacemakers; 278, other implants; 279, other supplies/devices; 280, oncology; 289, other oncology; and 624, investigational devices. We determined
that the medians increased for some device-dependent APCs when we used only claims with a charge in at least one of these revenue codes, but our analysis provided no reliable evidence that the charges that would be found in these revenue codes were necessarily for the
cost of the device.

Further, we considered using CY 2002
claims to calculate a ratio between the median calculated using all single bills and the median calculated using only
claims with HCPCS codes for devices on them, and applying that ratio to the median calculated using all single bills from CY 2003 claims data. We rejected this option because it assumes that the relationship between the costs of the
claims with and without codes for devices is a valid relationship not only
for CY 2002 but CY 2003 as well. It also assumes no changes in billing behavior.
We have no reason to believe either of these assumptions is true and, therefore, we did not choose this option.

In summary, we considered and rejected all of the above options. We have given special treatment to the device-dependent APCs for the past 3 years, recognizing that, in a new payment system, hospitals need time to establish correct coding processes and, considering the need to ensure continued access to these important services. After 3 years of such consideration, we believe that it is time to begin a transition to the use of pure claims data for these services (reflected in these APCs) to ensure the appropriate relativity of the median costs for all payable OPPS services. Our goal is to establish payment rates that provide appropriate relative payment for all services paid under the OPPS without creating payment disincentives that may
reduce access to care.

Therefore, we proposed to base median costs for device-dependent APCs in CY 2005 on the greater of (1) median costs calculated using CY 2003 claims data, or (2) 90 percent of the APC payment median for CY 2004 for such services. We proposed this adjustment
because we believe that some variation in median costs is to be expected from year to year, and we believe that recognizing up to a 10 percent variation in our payment approach is a reasonable limit. In the August 16, 2004 proposed rule, we solicited comments on all aspects of theses issues and particularly on steps that can be taken in the future to transition from the historic payment
medians to claims based median costs for OPPS ratesetting for these important services. In addition, we discussed this
issue with the APC Panel at its September 1 through 2, 2004 meeting.
The Panel recommended that we base
median costs for these APCs on no less than 95 percent of the CY 2004 median not to exceed 105 percent of the CY 2004 payment median.

We received numerous public comments on our proposals.

Comment: A number of commenters objected to the proposal to set the payment medians for device APCs at 90 percent of the CY 2004 payment median for the APC. They indicated that many of these APCs had already been reduced substantially over the past few years and that permitting them to be reduced another 10 percent would mean that some hospitals may close their programs and send patients to other hospitals for
these services. Some commenters
recommended that the median costs for these APCs be set at 100 percent of the CY 2004 payment median. Some
commenters recommended that CMS use the CY 2004 payment median plus an update amount as the median cost for
the CY 2005 OPPS. Commenters also recommended that instead of using median costs from claims data with any adjustment, that we collect actual hospital acquisition data or use cost data provided by manufacturers and
other stakeholders and substitute that data for the device portion of the median costs. They indicated that we used external data in the past and that we should do so this year also. They cited APCs 0081, 0107, 0108, 0225, 0229, 0259, 0385, and 0386 as cases in which the proposed APC payment rates
were less than the cost of the devices
and as those for which CMS should use external data in setting the payment
rates for CY 2005. A commenter supported the proposal to pay the greater of the CY 2005 claims based median or 90 percent of the CY 2004 payment median.

Response: For the reasons discussed below, we set the adjusted CY 2005 OPPS device-dependent median at the greater of the CY 2005 OPPS unadjusted median or 95 percent of the CY 2004 OPPS adjusted final payment median rather than the greater of the CY 2005 unadjusted median or 90 percent of the CY 2004 OPPS adjusted final median as we proposed in the August 16, 2004 proposed rule. We view this as a
transition to the full use of claims data
to set the medians for these services. The integrity of a prospective payment system lies heavily in its reliance on a standardized process applied to a
standardized data source. The use of external data can, as some commenters point out, unfairly unbalance the payments and result in inequities in payment. (Section III.C.5. of this preamble includes a discussion on the use of external data.)

We considered setting the medians at the CY 2004 adjusted final payment
medians with and without further inflation, but we think a certain amount of fluctuation in costs from year to year is to be expected as the costs of services decline after they have been on the market for some time. Moreover, we considered our proposal to pay the greater of the CY 2005 unadjusted median or 90 percent of the CY 2004 OPPS adjusted final payment median, but acknowledged the concerns of the commenters who believe that setting the comparison at 95 percent of the CY 2004 OPPS final adjusted payment median was more appropriate and less likely to impede access to these important services. We recognize that adjustments


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to median costs derived from claims data may be necessary yet again in the CY 2006 OPPS due to the voluntary nature of the reporting of device codes in CY 2004. However, as discussed
further below at section III.C.4. of this preamble in our discussion of mandatory coding for devices, we expect that reporting of device codes in
the CY 2005 claims will enable us to rely upon the claims data for setting the median costs without adjustment in CY

2007.

Comment: Some commenters opposed
the APC Panel ’ s recommendation to
limit increases in median costs for device APCs to 5 percent over the CY 2004 payment median because the
commenters believe such a limit would be arbitrary and would be a hindrance to the improvement of cost data.

Response: We agree and we have not
limited the extent to which the median costs for device-dependent APCs may
increase for the CY 2005 OPPS. We believe that in a number of cases, providers are reporting the charges for the devices and have otherwise greatly improved coding of their services, resulting in increases in median costs that appear to appropriately reflect the
costs of the services furnished. We have
no indication that the increases do not otherwise properly reflect the costs of services and, therefore, see no reason to
constrain the increases that have
resulted.

Comment: Some commenters stated that CMS should look long term to determining a factor through regression analysis that enables CMS to adjust the charges for high cost devices so that the methodology will result in more accurate costs for high cost devices.

Response: We will review and
consider the results of credible studies of the possible compression of all charges, both for high cost services and
low cost services. Studies that focus only on part of the spectrum of hospital charges, for example, those which look at low markup of high cost items but not at high markup of low cost items, would not be useful in a relative weight
system.

Comment: Some commenters indicated that hospitals typically markup high cost items and services less than they markup low cost items
and services and that CMS ’ cost finding methodology does not recognize thisbecause it applies a uniform cost-tocharge ratio (for the department or hospital overall) to the charges, which then yields distorted costs. They
recommended that CMS resolve this problem using external data from
manufacturers and other stakeholders until such time that CMS can comply with the GAO study that recommended
that CMS ‘‘ analyze variation in hospital charge setting to determine if the OPPS payment rates uniformly reflect hospitals ’ costs of provided outpatient services and if they do not, to make appropriate changes to the methodology. ’’ The commenters asked that CMS provide explicit instructions to hospitals regarding how to adequately capture and charge for high cost
devices.

Response: As we discussed previously, we have decided not to use external data to adjust the APC payment rates for CY 2005 OPPS. We do, however, reassess our existing methodology each year to determine
how we can best create rates that uniformly reflect hospitals ’ cost of providing outpatient services. We will not provide instructions to hospitals regarding how to capture and charge for high cost devices. As a matter of policy, we do not tell hospitals how to set their charges for their services. However, we will continue to inform hospitals of the importance of their charge data in future ratesetting and encourage them to include all appropriate charges on their
Medicare claims.

Comment: One commenter objected to us applying the wage index adjustment
to the cost of a device in a devicedependent APC because, as the commenter stated, the wage index is
intended to address the identified differential in wages across localities.
The commenter contends that there is
no demonstration of a similar
differential in the costs of devices across
localities.

Response: Previous studies have shown that across the entirety of all services paid under OPPS, approximately 60 percent of total cost is
labor related. Therefore we believe it is appropriate to apply the wage index to 60 percent of the payment for each service. The application of the wageindex to the payment for the devicedependent APC can either inflate the total payment for the device-dependent APC or reduce it depending on whether the hospital is in a high cost or low cost area. In many cases, if we ceased to apply the wage index adjustment to 60 percent of the APC payment, the payment to the hospital for the APC would be significantly reduced. We will, however, consider whether it is appropriate to continue to apply the wage index adjustment as we currently
do.

Comment: One commenter asked that we add CPT codes 47382, (Radiofrequency ablation procedures of the liver) and CPT code 20982, (Radiofrequency ablation procedures of the bone) to the list of device-dependent APCs because they require the use of
devices.

Response: We will consider whether
these services should be added to the list of device-dependent APCs in the future. However, it is unclear to us what proportion of total cost of each of these procedures is the cost of the device because codes are not reported for the devices. We do not agree that the cost
of the devices could be derived from charges reported in particular revenue
codes because there is no identification of the items charged under any revenue
code.

Comment: Some commenters
indicated that the reductions in APCpayments following termination of passthrough status for devices have resulted in the elimination of programs at hospitals that have chosen to no longer implant prosthetic devices.

Response: We share the concern that
beneficiaries should have access to
services covered under Medicare and believe that our payment policies under OPPS have consistently taken this

concern into account.

Comment: Some commenters indicated that the proposed payment rates for APCs 0081, 0107, 0108, 0222, 0229, 0385, and 0386 are inadequate and do not cover the cost of the device; therefore, they do not provide payment for the facility services. The commenters stated that hospitals have taken a loss on these services for several years and cannot continue to provide the services at a loss. The commenters developed alternative cost estimates using external data and urged CMS to use these data
rather than its claims data as the basis for developing median costs.

Response: As stated, for devicedependent APC in general, we have not used external data to adjust any median costs for CY 2005 OPPS. Instead, we set
the medians for these APCs at the greater of the median cost for CY 2005 derived using claims data or 95 percent of the CY 2004 OPPS adjusted payment median. Beginning in CY 2005, we will also require that the claims containing codes assigned to these APCs also contain a code for an appropriate device for the claim to be paid, so that in CY 2007 we will have correctly coded claims to help us in setting the payment weights.

Comment: Some commenters stated that the proposed payment for cryoablation of the prostate (CPT code 55873) is insufficient to cover the cost for the procedure. They further stated
that CMS should factor in external data that shows hospital costs to exceed $9,000, eliminate or adjust claims for APC 0674 in which the charges for


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cryoablation probes are less than $7500, or discard all claims containing CPT
code 55873 in the Medicare database for which the total hospital costs are less than $6500. The commenters indicated
that access to this care would be impeded if the APC payment is not sufficient to pay the full cost of the
service. The commenters believed that APC payment at less than full costs for the service will give rise to the use of alternative means of treating prostate
cancer. These commenters indicated that the charges hospitals report on their
claims are seldom sufficient to result in the full cost of all of the supplies and equipment needed to furnish the
service. The commenters also indicated that when the only claims used to set
the median are those for which the code for cryoablation probes is found, the median increases significantly.

Response: The codes for the cryoablation probes used in providing cryoablation of the prostate were billed in CY 2003 because they were paid as pass-through payments in CY 2003. Therefore, they exist in the claims data and we used them to screen for correctly coded claims in setting the median cost
for APC 0674. The median derived using the subset of claims is $6,562.69, a decrease of 5.10 percent from the CY 2004 final payment median for APC0674. Therefore, based on the devicedependent APC policy that we are finalizing for CY 2005, we set the median for APC 0674 at 95 percent of the CY 2004 final payment median, or $6,569.33.

Comment: Some commenters supported the increased payment for cochlear implant services (CPT code 69930 in APC 0259) even though they indicated that they believe that the Medicare payment continues to be insufficient to fully pay for the costs of both the device and the procedure. One commenter provided an independent statistical analysis of the Medicare
claims data and invoice data that the commenter indicated revealed hospital costs of $27,954 based on a screen of
claims that contained HCPCS code
L8614 and asked that CMS set the payment at that amount. Some commenters stated that they believe that some hospitals are using the cochlear implant codes to code implantation of less expensive implantable hearing aid
devices. The commenter also asked that CMS provide education and develop a guidance document for hospitals specific to coding and billing for cochlear implant surgery.

Response: The device code for cochlear implants remained active in
CY 2003 because Medicare uses it for purposes other than the OPPS. In developing the CY 2005 OPPS medians,
we created a subset of claims for implantation of cochlear implants that
contained the device code and
calculated the median for the CY 2005 OPPS using only those correctly coded claims. This yielded a median cost of $26,006.74, which we used as the basis for the APC 0259 payment weight for the CY 2005 OPPS. While it is certainly possible that some hospitals are misusing the code for cochlear implantation to bill for less costly implanted hearing aid devices, we have no way to make that determination using the claims data. However, we note that hospitals billing in such a manner do so at their own risk of being found
to have filed a false claim. We will consider what general education
activities we need to undertake with regard to all devices but we are disinclined to focus on specific devices
to the exclusion of others.

Comment: One commenter indicated that the proposed decrease in payment rates for APC 0039 (Level I Implantation of Neurostimulator) is not acceptable as it would not enable hospitals to cover the cost of the service. Moreover, the commenter stated that hospitals have failed to code and bill correctly for this
service and that there are no disincentives for incorrect coding and billing. The commenter further stated that the only diagnosis on the claims for APC 0039 should be that for epilepsy
because that is the fundamental reason for implanting the device. However, according to the commenter,
examination of the claims for APC 0039 revealed that only 12 percent of those claims contained an epilespsy diagnosis; therefore, the remaining claims caused the median to incorrectly represent the implantation of the device for treatment of epilepsy. The
commenter recommended that CMS use
external data to ensure that the costs of the device and procedure are adequate to avoid discouraging hospitals from providing the care.

Response: As with other devicedependent APCs, the absence of device
codes on the claims for CY 2003 means
that we were unable to screen the claims to positively identify which claims
include the neurostimulator device
costs and we are not confident that screening only for the diagnosis of epilepsy will resolve the coding problem. Therefore, we have set the median for APC 0039 at 95 percent of the CY 2004 final adjusted payment
median.

Comment: Some commenters objected to the assignment of status indicator ‘‘ T ’’ to APC 0229 (Transcatheter Placement of Intravascular Stent) because they believe it should not be subject to the multiple procedure reduction due to its dependence on a device. They believed that the payment for the services is undervalued because it is typically done with other procedures and that it is further underpaid by the application of the multiple procedure reduction.

Response: We have not changed the
status indicator for APC 0229 because
the cost of the device for services in this APC is less than 50 percent of the total cost of the service. Therefore, the multiple procedure reduction of 50 percent does not result in the APC payment being less than the device cost. Moreover, there are efficiencies when multiple services are performed on the same day that we believe justify applying the multiple procedure
reduction to the services in this APC.

Comment: One commenter asked that CMS require hospitals to show the actual acquisition cost for devices on the bill using a UB92 value code and the
amount. The commenter recommended that where 50 percent or more of the APC is attributable to packaged device cost, CMS should obtain actual device
information and use it to determine if
APC cost calculations are reasonable.

Response: We do not believe the imposition of an additional reporting requirement would be effective. Such a requirement would be both burdensome and unlikely to provide the actual hospital acquisition cost because hospitals have the ability to reflect general rebates and discounts on a per
device basis.

Comment: One commenter asked that we make separate payments for CRT

– Ds (pacemaker-defibrillators) for which there was a new technology add-on payment under the IPPS for FY 2005, so that payment for this service under the
IPPS and the OPPS would be better aligned.

Response: CRT

– Ds were paid on a pass-through basis under the OPPS inCYs 2001 and 2002. Their OPPS passthrough status expired in CY 2003 and their component services were packaged into clinical APC 0107 (Insertion of Cardioverter-Defibrillator) and APC 0108 (Insertion/Replacement/Repair of Cardioverter-Defibrillator Leads) and. Accordingly, no separate additional payment is appropriate for these
devices.

After carefully reviewing the comments, considering the APC Panel recommendations and examining the claims data, we are adjusting the medians for device-dependent APCs based on comparison of the CY 2005
median costs and the CY 2004 final payment median costs. Specifically, we
decided to set the median costs for these


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APCs at the higher of the CY 2005
median cost from our claims data or 95 percent of the CY 2004 final adjusted median cost used to set the payment in CY 2004 rather than 90 percent of the CY final adjustment median cost as we proposed.

We believe that this adjustment methodology provides an appropriate transition to eventual use of all single bill claims data without adjustment, and that the methodology moves us towards the goal of using all single bill data without adjustment by CY 2007. It is a simple and easily understood methodology for adjusting median costs. Where reductions occur compared to CY 2004 OPPS, we believe that, under this methodology, the reductions will be sufficiently modest that providers will
be able to accommodate them without ceasing to furnish services that
Medicare beneficiaries need.

In addition, beginning in CY 2005, as proposed, we are requiring hospitals to bill all device-dependent procedures using the appropriate C-codes for the devices. We believe that this approach mitigates against the reduction of access to care while encouraging hospitals to bill correctly for the services they furnish. We intend this requirement to be the first step towards use of all available single bill claims data to establish medians for device-dependent APCs. Our goal is to use all single bills for device-dependent APCs in developing the CY 2007 OPPS, which we expect to base on data from claims
for services furnished in CY 2005. We further discuss our coding requirement in section III.C.4. of this preamble.

Table 18 below, which is sorted by APC, contains the CY 2004 OPPS payment medians, the CY 2005 OPPS final adjusted medians using single bill claims from January 1, 2003, through December 31, 2003), and the medians derived from the adjustment processes
discussed further below.

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We also note that as a result of ourinitial data analysis for devicedependent APCs, we proposed to make the following additional adjustments to specific device-dependent APCs for the reasons specified:

a. APC 0226: Implantation of Drug Infusion Reservoir

We proposed to remove APC 0226 (Implantation of Drug InfusionReservoir) from the list of devicedependent APCs and to use its unadjusted single bill median of $2,793.30 as the basis for the payment weight. CPT code 62360 (Implantation or replacement of device for intrathecal or epidural drug infusion, subcutaneous reservoir) is assigned to APC 0226. In CY 2002, when we packaged 75 percent
of the cost of the device into the payment for the procedure with which the device was billed to reduce the pro rata adjustment, we inadvertently packaged the cost of an implantable infusion pump (C1336 and C1337) rather than that of a drug reservoir. Our
data indicated that the reservoir used in performing CPT code 62360 costs considerably less than an implantable infusion pump, and we believe that the median cost for APC 0226 appropriately
reflects the relative cost of the service and the required device.

We did not receive any public comments on this proposal. Accordingly, we have removed APC 0226 from the device-dependent APC list and used its unadjusted single bill median of $2,541.43 as the basis for its CY 2005 relative payment weight.

b. APC 0048: Arthroscopy With
Prosthesis

In addition, we proposed to delete APC 0048 (Arthroplasty with Prosthesis) from the list of device-dependent APCs for CY 2005 and to not adjust the
median costs for this APC because we
believe that the CY 2005 median cost for
this APC as restructured is reasonable and appropriate. Based on our careful analysis of the CY 2003 claims data for this APC, we believe the difference
between the CY 2004 and CY 2005
median cost is attributable to the migration of certain high cost CPT codes (23470, 24361, 24363, 24366, 25441, 25442, 25446) from APC 0048 to new APC 0425 (Level II Arthroplasty with Prosthesis) and, as such, this change would not adversely limit beneficiary access to this important service. Therefore, we did not propose to apply a device-dependent adjustment to the
median cost for APC 0048.

We did not receive any public comments on this proposal. Accordingly, for CY 2005 we areremoving APC 0048 from the devicedependent list and are not adjusting the
median cost for this APC.

c. APC 0385: Level I Prosthetic Urological Procedures

We proposed to move CPT code 52282 (Cystourethroscopy, insert urethral stent), from APC 0385 (Level I Prosthetic Urological Procedure) and assign it to APC 0163 (Level IV Cystourethoscopy and other Genitourinary Procedures), for clinical homogeneity. As titled, APC 0385 was intended for the assignment of certain urological procedures that require the use of prosthetics. However, CPT code 52282 requires the use of a stent rather than a urological prosthetic. Therefore, we proposed to reassign CPT code
52282 to APC 0163. Recalculation of the
median cost for APC 0385 after reassigning CPT code 52282 yielded a
median cost for that APC that is
consistent with its CY 2004 median payment. Thus, we did not propose a device-dependent adjustment for the
median cost for APC 0385.

Comment: Some commenters asked that we keep CPT code 52282 in APC
0385 and not move it to APC 0163.
These commenters believed that placement of CPT code 52282 in APC
0385 would maintain clinical coherence and resource similarity. They also supported the APC Panel ’ s recommendation that all three codes, which we proposed to move from APC 0385 to 0386 (CPT codes 53440, 53444, and 54416) should be retained in APC 0385 for CY 2005 OPPS because they are
dissimilar in terms of the nature of the surgical procedure and the sophistication of the prosthetic urology device that is implanted.

Response: We have moved CPT code
52282 from APC 0385 to APC 0163
because we believe that this service is more compatible from a clinical and resource perspective with the other cystourethroscopy services assigned to APC 0163 than with services assigned to
APC 0385. We have retained CPT codes
53440 and 53444 to APC 0385 because the median costs for these procedures in
the CY 2003 data that were used to develop this final rule with comment period indicate that the resources required for them are similar to those for CPT code 54400, which is also assigned to APC 0385. However, we have placed
CPT code 54416 in APC 0386 because
the median cost shows that the
resources are much more like those for services assigned to APC 0386 than the
median costs for services in APC 0385. CPT code 54416 requires removal and replacement of a non-inflatable or inflatable prosthesis and our resource data demonstrate relatively high costs for the service, most typically associated with replacement of an inflatable prosthesis. Thus, the nature of the services are sufficiently similar such that CPT code 54416 is clinically
coherent with the services in APC 0386.

d. APC 0119: Implantation of Infusion
Device and APC 0115: Cannula/Access
Device Procedures

We proposed to remove CPT code 49419 (Insert abdom cath for chemo tx), from APC 0119 (Implantation of Infusion Pump) and assign it to APC 0115 (Cannula/Access Device Procedures) to achieve clinical homogeneity within APC 0115. Unlike all the other codes assigned to APC 0115, HCPCS code 49419 does not require the use of an infusion pump. Rather, this code is used when inserting an intraperitoneal cannula or catheter with a subcutaneous reservoir. Thus, we believed it would be more appropriate clinically to reassign HCPCS code 49419 to APC 0115 that includes procedures that require the use of devices similar to that required for CPT code 49419.

Comment: One commenter
recommended that we move the CPT code 36260 (Insertion of infusion pump) and CPT code 36563 (Insert tunneled cv catheter) from APC 0119 to APC 0227 (Implantation of Drug Infusion Device), which is also for implantation of infusion pumps. The commenter
indicated that all of these services are for implantation of infusion pumps and that the external cost data on the pumps
are not dissimilar.

Response: We have not combined the codes in these APCs because they are not clinically homogeneous. Specifically, the services in APC 0227 are for the insertion of spinal infusion pumps and those in APC 0119 are for insertion of vascular infusion pumps.
We see no clinical reason to move these codes as suggested by the commenter.

2. Treatment of Specified APCs

a. APC 0315: Level II Implantation of
Neurostimulator

As stated in the August 16, 2004 proposed rule, CPT code 61866 (Implant neurostim arrays) was brought to our attention by means of an application for a new device category for transitional pass-through payment for the Kinetra  neurostimulator, a dual channel neurostimulator currently approved and
used for Parkinson ’ s disease. We denied approval for a new device category for
the Kinetra  neurostimulator because the device is described by a previously


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existing category, C1767 (Generator, neurostimulator (implantable)).

The manufacturer of Kinetra  stated
that the AMA created CPT 61886 to accommodate implantation of the

Kinetra  neurostimulator and that no services other than implantation of the

Kinetra  are currently described by that CPT code. Even though the Kinetra  did not receive full FDA pre-market approval until December 2003, hospital outpatient claims were reported in CYs 2002 and 2003 (289 total claims in CY 2003) for this device. The manufacturer
asserted that these claims must have
been miscoded because the Kinetra  could not have been used in performing CPT code 61886 before obtaining FDA approval in December 2003. Therefore,
the manufacturer did not believe that
the device cost could be included in the median for CPT code 61886, which has been assigned to APC 0222.

In examining the CY 2003 claims for CPT code 61866, we noted that many of
the claims also contained codes for procedures related to treatment with cranial nerve stimulators, including the placement of electrodes for cranial nerve stimulation. The placement of the
cranial neurostimulator electrodes used
with the Kinetra  is currently an inpatient rather than outpatient procedure. Therefore, we would not expect patients being prepared for
cranial nerve stimulation to also have a

Kinetra  neurostimulator for deep brain
stimulation for Parkinson ’ s disease placed at the same time. Thus, it seems possible that the CY 2003 claims for CPT code 61886, generally, are incorrectly coded and do not include
the dual chamber neurostimulator in the reported charges.

Prior to the availability of the dual
channel neurostimulator Kinetra  for bilateral deep brain stimulation, it is our understanding that patients diagnosed
with Parkinson ’ s disease had two single channel neurostimulator generators implanted in the same operative session. According to the Kinetra  manufacturer, this device will now replace the insertion of two single
channel neurostimulators and the cost
of the Kinetra  is equivalent to the cost of two single channel neurostimulators. Given this information, we examined
our CY 2003 claims data and found that 69 single claims were reported for patients with a diagnosis of Parkinson ’ s disease and that 2 single channel neurostimulator pulse generators (CPT code 61885) were implanted on the same day. The median cost for these claims was $20,631. Other than the device costs, we believe the procedural costs for the insertion of two single
channel devices or one dual channel device should be roughly comparable. Therefore, we proposed to establish a new APC 0315, Level II Implantation of Neurostimulator, for CPT code 61886, and assign it a median cost of $20,631. Because of our concern that hospitals correctly code OPPS claims for CPT code 61886, we also proposed to require device coding (C-code) for APC 0315 to improve the coding on all claims for placement of a dual channel cranial neurostimulator pulse generator or receiver, as we proposed for APC 0039, Implantation of Neurostimulator, for placement of a single channel cranial neurostimulator, discussed in section III. C. of this preamble.

Comment: We received one comment in support of our proposed median cost
for APC 0315.

Response: We appreciate the

commenter ’ s support. Accordingly, we are finalizing our CY 2005 proposal to assign CPT code 61886 to APC 0315 with an assigned median cost of $20,633.70.

b. APC 0651: Complex Interstitial Radiation Application

For CY 2003, APC 0651 included CPT code 77778 (Complex interstitial radiation source application). This code was not to be used for prostate brachytherapy because we created HCPCS codes G0256 (Prostate brachytherapy with palladium sources) and G0261 (Prostate brachytherapy with iodine sources) in which we packaged the cost for placement of needles or catheters and sources into a single APC payment for each G code (67 FR 66779).
When we calculated the median from all single bills for CPT code 77778 from CY 2003 data for CY 2005 OPPS, we found that 73 percent of the single bills for this APC were for prostate brachytherapy and, therefore, were miscoded. The median for APC 0651, using all single bills, including those miscoded for prostate brachytherapy, was $2,641.67. When we removed the incorrectly coded claims for prostate brachytherapy,
which we believed to contain brachytherapy sources and which are paid separately for CY 2004 and will be paid separately for CY 2005, the median was $1,491.39. This is the amount that we proposed for payment for CY 2005 OPPS for APC 0651. The proposed median was considerably higher than the median cost of $589.72 for CY 2004 OPPS (from CY 2002 claims data).

We believed that this adjusted median was appropriate for APC 0651 when used for prostate brachytherapy because the service described by CPT code 77778 is only one of several components of the payment for the service in its entirety. When it is used for prostate brachytherapy, hospitals should also bill for the placement of the needles and catheters using CPT code 55859 and should also bill the brachytherapy sources separately. Hospitals will be paid for both APCs and for the cost of

sources.

Section 621(b)(1) of Pub. L. 108

– 173 specifically provides separate payment

in CY 2005 ‘‘ * * * for a device of brachytherapy, consisting of a seed or seeds (or radioactive source) * * * ’’ at the hospital ’ s charge adjusted to cost. We proposed to package the cost of
other services such as the needles or catheters into the payment for the brachytherapy APCs and not to pay on the same basis as the brachytherapy
sources because the law does not
include needles and catheters in its definition of brachytherapy sources to be paid on charges adjusted to cost.

We also recognized that APC 0651 is used for brachytherapy services other than prostate brachytherapy and that, in some of those cases, there are no other separate procedure codes for placement
of the needles or catheters. In those cases, which are represented in the
claims we used to calculate the proposed median (once the miscoded claims for prostate brachytherapy were excluded), we believed that the charges for CPT code 77778 may have included the placement of the needles or catheters and, therefore, the median may be somewhat overstated when used as the basis for payment for prostate brachytherapy and the other forms of brachytherapy that have procedure codes for placement of needles and catheters. Similarly, we believed that the median may be understated when used to pay for brachytherapy services for which there are no separate HCPCS codes for needle or catheter placement.
We considered whether to create new G codes for the placement of catheters and needles for the brachytherapy services for which such codes do not exist, but we were concerned that doing so might create unneeded complexity and that the existing data may not support establishing medians for the new codes. We requested comments on how to
address those services for which there are currently no HCPCS codes for placement of needles and catheters for brachytherapy applications.

Comment: Commenters indicated that the absence of codes for brachytherapy needle/catheter placement is problematic because hospitals are forced to use existing ‘‘ not otherwise
classified ’’ codes that makes claims analysis difficult for ratesetting. They
asked that we create three ‘‘ not otherwise classified ’’ HCPCS codes for the placement of needles and catheters


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for application of brachytherapy sources other than prostate brachytherapy so that they can be billed and paid appropriately. Specifically, they asked (1) that CMS create a code for 1

– 4 needles/catheters and place it in APC 1507; (2) that CMS create a code for placment of 5

– 10 catheters and place it in New Technology APC 1513; and (3)
that CMS create a new code for more than 10 needles/catheters and place it in New Technology APC 1522.

Response: We have not created
HCPCS codes for needle/catheter placement for CY 2005 as suggested by
the commenters. We do not believe that the requested new, ‘‘ not otherwise
classified ’’ codes would be any more meaningful for OPPS ratesetting than the existing ‘‘ not otherwise classified ’’
codes.

As explained in the November 30, 2001 final rule (66 FR 59897), new Technology APCs are for complete procedures, not devices or drugs or biologicals, but such items may be part of the cost of the complete service. To qualify for OPPS payment under the new technology APCs, a service must meet the following criteria:

• Service must be a complete service.

• Service must not be described by an existing HCPCS code or combination of
codes.

• Service could not have been adequately represented in the claims
data used for the most current annual OPPS payment update.

• Service does not qualify for additional payment under pass-through payment provisions.

• Service cannot reasonably be placed in an existing APC group that is appropriate in terms of clinical
characteristics and resource costs.

• Service is medically reasonable and

necessary.

• Service falls within scope of
Medicare benefits.

Processes and requirements for passthrough and new technology service APC applications are provided in more
detail on the OPPS Web site: http:// www.cms.hhs.gov/poviders/hopps/.

Implicit in the criteria is that there exists a meaningful description of the services for which new technology status is being requested. We do not
believe the ‘‘ not otherwise classified ’’ codes proposed by the commenters are sufficiently specific that they could satisfy the criteria. We believe that CPT already contains sufficient ‘‘ not otherwise classified ’’ codes for the coding of placement of brachytherapy
needles and catheters in locations of the body for which specific codes do not now exist. We are unable to specify the

‘‘ not otherwise classified ’’ codes that should be used because the ‘‘ not otherwise classified ’’ codes are generally categorized by body part or function, and, therefore, the code that would apply depends on the location in the body in which the needles and catheters are being placed. For example, placement of needles or catheters in a
shoulder muscle would be coded differently from placement of needles or catheters in the pancreas.

Comment: Some commenters supported the proposed payment for APC 0651 (Complex Interstitial Radiation Source Application). They indicated that, together with separate payment for the brachytherapy sources and the placement of needles and catheters, the proposed payment would provide adequate payment for these important services.

Response: We appreciate the

commenters ’ support. Further discussion regarding the payment for APC 0651 is provided at III.C.2.b.

Comment: One commenter indicated that there are many supplies and
devices other than needles and catheters that are used in providing brachytherapy and asked that CMS develop codes for them so that they
could be billed as coded items because such coding would facilitate capture of all the costs associated with performing
the services.

Response: We have not created new device codes for the supplies and equipment that the commenter requested because such items are
incidental to the service. We do not believe that such incidental items justify development of new device codes.

In this final rule with comment period, the median cost for APC 0651 is $1,283.44, resulting in a national unadjusted payment rate of $1,248.93.
There were fewer CY 2003 final action
claims for this service in the database
that was constructed from the most current claims data and used to develop the weights and median costs for this final rule with comment period. Twelve hospitals whose claims had appeared in
the CY 2003 claims data used to calculate the proposed weights and
median costs withdrew their claims before we pulled the data for this final rule with comment period. This may have been because they realized that they had billed incorrectly and withdrew the claims to bill correctly.

Our examination of the claims data
set for this final rule with comment period reveals that the claims largely appear to not include charges for brachytherapy sources. The unadjusted
median cost that resulted from use of these claims is $1,283.44, a 117 percent
increase over the median cost for CY 2004 for this APC. As we noted previously, the median should reflect accurately the appropriate claims for the
APC. We have no reason to believe that this median is flawed. Therefore, we
have used it as the basis for the CY 2005 OPPS unadjusted payment rate of $1,248.93.

c. APC 0659: Hyperbaric Oxygen Therapy

In the August 16, 2004 proposed rule, we stated that over the past year, we have received a number of questions about billing and payment for HCPCS code C1300 (Hyperbaric oxygen under pressure, full body chamber, per 30 minute interval). In light of these issues, we carefully examined the CY 2003 single procedure claims data that we proposed to use to calculate the CY
2005 median for APC services. Based on our examination of single procedure
claims filed for HCPCS code C1300 in CY 2003, we believe that the claims for
these services were either miscoded or the therapy was aborted before its completion. The claims that we examined reflected a pattern that is inconsistent with the clinical delivery of this service. Hyperbaric oxygen therapy (HBOT) is prescribed for clinical conditions such as promoting the healing of chronic wounds. It is typically prescribed on average for 90 minutes and, therefore, you would expect hospitals to bill multiple units of HBOT to achieve full body hyperbaric oxygen therapy. In addition to the therapeutic time spent at full hyperbaric oxygen pressure, treatment involves additional time for achieving full pressure (descent), providing air breaks to prevent neurological and other complications from occurring during the course of treatment, and returning the patient to atmospheric pressure (ascent).
Our examination of the claims data revealed that providers who billed multiple units of C1300 reported a consistent charge for each ‘‘ 30 minute ’’ unit. Conversely, providers who billed only a single unit of C1300, suggesting either a miscoded or aborted service, reported a charge that was 3 to 4 times greater than the per ‘‘ 30 minute ’’ unit reported by providers billing multiple
units of HCPCS code C1300. While it appears that many of the single procedure HBOT claims that we examined represented billing for a full 90 to 120 minutes of HBOT (including ascent, descent, and air break time), they were improperly billed as 1 unit
rather than as 3 or 4 units of HBOT. Consequently, this type of incorrect coding would result in an inappropriately high per 30 minute
median cost for HBOT or a median cost


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for HBOT of $177.96 derived using single service claims and ‘‘ pseudo ’’ single service claims. This is a significant issue because HBOT is the only procedure assigned to APC 0659.

Our initial analysis of the HBOT
claims data further revealed that about 40 percent of all HBOT claims included packaged costs. To confirm our belief that these packaged costs were not associated with HBOT, we examined the other major payable procedures billed in conjunction with HBOT. As a result, we identified billed services such as drug
administration and wound debridement that we would typically expect to have associated packaged services. We also looked at the magnitude of packaged costs in our single bills and found the majority of these costs were small, less than $30, and concentrated in revenue codes 25X, Pharmacy, and 27X, Medical/Surgical Supplies.

As a result of these coding anomalies, we proposed to calculate a ‘‘ 30 minute ’’ median cost for APC 0659, using a total of 30,736 claims containing multiple units or multiple occurrences of HBOT, about 97 percent of all HBOT claims. Based on our finding, we proposed to exclude claims with only one unit of
HBOT. We estimated costs on these claims using the respiratory therapy cost
center CCR when one was available. Otherwise we used the hospital ’ s overall CCR. Using this proposed methodology, the proposed median cost per unit of C1300 was $82.91. Based on hospitals ’ charges on correctly coded claims, we
believe this estimate is much more accurate for 30 minutes of HBOT. Thus, we proposed a median cost for APC 0659 of $82.91 for CY 2005.

We received many public comments on this proposal.

Comment: Overall, commenters expressed concern about the proposed reduction in payment for HBOT. There also was great consistency in the
comments. Almost all the commenters cited a recent research report by The Lewin Group (Lewin) that examined our methodology for calculating a payment
rate for APC 0659 and offered us several alternatives for identifying a median for
HBOT. In their evaluation of our proposed change for calculating a median for HBOT, The Lewin Group ultimately concluded that, while our proposed use of claims with multiple
units of C1300 in lieu of the clams with a single unit of C1300 was appropriate for calculating the median cost, we used an inappropriate cost-to-charge ratio to estimate costs from charges on those multiple unit claims.

Lewin surveyed the majority of hospitals billing Medicare for HBOT, requesting specific pages from each hospital ’ s cost report to determine where HBOT services are reported and
the associated CCR. Lewin received completed responses from 120 hospitals, a 30 percent response rate. The majority of responding hospitals, 63 percent, frequently broke out the costs of hyperbaric/wound care in a subscripted cost center on their cost report. In addition, 24 percent included their costs in the respiratory therapy cost center, and the remainder included their costs in disparate cost centers including emergency room and physical therapy. For those hospitals reporting separate line-items for hyperbaric/ wound care, Lewin used CMS claims
data to estimate a median CCR of 0.400 as compared with the median CCR for respiratory therapy of 0.248. Lewin also sought to establish the generalizability of their sample findings by demonstrating that responding hospitals were geographically diverse and that the respiratory therapy CCR for the responding hospitals was comparable to
that observed in the claims data. Finally, Lewin used their survey findings to estimate a proportional difference in CCRs between respiratorytherapy and the observed, hyperbaricrelated CCRs of 1.411 and, applying this adjustment to the CMS claims data, they calculated a payment rate of $118.21.

Practically all commenters offered four possible alternatives to our proposed methodology. First, commenters suggested that CMS leave
HBOT reimbursement at its CY 2004 level until CMS can accurately estimate costs and charges for HBOT. Second, commenters suggested that CMS apply The Lewin Group methodology in estimating median cost. Third, commenters suggested that CMS adopt The Lewin Group ’ s estimated median of $118.21 per 30 minutes. With regard to this specific recommendation, several commenters stated that they thought that the $118 rate was appropriate, and one commenter believed a rate of $120 or greater would be acceptable. Finally, commenters suggested that CMS default
to the overall CCR of 0.47 in lieu of using the respiratory therapy CCR.

Response: We agree with the commenters that The Lewin Group analysis provides sufficient evidence
that the CCR for HBOT is not reflected solely in the respiratory therapy cost center. With regard to the first recommended alternative, we do not believe it is appropriate to maintain the CY 2004 HBOT payment rate for CY 2005. We have clearly demonstrated that the single procedure claims are inappropriate for calculating a median cost, and the submitted research did not dispute our median calculation methodology. We cannot undertake the
recommended second alternative and replicate The Lewin Group ’ s methodology because the hyperbaric/wound care cost report cost center lineitems are neither standard nor nonstandard cost centers. We presume that these line-items for hyperbaric/wound care are subscripted cost centers that are ultimately rolled-up in to a standard cost center on the electronic cost report data. Without the specific subscriptedinformation, we cannot calculate a costto-charge ratio specific to HBOT.

We also do not believe it is appropriate to adopt the $118.21 estimate made by Lewin using its survey results and our data, the third
recommended alternative. The Lewin survey indicates diversity among hospitals in the subscripted location of reported hyperbaric oxygen costs on the cost report. In addition, the $118.21 is based on an adjustment to the CCR that assumes all nonresponding hospitals report their costs in the hospital-specific hyperbaric oxygen-related cost centers, even though roughly one-fourth of hospitals in the Lewin sample were demonstrated to report costs in the respiratory therapy cost center and 13 percent reported costs in other cost
centers. The submitted research further indicates fairly substantial variation in the CCRs for the responding hospitals in the HBOT-related cost centers. In light of this, we agree to adopt the last recommended alternative, which is to calculate the median using the overall CCR. As several commenters noted, defaulting to the hospital ’ s overall CCR is standard OPPS policy when an appropriate cost center cannot be assigned to a revenue code. We estimate an overall, hospital-weighted, median CCR for all hospitals of 0.33 and a hospital-weighted, median CCR for respiratory therapy for all hospitals of 0.27. Using the overall CCR to estimate costs from charges associated with HCPCS code C1300, we calculated a median cost of $93.26 using 38,505
claims in the final rule data. We used
this median to set the final CY 2005 payment for APC 0659.

Comment: One commenter conducted an internal study of 11 member hospitals and reported a median total cost of $126.42. The study findings acknowledged that we found billing anomalies in the claims with single units, but noted that our proposed approach will have unintended financial consequences. The commenter requested that we review our claims
data to ensure HBOT rates that reflect the full cost of providing HBOT

services.


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Response: As discussed above, we agree that the proposed cost for HBOT was too low because it relied solely on the respiratory therapy CCR. However, based on the volume and consistency of claims for HBOT, we still believe that the claims data are correct. As already discussed, we will base payment for HBOT on a median calculated using the overall hospital CCR. Further, the purpose of OPPS is not to pay the full cost of a service for any given hospital, but rather to proportionally redistribute
total OPPS dollars in a manner that
reflects relative resource use. APC payment rates are based on the median cost of a group of services, or in this case, one service, to achieve the averaging effect of a prospective payment system and are not intended to reimburse the full cost to a specific hospital. The costs for these 11 member hospitals may fall above the median cost for all hospitals billing HBOT.

Comment: One commenter reviewed CMS claims with multiple units and found an overall average of 15 units of HBOT per claim. This commenter
recommended that CMS review a sample of medical records.

Response: We expect that this finding
is the result of outlier claims and unit coding errors. In our analyses of HBOT claims for the proposed rule, we found that the vast majority of claims, 93 percent, were for 3 to 5 units of service. Further, The Lewin Group analysis reviewed above did not dispute the appropriateness of using claims with multiple units for calculating a median cost. As discussed above, we believe that the appropriate concern in estimating a median cost for HBOT is the disparity in charging and cost reporting practices among hospitals and not with the claims themselves, a finding that mitigates the need for
medical record review.

Comment: One commenter
recommended that CMS continue to compile claims data on HBOT and refer
this issue to the APC Panel before making changes.

Response: By using claims with multiple units, we believe that we have ample claims data. However, the APC Panel is an official public forum designed to consider and advise us on APC-related issues. If this is a particular concern to the public, the public is invited to present this concern at the next APC Panel meeting.

After carefully reviewing all comments received, we are basing payment for HBOT on a median calculated using the overall hospital CCR rather than the respiratory therapy CCR as proposed. As discussed above, using the overall CCR to estimate costs from charges associated with HCPCS code C1300, we calculated a final CY 2005 payment for APC 0659 of $90.75.

3. Other APC Median Cost Issues

a. APC 0312 Radioelement Applications

Comment: Some commenters stated that the payment rate for APC 0312 (Radioelement Applications) is inadequate to pay for the staff, supplies and appliances that are needed to
furnish the service. The commenters further stated that the APC payment
should be similar to that for APC 0651.

Response: The median for APC 0312 has increased significantly from the CY 2004 payment median of $199.90 to the
CY 2005 OPPS final rule with comment period median of $326.65. Moreover, we were able to use 28 percent of the total
claims in CY 2003 for this APC to set
the median cost for the CY 2005 OPPS. Therefore, we see no reason to adjust
the median for this APC to the level of

APC 0651.

b. Percutaneous Radiofrequency
Ablation of Liver Tumors

Comment: Some commenters objected to the proposal to move CPT code 47382 (Percutaneous radiofrequency of liver tumors), from a New Technology APC to clinical APC 0423 (Level II Percutaneous Abdominal and Biliary Procedures) because they believe that there is an inadequate number of claims on which to base median costs, and that median costs are inappropriately low
because device costs associated with performing this procedure are underreported. They indicated that the proposed reimbursement does not cover the costs of the single use catheters used in performing the service. The
commenters stated that revenue codes
should be used to screen for appropriately coded claims. They contended that if CMS cannot complete this analysis for this final rule with comment period, CMS should retain CPT code 47382 in a new technology APC at the CY 2004 payment rate until more representative cost data are available. They argued that this latter approach is consistent with how CMS has handled APC payments for PET
services since CY 2001. The
commenters also recommended that CPT codes 76362 (CT guidance for and monitoring of visceral tissue ablation), 76394 (Magnetic resonance imaging for and monitoring of visceral tissue ablation), and 76940 (Ultrasound guidance for and monitoring of visceral tissue ablation) be added to the bypass list so that more single bills could be
used to set the median for CPT code

47382. Response: We believe that the claims volume is sufficiently adequate to
remove CPT code 47382 from New Technology APC 1557 and place it in a clinical APC. Moreover, the median cost, $1,801.84, derived from the CY 2003 claims data for APC 0423, is very close to the payment that was made for New Technology APC 1557 of $1,850. Therefore, as proposed, this service will be placed in clinical APC 0423 and paid
based on its historic claims data for
services furnished for the CY 2005

OPPS.

In addition, the three CPT codes that
the commenter recommended we add to the bypass list do not meet the CY 2005
criteria for inclusion on the list. However, we will consider their
inclusion when we next review items
for inclusion in CY 2006.

c. Heparin Coated Stents

Comment: One commenter objected to

CMS ’ policy that heparin coated stents should be coded under C1874 (Stent, coated/cov w/del sys) because the
commenter believes that to do so will adversely affect the median cost of the stents. The commenter urged us to create a unique C-code if HCPCS codes G0290 and G0291, which are used for placement of drug eluting stents, are
retired.

Response: HCPCS codes G0290 and
G0291 will remain active codes for CY
2005 and we see no reason to create
another C-code at this time. We will
determine whether there is a need for
another C-code to differentiate between
stents if and when HCPCS codes G0290
and G0291 are retired.

d. Aqueous Drainage Assist Device

Comment: One commenter asked that
CMS ensure that the costs of code C1783 (Aqueous drainage assist device) are packaged with the costs of the procedures with which the device is most commonly billed. The commenter stated that codes C1783, L8610 and L8612 would usually be billed with procedures that are in APC 0673.

Response: We package the costs of
devices that are billed on the same claim with the procedural APCs into the cost of the procedural APC. Thus, the
extent to which the costs of these devices are packaged into the median cost for the procedure depends upon the extent to which the hospitals include the charges for the devices on the claim, with or without including the code for the device. To the extent that hospitals included charges for these devices on the claims for the procedures in which they were used, those charges would be converted to costs and packaged into the median cost for the procedure.


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4. Required Use of C-Codes for Devices

An important ancillary issue in regard to using hospital outpatient claims data
to calculate median costs for a devicedependent APC is whether to require that hospitals bill the HCPCS codes for the devices that are required for use in the provision of the services in these
APCs. We deleted HCPCS codes for devices in CY 2003 because hospitals objected to the complexity of this coding, and we believed that hospitals would charge for the devices in appropriate revenue codes. Our review of the claims data does not support this belief. Hospitals do not appear to routinely include the charges for the devices they use when they bill for all
of the related services in the devicedependent APCs. Therefore, as discussed in the August 16, 2004 proposed rule, we proposed requiring hospitals to code devices for APCs to improve the quality of the claims data in support of our transition to the use of all single claims to establish payment
rates for those APCs. We made this proposal cautiously, as we realize that it imposes a burden on hospitals to code
the devices.

For the CY 2005 OPPS, we proposed to require coding of devices required for APCs for which we proposed to adjust
the median costs for the CY 2005 OPPS.
The APCs and the devices that were proposed for device coding were published in Table 20 of the August 16, 2004 proposed rule (69 FR 50497 through 50499). Specifically, if one device is shown for one APC, that
device would have to be billed on the
claim for a service in that APC or the claim would be returned to the provider
for correction. If more than one device is shown for one APC, the provider would be required to bill one of the
device codes shown on the same claim
with the service in that APC for the claim to be accepted.

We also proposed to require coding of C1900 (Left ventricular lead) required to perform the service described in APC 0418, Left Ventricular Lead, because the service cannot be done without the lead,
and because the device has been billed separately for pass-through payment in
CYs 2003 and 2004. We believe that continued coding of the device would not impose a burden on hospitals. Similarly, because of our concerns regarding the correct coding of claims for CPT code 61886 (Implant neurostim arrays), assigned to APC 0315 (discussed in greater detail in section III.C.2.a. of this preamble), we proposed to require device coding for APC 0315 (Level II Implantation of Neurostimulator) to improve the coding on claims for placement of a dual channel cranial neurostimulator pulse generator or receiver, just as we proposed to require device coding for APC 0039 (Implantation of Neurostimulator) for placement of a single channel cranial neurostimulator
as noted below.

We solicited comments on the proposed C-code requirements.

In addition, we announced in the proposed rule that we are considering expanding the device coding requirements in the future. We believed that, by requiring device coding for a small subset of device-dependent APCs each year, we would minimize the marginal annual coding burden on hospitals and begin to improve data for these APCs, which have consistently proven to be problematic. We believed coding of devices was essential if we were to improve the accuracy of claims data sufficiently to better calculate the
correct relative costs of devicedependent APCs in relation to the other services paid under the OPPS.

We asked that the public inform us of
the device codes that are essential to theprocedures contained in the devicedependent APCs listed in Table 20 of the proposed rule. The alphanumeric
HCPCS codes for devices that were
reactivated for CY 2004 OPPS can be
found on the CMS Web site at http:// www.cms.hhs.gov/providers under coding. They are in the section of alphanumeric codes that begin with the
initial letter ‘‘ C. ’’

We received a number of comments regarding our request.

Comment: In general, commenters supported a requirement for mandatory device coding for all devices, not only those for which CMS proposed mandatory reporting. However, they had different views regarding what the requirement should contain and how it
should be enforced. Some commenters asked that we require that all procedures for device-dependent APCs contain a C-code to identify the device used in the procedure. They indicated that they believed that this requirement is crucial to acquiring valid cost data for
these services. Some commenters were
concerned about the administrative burden that required C-coding imposes on hospitals and urged CMS to reassess the burden within 2 years if it imposes mandatory C-coding for devices. Other commenters urged CMS to implement a grace period of no less than 90 days after implementation of the CY 2005 OPPS to enable hospitals to be sure that they are prepared for device code edits. During this period, the commenters wanted intermediaries to accept the codes and not return incorrectly coded claims. The commenters indicated that
the edits should be included in this final rule with comment period so that hospitals can begin to work on them as soon as possible. Those commenters suggested that the device codes for which edits will not be implemented in CY 2005 should not be required until
CY 2006. The commenters indicated that both OCE and intermediary systems must be ready to handle this change,
and that no edits should be implemented if they are not and if providers have not had at least 30 days notice. Some commenters urged CMS to base any edits or list of required device codes on CPT codes, not APCs, because in some cases, not all codes in an APC require the same device. One commenter objected to the use of edits to return to providers claims that contain a procedure code that cannot be
done without a device but which
contain no device code. The commenter
indicated that CMS has been inconsistent in its policies governing coding of devices since the inception of the OPPS and should provide some greater period of stability in coding before it edits for the presence of the
device codes.

Response: We appreciate the comments, but continue to believe coding of devices is vital to enhancing the device-dependent APC claims data. Therefore, as proposed, effective for services provided on or after January 1, 2005, we will require hospitals to include device category codes on claims
when such devices are used in conjunction with procedures billed and paid for under the OPPS. While we are requiring use of these device codes for reporting all such devices effective January 1, 2005, we will not implement
the edits contained in Table 19 until April 1, 2005, to provide time for further review and for hospitals to prepare for them. The edits will not apply to claims that contain a procedure code reported with a modifier 73 or 74 to signify an interrupted procedure because we recognize that in those cases, the procedure might have been interrupted before the device was implanted.

We will apply the edits at the CPT/ HCPCS code level to be as precise as possible. Table 19 includes the edits that we expect to go into effect April 1,
2005. The table of edits and the definitions of the C-codes (Table 20 of this preamble) will be posted on the CMS Web site on the OPPS page. As noted on Table 19, there are some CPT
codes for which edits cannot be established, for example, because of the optional nature of the use of a device when performing the service. Although there is no official comment period


### 65762 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

associated with implementation of the edits, we welcome comments on the edits to be implemented on April 1, 2005, particularly from hospitals to whose claims the edits will apply and from medical specialties whose physicians use the devices in the procedures performed in hospital outpatient settings. Comments may be

sent to OutpatientPPS@cms.hhs.gov if possible, by December 1, 2004.

In the future, we will consider edits for additional procedure codes in other device-dependent APCs. We will post
all final edits on the CMS Web site with
an announcement of the calendar quarter in which we expect to implement them. We will also provide them in a Medlearn Matters article. Any future edits will be implemented as always as part of the quarterly OCE release. We intend to expand the editing of device-dependent procedure codes for appropriate device C-codes as expeditiously but also as carefully as possible. The next group of device procedures for which we will consider edits will include those procedures in
APCs for which we set the median cost at 95 percent of the CY 2004 payment
median but for which we did not propose edits in the August 16, 2004 proposed rule.

Comment: One commenter asked that CMS encourage manufacturers to put the applicable HCPCS device C-code on the device package and that CMS workwith FDA to expedite placement of Ccodes on device packages. The commenter also urged CMS to simplify
the C-codes to be consistent with the information routinely reported by physicians in operative reports. The commenter gave, as an example, the
seven device codes used with APC 0087 (Noncoronary Angioplasty or Atherectomy), all of which could be reported using only one code for

‘‘ transluminal catheter ’’ . The
commenter stated that such simplification would greatly improve
the likelihood that the device is coded on the claim because the description that distinguishes one of the seven codes from another is typically not documented in the hospital ’ s record and
is not information the coder would
know. Other commenters asked that CMS actively undertake a program designed to educate providers on how to bill for devices and how to set charges for high cost devices so that future updates to the OPPS will more accurately reflect the costs of these services. Some commenters urged CMS
to create and maintain a file on the CMS Web site that contains a complete
crosswalk of devices codes to CPT codes
in the device APCs. Some commenters asked that CMS provide a detailed
revenue code to device code crosswalk so that hospitals will promote more uniformity in billing for devices.

Response: We will carefully examine how we can facilitate correct coding of devices, including possible
communication with the FDA. We will
also consider the extent to which we can simplify the HCPCS codes for devices to facilitate straightforward coding. Finally, we will determine the extent to which we can improve provider education regarding correct coding for devices. However, we will not undertake any activity designed to advise hospitals on how to set charges for their services or to designate what revenue codes hospitals should use on a device-specific basis.

The edits that we created to ensure the coding of devices for the selected
APCs that are listed in Table 19 of this preamble are also available as an Excel file in the supporting documentation of this final rule with comment period that will be posted on the CMS Web site and
will also be contained in the transmittals for the January 2005 OPPS update and OCE release. Moreover, as described above, we will post any added edits for device coding on the OPPS page of the CMS Web site so that providers can have ready access to
them.

Comment: Some commenters asked that we add particular device and procedure combinations to the table of edits. Specifically, a commenter asked that we add APC 0259 (Cochlear Implant Surgery) as paired with device code L8614 (Cochlear implant), and APC 0040 paired with both device codes C1778 (Lead neurostimulator) and C1883 (Adapter/extension packing lead or neurostimulator lead). Another
commenter asked that we add code C1787 (Patient programmer, neurostimulator) to the required devices
for APC 0222. Another commenter
asked that the same device codes be required for the CPT codes in APC 0087 as we proposed to require for APC 0085
because the commenter believes that the
same devices are used in both APCs.
Other commenters asked that we include edits for other APCs, for example, APC 0385 (Level I Prosthetic Urological Procedures) and APC 0386 (Level I Prosthetic Urological Procedures).

Response: Except as discussed below, we have not added any APCs to the list that we proposed be edited for device codes at this time. Although our policy to require hospitals to code all devices is effective January 1, 2005, we will not implement edits until April 1, 2005. We will consider the comments regarding additional edits for later implementation. We believe that it is preferable to focus first on the APCs most affected and to add subsequent
edits after careful deliberation. In this manner we can minimize the potential for adverse effects on claims processing and hospitals ’ cash flow.

However, we have added one CPT
code to the list of codes that will be
edited for device codes. We inadvertently omitted a proposed edit for CPT code 33225 (Left ventricular pacing lead add-on), which we proposed to place in New technology APC 1525. This procedure uses the device code C1900 (Left ventricular lead), whose pass-through status expires in January 2005. We proposed thatwhen the lead is implanted as a standalone procedure using CPT code 33224 (Insert pacing lead and connect), we would edit for the presence of the
device code for the lead on the claim. However, we believe that it is also appropriate to edit for the presence of the lead on a claim for the add-on code, CPT code 33225, and that it should pose no additional burden on hospitals because hospitals have been required tobill the device code C1900 for passthrough payment since CY 2004.

Summary of provisions related to required use of C-codes for devices that we are making final beginning in CY

2005:

1. Hospitals are required to report device category codes on claims when such devices are used in conjunction with procedure(s) billed and paid for under the OPPS in order to improve the claims data used annually to update the OPPS payment rates.

2. Beginning April 1, 2005, the OCE
will include edits to ensure that certain procedure codes are accompanied by an associated device category code.

3. CMS will post the OCE edits that are to be implemented beginning April 1, 2005 on the CMS Web site to give hospitals and the provider community ample opportunity to review them and provide feedback prior to implementation.

4. Edits will apply at the CPT/HCPCS
code level rather than the APC level.

5. Edits will not apply when a procedure code is reported with a
modifier

¥ 73 or

¥ 74 to designate an incomplete procedure.

6. CMS will add edits as needed in future quarterly updates of the OCE to ensure that hospitals are reporting device category codes appropriately with associated procedure codes. CMS will post future device category and procedure code edits on the CMS Web site to give hospitals and the provider


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community ample opportunity for input prior to implementation.

**BILLING CODE 4120**

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**BILLING CODE 4120**

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5. Submission of External Data

In the August 16, 2004 proposed rule,

we stated that we would consider external data submitted with respect to any APC to the extent that such data enable us to verify or adjust claims data

where we are convinced that such an adjustment to the median cost is appropriate. Further, we stated that all comments and any data we use would be available for public inspection and commenters should not expect that any data furnished as part of the comment


### 65770 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

would be withheld from public inspection. We also stated that parties
who submit external data for devices should also submit a strategy that can be used to determine what part of the median cost represents the device to which the external data applies. We stated in the proposed rule that external data that are likely to be of optimal use should meet the following criteria:

• Represent a diverse group of hospitals both by location (for example, rural and urban) and by type (for example, community and teaching). We preferred that commenters identify each hospital, including location with city and State, nonprofit vs. for profit status, teaching vs. nonteaching status, and the percent of Medicare vs. non-Medicare patients receiving the service. A pseudo identifier could be used for the hospital
identification. Data should be submitted
both ‘‘ per hospital ’’ and in the aggregate.

• Identify the number of devices billed to Medicare by each hospital as well as any rebates or reductions for bulk purchase or similar discounts and identify the characteristics of providers to which any such price rebates or reductions apply.

• Identify all HCPCS codes with
which each item would be used.

• Identify the source of the data.

• Include both the charges and costs for each hospital for CY 2003.

Meeting the criteria would help enable us to compare our CY 2003
claims data to the submitted external data and help us determine whether the submitted data are representative of hospitals that submit claims under the

OPPS.

We noted in the proposed rule thatinformation containing beneficiaryspecific information (for example, medical records, and invoices with beneficiary identification on it) must be altered, if necessary, to remove any individually identifiable information,
such as information that identifies an individual, diagnoses, addresses, telephone numbers, attending physician, medical record number, and
Medicare or other insurance number. Moreover, individually identifiable beneficiary medical records, including progress notes, medical orders, test results, and consultation reports must not be submitted to us. Similarly, photocopies of checks from hospitals or
other documents that contain bank routing numbers must not be submitted

to us.

We received a number of public comments concerning the submission of
external data.

Comment: Some commenters supported use of claims data and strongly opposed use of data from external sources to set the OPPS payment rates. They believed that claims data more accurately reflects the costs hospitals incur to provide outpatient services. They strongly opposed use of external data because they believe that item specific adjustments will make OPPS unduly complex and result in unfair imbalances in payments. They believed that CMS
should remain committed to the principles of prospective payment and the use of the averaging process rather than seeking to pay actual cost for one element of costs (for example, new technology) at the expense of all other items, which would result after application of mandated budget neutrality adjustments. Conversely,
other commenters indicated that CMS should rely on external data in lieu of claims data for procedures that require high cost devices because the CMSmethodology of applying a cost-tocharge ratio to charges to acquire costs will always result in costs that are below the actual acquisition cost of the device and that, barring a significant change in CMS ’ cost finding process, external data are the only means by which valid cost data for high cost
devices can be introduced into the OPPS. Some commenters provided
external data on the devices of interest to them and some provided specific amounts calculated using external data, which they asked that we substitute for claims data in setting the weight for the
APC of interest to them.

Response: We have not applied
numbers from external data in our adjustments of median costs for the CY 2005 OPPS. While recognizing that external data aids in our general analysis of determining payment rates, we believe that generally such use of external data is not the optimal way to set payment rates for services in a relative weight system. As we discussed in section III.C.5. of this preamble, we believe that using external data has a significant potential for creating an unfair imbalance in a prospective payment system. However, we appreciate the efforts of some commenters in providing us with
external data.

Comment: Some commenters urged us
to use external data in the construction of APC rates and urged us to use confidential data for this purpose. Some
commenters are concerned about the criteria CMS proposed for external data and urged us to expand the use of
confidential external data to calculate future payment rates whenever such data are indicated and proven reliable
based on the data ’ s merits. The commenter did not suggest criteria for determining if confidential proprietary
external data are reliable.

Response: As we indicated in the August 16, 2004 proposed rule, all information sent in response to
comments will be made available to the public for review. We believe that all parties who are affected by the payment rates set under this system should have
access to the information on which the

rates are set.

Comment: One commenter indicated
that CMS should use external data for
all device APCs in which the device cost exceeds 5 percent of the total APC
cost because to do otherwise would unfairly benefit some categories of services compared to other categories of

services.

Response: We have not used external data to adjust any medians for the CY2005 OPPS. As discussed above, we applied the same adjustment rules to all
device medians.

After carefully reviewing all public comments received, we have decided not to use any external data to adjust the
median costs for the CY 2005 OPPS for
the reasons discussed above.

D. Calculation of Scaled OPPS Payment Weights

Using the median APC costs discussed previously, we calculated the relative payment weights for each APC
for CY 2005 shown in Addenda A and
B to this final rule with comment period. As in prior years, we scaled all the relative payment weights to APC 0601 (Mid-Level Clinic Visit) because it is one of the most frequently performed services in the hospital outpatient setting. We assigned APC 0601 a relative payment weight of 1.00 and divided the median cost for each APC by the median
cost for APC 0601 to derive the relative payment weight for each APC. Using CY 2003 data, the median cost for APC 0601 is $57.32 for CY 2005.

Section 1833(t)(9)(B) of the Act requires that APC reclassification and recalibration changes, wage index changes, and other adjustments be made in a manner that assures that aggregate payments under the OPPS for CY 2005 are neither greater than nor less than the aggregate payments that would have been made without the changes. To comply with this requirement concerning the APC changes, we compared aggregate payments using the CY 2004 relative weights to aggregate payments using the CY 2005 proposed relative weights. Based on this comparison, we proposed to make an adjustment to the weights for purposes of budget neutrality. The unscaled weights were adjusted by 0.984667135 for budget neutrality. The CY 2005


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relative weights, which incorporate the recalibration adjustments explained in this section, are listed in Addendum A
and Addendum B to this final rule with comment period.

Section 1833(t)(14)(H) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, states that ‘‘ Additional expenditures resulting from this paragraph shall not be taken into account in establishing the conversion factor, weighting and other adjustment
factors for 2004 and 2005 under paragraph (9) but shall be taken into account for subsequent years. ’’ Section 1833(t)(14) provides the payment rates for certain specified covered outpatient drugs. Therefore, the incremental cost of those specified covered outpatient drugs (as discussed in section II.J. of this final rule with comment period) is excluded from the budget neutrality calculations but the base median cost of the drugs
continues to be a factor in the calculation of budget neutrality. Accordingly, we calculated median costs for the specified covered outpatient drugs to which this section applies and used those medians and the frequencies in the calculation of the scaler for budget neutrality.

Under section 1833(t)(16)(C) of the Act, as added by section 621(b)(1) of
Pub. L. 108

– 173, payment for devices of brachytherapy consisting of a seed or seeds (or radioactive source) is to be made at charges adjusted to cost for services furnished on or after January 1, 2004 and before January 1, 2006. As we stated in our January 6, 2004 interim final rule, charges for the brachytherapy sources will not be used in determining outlier payments and payments for
these items will be excluded from budget neutrality calculations, consistent with our practice under the OPPS for items paid at cost. (We provide a discussion of brachytherapy payment issues at section VII.G. of this final rule with comment period.)

IV. Payment Changes for Devices

A. Pass-Through Payments for Devices

1. Expiration of Transitional PassThrough Payments for Certain Devices

Section 1833(t)(6)(B)(iii) of the Act requires that, under the OPPS, a category of devices be eligible for transitional pass-through payments for at least 2, but not more than 3 years. This period begins with the first date on which a transitional pass-through payment is made for any medical device that is described by the category. In our November 7, 2003 final rule with comment period (68 FR 63437), we specified six device categories currently in effect that would cease to be eligible for pass-through payment effective January 1, 2005.

The device category codes became effective April 1, 2001, under theprovisions of the BIPA. Prior to passthrough device categories, we paid for pass-through devices under the OPPS on a brand-specific basis. All of the initial category codes that were established as of April 1, 2001, have expired; 95 categories expired after CY 2002 and 2 categories expired after CY 2003. All of the categories listed in Table 21, along with their expected expiration dates, were created since we published the criteria and process for creating additional device categories for pass-through payment on November 2, 2001 (66 FR 55850 through 55857). We based the expiration dates for the category codes listed in that table on the date on which a category was first eligible for pass-through payment.

There are six categories for devicesthat would have been eligible for passthrough payments for at least 2 years as of December 31, 2004. In our November 7, 2003 final rule with comment period, we finalized the December 31, 2004 expiration dates for these six categories. (Three other categories listed in Table 21, as proposed, C1814, C1818, and C1819, will expire on December 31, 2005.) As indicated in Table 21, as proposed, the six categories that will expire as of December 31, 2004, are: C1783, C1884, C1888, C1900, C2614, and C2632. Each category includes devices for which pass-through payment
was first made under the OPPS in CY

2002 or CY 2003.

In the November 1, 2002 final rule, we established a policy for payment of devices included in pass-through categories that are due to expire (67 FR 66763). For CY 2003, we packaged the costs of the devices no longer eligible for pass-through payments into the costs of the procedures with which the
devices were billed in CY 2001. There were few exceptions to this established policy (brachytherapy sources for other than prostate brachytherapy, which is now also separately paid in accordance with section 621(b)(2) of Pub. L. 108

– 173). For CY 2004, we continued to apply this policy for categories that expired on January 1, 2004.

2. Proposed and Final Policy for CY

2005

In the August 16, 2004 proposed rule, we proposed to continue to base the expiration date for a device category onthe earliest effective date of passthrough payment status of the devices that populate the category. This basis for determining the expiration date of a device category is the same as that used
in CY 2003 and CY 2004.

We also proposed that payment for the devices that populate the six categories that would cease to be eligible for pass-through payment after December 31, 2004, would be made as part of the payment for the APCs with which they are billed. This methodology for packaging device cost is consistent with the packaging methodology that we
describe in section III. of this final rule with comment period. To accomplish this, we proposed to package the costs of devices that would no longer be eligible for pass-through payment in CY
2005 into the HCPCS codes with which
the devices are billed.

In the proposed rule, we noted that category C1819 (Tissue localization excision device) was added subsequent to our proposed rule for CY 2004. We
first announced the start date and the proposed expiration date for this device category in our November 7, 2003 final rule with comment period. Therefore, we proposed to maintain the category ’ s December 31, 2005 expiration date. We invited specific comments on the proposed expiration date for category

C1819.

We received a number of public comments on our proposals relating tothe expiration dates for transition passthrough devices.

Comment: One commenter noted that C1884 (Embolization protection system) is used for carotid stenting. The
commenter recommended that CMS continue paying pass-through payment for C1884 until carotid stenting APC
costs are established.

Response: Carotid stenting procedures are on the inpatient list for the OPPS and, therefore, are not paid by Medicare when performed in the outpatient hospital setting. To the extent that
C1884 has been used with other procedures payable under the OPPS, we packaged the costs of C1884 into the APCs that include the procedures with
which this device code was billed.

Comment: One commenter objected to our proposal to remove HCPCS code C1884 from pass-through status, effective January 1, 2005. The
commenter believed that the service had been unfairly subjected to the device offset because it was totally new and did not replace any existing device. The commenter claimed that, for CY 2003, code C1884 inappropriately received very little pass-through payment when
the device was used. The commenter indicated that CMS subsequently recognized its error by changing the offset policy for CY 2004, the second year of the device ’ s pass-through status,


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and, therefore should give the device a third year of pass-through payment.

Response: We disagree with the commenter that we inappropriately made little pass-through payments for C1884. The commenter is correct that, for CY 2004, following notice and comment rulemaking, we changed the policy for applying offsets. As of January 1, 2004, we apply offsets, on a device-category-specific basis, when we
determine that an APC contains costs
associated with the device. Under the policy in effect prior to CY 2004, we applied offsets when a device category was billed with any of the APCs on our device offset list. This policy change affected all the categories in effect in CYs 2003 and 2004, including C1884. Some of these categories went into effectas of January 1, 2003; thus their passthrough status will expire after exactly 2 years. Other categories began receiving pass-through payments in the middle of 2002. Therefore, their categories will have more than 2, but less than 3 years with pass-through payment. We would not be able to extend pass-through payment for the second group of categories for an additional year, because they would then have greater than the statutory maximum of 3 years of pass-through payment.

We see no reason to adopt the

commenter ’ s suggestions to only change the status for code C1884. In CY 2003, C1884, like all our other pass-through categories, was subject to the same offset policy. Therefore, we are not changing the expiration date of device category

C1884.

This device will cease to be a passthrough device effective January 1, 2005, at which time it will have had 2 years of pass-through payment.

We note that the expiration dates of C1884 and most other categories (the exception being C1819, discussed below) that were in effect at the time of our final rule for CY 2004 (68 FR 63437) were made final in that same rule, having been proposed in the proposed rule for CY 2004. We are now merely reaffirming that policy.

A few commenters supported our proposal to remove the six device categories from further pass-through payments and our proposal to package
the costs of these devices into the cost of the APCs with which they are billed.
The commenters indicated that incorporating these technologies into the APC system will minimize special payment incentives to use certain
devices over others.

Comment: One commenter was concerned that pass-through payment for a brachytherapy-related solution(C2632, Brachytherapy solution, Iodine125, per mCi) would expire from passthrough payment after December 31, 2004, under our proposal, and requested a third year of pass-through payment,until December 31, 2005, because passthrough payment has been made only since January 1, 2003. The commenter claimed that this category still qualifies for another year of pass-through payment.

Response: Because the brachytherapy solution in question, C2632, is a brachytherapy source separately payable under the OPPS according to section 621(b) of Pub. L. 108

– 173, it will continue to receive cost-based payment as of January 1, 2005, based on those statutory provisions, rather than on the pass-through payment provisions.
Section VII.G. of this final rule with comment period explains those provisions and includes code C2632 for cost-based payment in CY 2005. As indicated, in regard to other comments concerning expired categories, this brachytherapy device will have had 2 years of pass-through status on January 1, 2005. Our policy is that pass-through devices are removed from pass-through status as soon as permitted under the statute. Therefore, this device will cease to be a pass-through device effective January 1, 2005, at which time it will have had 2 years of pass-through payment.

Comment: A few commenters were concerned that pass-through payment for C2614 (Probe, percutaneous lumbar diskectomy) in APC 0220 (Level I NerveProcedures) would expire from passthrough payment after December 31, 2004, under our proposal, and requested that CMS continue to pay for this device category separately on a pass-through
basis. The commenters were under the impression that the methodology used
to determine whether or not a device category would continue to be eligible for payment in CY 2005 was if it
showed ‘‘ that there were no close or
identifiable costs associated with the devices relating to the respective APCs that are normally billed with them. ’’

One commenter indicated that the payment for APC 0220 is not sufficient to cover the cost of the high end disposable RF lumbar probe coded
under C2614. The commenter was also concerned that this device, which is used in performing CPT code 62287 (Percutaneous diskectomy), and which costs $1,150, will cease to be eligible for pass-through payments effective January
2005. The commenter stated that the
device has increased effectiveness and reduced recovery time for patients but unless CMS increases the payment for APC 0220 for which we proposed to pay $996.69, hospitals will be forced to cease using it in 2005. The commenter urged that CMS continue pass-through payment for C2614 until such time as the payment rate for APC 0220 is adequate to cover the cost of the probe.

Response: The commenters are incorrect in their understanding of our criteria for proposing to expire device categories. We proposed to expire C2614 because it has received pass-through payment for at least 2 years, which is also the basis for our proposal to expire the other five device categories listed for expiration in CY 2005 in our proposed
rule. A device with no close or
identifiable costs associated with the devices relating to the respective APCs that are normally billed with them is actually a factor in determining whether to apply an offset, which would reduce the pass-through payment amount, as explained in the August 16, 2004 proposed rule (69 FR 50501). As indicated, similar to other responses in regard to other comments concerning other categories due to expire, this disc decompression device will have had 2 years of pass-through status on January 1, 2005. Our policy is that pass-through devices are removed from pass-through status as soon as permitted under the statute. Therefore, this device will cease to be a pass-through device effective January 1, 2005, at which time it will have had 2 years of pass-through payment.

We have considered the commenter ’ s concern regarding placement of code C2614, the code for a device that is used in performing CPT code 62287, in APC
0220 and find that the resource costs for CPT code 62287 may be more appropriate for APC 0221 (Level II Nerve Procedures). Therefore, we have reassigned CPT code 62287 to APC 0221, for which the CY 2005 payment rate is $1,635.87.

Comment: One commenter recommended that CMS continue to pay for C2614 as a pass-through device category until CMS determines how the procedure, percutaneous lumbar diskectomy, is coded for determination of accurate APC cost weighting.

Response: As explained previously, we packaged costs of the C-code devices
into the APCs that include the procedures with which the device codes were billed. We are packaging the costs
related to code C2614 in this manner.

Comment: One commenter, a device manufacturer, recommended that CMSextend the expiration date for passthrough payment of C1819 (Tissue localization excision device) until December 31, 2006, instead of ending pass-through payment after CY 2005.
The commenter claimed that CMS will have only a partial year of data for the


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CY 2006 year, unless it extends the datethat the category is effective for passthrough payment. This commenter claimed that the proposed payment for APC 0028, in which therapeutic breast cancer procedures, CPT codes 19125 and 19160, are placed, increased by only $100 and does not represent any

device codes. The commenter asserted

that CMS needs to collect data over 2 years and increase payment for APC 0028 to at least $1,345 starting in CY 2007. The commenter also pointed out that two categories set to expire after December 31, 2005, C1814 (Retinal tamonade device, silicone oil) and C1818 (Integrated keratoprosthesis), would be paid as pass-through devices several months longer than C1819, resulting in a greater amount of data for ratesetting than will be available for

C1819.

Response: We believe it is premature to make any conclusions and recommendations concerning the payment rate for APC 0028 for CY 2006or CY 2007. Presumably, after the passthrough period ends, the device costs of category code C1819 will be included in
the median costs of APC 0028 if the device is billed with procedures that are included in that APC. We reiterate that, as with other categories due to expire,

this tissue localization device will have had 2 years of pass-through status onJanuary 1, 2006. Our policy is that passthrough devices are removed from passthrough status as soon as permitted under the statute. Therefore, this device will cease to be a pass-through device effective January 1, 2006.

In this final rule with comment period, we are finalizing the proposed expiration dates for device categories as specified in the proposed rule, as

indicated in Table 21 below.

B. Provisions for Reducing Transitional Pass-Through Payments to Offset Costs Packaged into APC Groups

1. Background

In the November 30, 2001 final rule, we explained the methodology we used to estimate the portion of each APC rate that could reasonably be attributed to
the cost of the associated devices that are eligible for pass-through payments (66 FR 59904). Beginning with the implementation of the CY 2002 OPPS update (April 1, 2002), we deducted from the pass-through payments for the
identified devices an amount that reflected the portion of the APC payment amount that we determined
was associated with the cost of the device, as required by section 1833(t)(6)(D)(ii) of the Act. In the November 1, 2002 final rule, we published the applicable offset amounts for CY 2003 (67 FR 66801).

For the CY 2002 and CY 2003 OPPS updates, to estimate the portion of each APC rate that could reasonably be
attributed to the cost of an associatedpass-through device eligible for passthrough payment, we used claims data from the period used for recalibration of the APC rates. Using those claims, we calculated a median cost for every APC without packaging the costs of associated C-codes for device categories
that were billed with the APC. We then calculated a median cost for every APC
with the costs of the associated device category C-codes that were billed with the APC packaged into the median. Comparing the median APC cost without device packaging to the median APC cost including device packaging enabled us to determine the percentage
of the median APC cost that isattributable to the associated passthrough devices. By applying those percentages to the APC payment rates, we determined the applicable amount to be deducted from the pass-through payment, the ‘‘ offset ’’ amount. We created an offset list comprised of any
APC for which the device cost was at least 1 percent of the APC ’ s cost.

As first discussed in our November 1, 2002 final rule (67 FR 66801) the offset list that we publish each year is a list
of offset amounts associated with those
APCs with identified offset amounts developed using the methodology described above. As a rule, we do not know in advance which procedures and APCs may be billed with new categories. Therefore, an offset amount is applied only when a new device category is billed with an APC appearing on the offset list. The list of potential offsets for CY 2004 is currently published on the CMS Web site: http:/ /www.cms.hhs.gov, as ‘‘ Device-Related Portions of Ambulatory Payment
Classification Costs for 2004. ’’

For CY 2004, we modified our policyfor applying offsets to device passthrough payments. Specifically, we indicated that we would apply an offset to a new device category only when we
could determine that an APC contains
costs associated with the device. We continued our existing methodology for determining the offset amount,
described above. We were able to use this methodology to establish the device
offset amounts for CY 2004 becauseproviders reported device codes (Ccodes) on the CY 2002 claims used for CY 2004 OPPS. However, for the CY 2005 update to the OPPS, we proposed
to use CY 2003 claims that do not include device coding. (Section III. of this final rule with comment period
contains a fuller discussion of our proposed and final requirement for use


### 65774 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

of C-codes for CY 2005.) In the CY 2004 OPPS update, we reviewed the devicecategories eligible for continuing passthrough payment in CY 2004 to
determine whether the costs associated with the device categories are packaged into the existing APCs. Based on our review of the data for the categories existing in CY 2004, we determined that
there were no close or identifiable costs associated with the devices relating to the respective APCs that are normally billed with them. Therefore, for those device categories, we set the offset to $0
for CY 2004.

2. Proposed and Final Policy for CY

2005

As we proposed in the August 16, 2004 proposed rule, in this final rule with comment period for CY 2005, we are continuing to review each new device category on a case-by-case basis
as we did in CY 2004 to determine
whether device costs associated with the new category are packaged into the existing APC structure. We are setting the offsets to $0 for the currently established categories that would continue for pass-through payment into CY 2005. If, during CY 2005, we create a new device category and determine
that our data contain identifiable costs associated with the devices in any APC, we will adjust the APC payment if the offset is greater than $0. If we determine that device offsets greater than $0 are appropriate for any new category that we create during CY 2005, we will
announce the offset amounts in the program transmittal that announces the
new category.

Further, as we proposed, in this final rule with comment period for CY 2005, we are using the device percentages (portion of the APC median cost attributable to the packaged device) that we developed for potential offsets in CY 2004 and apply these percentages to the CY 2005 payment amounts to obtain CY 2005 offset amounts, in cases where we determine that an offset is appropriate. As proposed, we are using the device percentage developed for CY 2004 because, as noted above, for the CY 2005 update to the OPPS, we are using CY
2003 claims that do not include device codes. Therefore, we are not easily able to determine the device portions of
APCs for CY 2003 claims data. We have posted the list of device-dependent APCs and their respective device portions on the CMS Web site: http:// www.cms.hhs.gov for CY 2004 We will update the device portions as a percentage of final CY 2005 APC payments and post these on the CMS
Web site. We did not receive any public comments on our proposed policy for reducing transitional pass-through payments to offset costs packaged into APC groups.

C. Criteria for Establishing New PassThrough Device Categories

Comment: Several commenters from the medical device community asked
that CMS revise the criteria underwhich it evaluates applications for passthrough status for new device categories. The commenters specifically requested that CMS eliminate the current requirement that items that are included in new pass-through device categories must be surgically inserted or implanted through a surgically created incision. The commenters expressed concern that the current requirement may prevent access to innovative and less invasive technologies, particularly in the areas of gynecologic, urologic, colorectal and gastrointestinal procedures. These commenters asked that CMS change the surgical insertionor implantation criterion to allow passthrough payment for potential new device categories that include items introduced into the human body through a natural orifice, as well as through a surgically created incision.

Several of the commenters
recommended that CMS allow the creation of a new pass-through category for items implanted or inserted through a natural orifice, as long as the other existing criteria are met. The
commenters do not believe that such an expansion of the criteria would significantly increase the amount spent on pass-through device categories and asked that CMS implement this change in January 2005. A few commenters predicted that this modification would result in expenditures of less than one quarter of the total amount available for pass-through payments. A few
commenters further asked that CMS allow new categories, even if the name or terminology associated with the requested category resembles an expired category, even if that entails modifying the description of the expired category.
One commenter claimed that manufacturers of technologies that are implanted through a surgically created opening have two options for incremental payment: (1) Pass-through payment; and (2) new technology APC, and that those not requiring a surgical incision have only one option for additional payment (the new technology APC).

Response: We share the views of the commenters about the importance of ensuring access for Medicare beneficiaries to new technologies that offer substantial clinical improvement
in the treatment of their medical conditions. We also recognize that, since the initial implementation of the OPPS, there have been beneficial changes in the methods by which some
conditions are treated. These are issues that the agency takes very seriously andconsiders in the context of both passthrough device categories and payment for new, complete procedures through assignment to either a new technology APC or an existing clinical APC.

We note that other payment
mechanisms exist within the OPPS for complete procedures that use new technology. These other payment mechanisms (establishment of a new code, where appropriate, and assignment to either a new technology APC or to a clinical APC) are already available, and do not require the implantation of a device through a surgical incision.

We are also interested in hearing the views of other parties and receiving
additional information on these issues. While we appreciate and welcome
additional comments on these issues from the medical device makers, we are also interested in hearing the views of Medicare beneficiaries, of the hospitals that are paid under the OPPS and of physicians and other practitioners who attend to patients in the hospital outpatient setting. For that reason, we are soliciting additional comments on this topic within the 60-day comment period for this final rule with comment period. (See the **ADDRESSES** section of this preamble for information on submitting comments. When submitting comments on this issue, please include the caption ‘‘ Device Categories ’’ at the beginning of your comment.) In framing their comments, commenters are asked to consider the following questions:

1. The comments discussed above
refer to devices introduced into the body through natural orifices. We are seeking comments on whether this
includes orifices that are either naturally or surgically created, as in the case of ostomies? If you believe this includes only natural orifices, why do you distinguish between natural and surgically created orifices?

2. How would you define ‘‘ new, ’’ with respect to time and to predecessor technology? What additional criteria or characteristics do you believe distinguish ‘‘ new ’’ devices that are surgically introduced through an existing orifice from older technology that also is inserted through an orifice?

3. What characteristics do you consider to distinguish a device that might be eligible for a pass-through category even if inserted through an


### 65775 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

existing orifice from materials and supplies such as sutures, clips or customized surgical kits that are used incident to a service or procedure?

4. Are there differences with respect to instruments that are seen as supplies or equipment for open procedures when those same instruments are passed through an orifice using a scope?

Concerning the request that we allow new categories for new devices by modifying the descriptors of existing categories, we note there are systems difficulties with changing a descriptor of an existing HCPCS code, such as payment considerations of claims prior
to when a modification would be made. Moreover, both hospitals and
manufacturers have informed us in the past that coding changes have led to confusion on the part of hospital coders. Modifying established device category C-codes would only exacerbate any such coding confusion. Therefore, we note that we are not inclined to change the descriptors of existing C-codes at this

time.

Comment: One commenter
recommended that CMS revise the cost significant criterion for establishing new device categories for pass-through payment. The commenter stated that
medical devices are sometimes used as part of procedures that are secondary to a primary procedure, and in these cases the cost significance threshold of at least 25 percent of the APC rate associated with the services performed with the device should be adjusted downward to reflect the lower APC payment made for the secondary service. The commenter provided as an example those cases when the secondary procedure would be subject to the multiple procedure discount, thus lowering the APC payment associated with the procedure by 50 percent. The commenter indicated that this scenario happens infrequently.

Response: We disagree that our cost significance criterion for a proposed new device category for pass-through payment requires revision or adjustment. The criterion commented on requires that the estimated average reasonable cost of devices in a proposed new device category exceeds 25 percent of the applicable APC payment amount
for the service associated with the device category (67 FR 66785). Very few new device category applications are denied for pass-through payment because they do not meet this cost criterion. If the proposed category of
devices can be billed with more than one APC, we generally use the lowest APC payment rate applicable for use
with the nominated device when we test against this cost criterion, thus increasing the probability the device will pass the cost significance criterion. We do not believe any further adjustment is needed for this cost

criterion.

Therefore, we are not making any additional changes to our policy for CY

2005.

V. Payment Changes for Drugs, Biologicals, Radiopharmaceutical Agents, and Blood and Blood Products

A. Transitional Pass-Through Payment for Additional Costs of Drugs and Biologicals

1. Background

Section 1833(t)(6) of the Act provides for temporary additional payments or

‘‘ transitional pass-through payments ’’ for certain drugs and biological agents. As originally enacted by the BBRA, this provision required the Secretary to make additional payments to hospitals for current orphan drugs, as designated under section 526 of the Federal Food, Drug, and Cosmetic Act (Pub. L. 107

– 186); current drugs and biological agents and brachytherapy used for the treatment of cancer; and current radiopharmaceutical drugs and biological products. For those drugs and biological agents referred to as

‘‘ current, ’’ the transitional pass-through payment began on the first date the hospital OPPS was implemented (before enactment of BIPA (Pub. L. 106

– 554), on December 21, 2000).

Transitional pass-through payments are also required for certain ‘‘ new ’’ drugs, devices and biological agents that were not being paid for as a hospital OPD service as of December 31, 1996,
and whose cost is ‘‘ not insignificant ’’ in relation to the OPPS payment for the procedures or services associated with the new drug, device, or biological.Under the statute, transitional passthrough payments can be made for at least 2 years but not more than 3 years.
In Addenda A and B to this final rule with comment period, pass-through drugs and biological agents are identified by status indicator ‘‘ G. ’’

The process to apply for transitional pass-through payment for eligible drugs and biological agents can be found on pages of our CMS Web site: http:// www.cms.hhs.gov. If we revise the application instructions in any way, we will post the revisions on our Web site and submit the changes to the Office of Management and Budget (OMB) for approval, as required under the Paperwork Reduction Act (PRA). Notification of new drugs and biological application processes is generally posted on the OPPS Web site at: http:/ /www.cms.hhs.gov/hopps.

2. Expiration in CY 2004 of PassThrough Status for Drugs and Biologicals

Section 1833(t)(6)(C)(i) of the Act specifies that the duration of transitional pass-through payments for drugs and biologicals must be no less than 2 years and no longer than 3 years. The drugs whose pass-through status will expire on December 31, 2004, meet that criterion. In the August 16, 2004 proposed rule, Table 22 listed the 13 drugs and biologicals for which we proposed that pass-through status would expire on December 31, 2004.

Comment: One commenter, a national hospital association, supported our proposal to remove these 13 drugs from the pass-through status on December 31,

2004.

Response: We appreciate the

commenters ’ support for our proposal.

For this final rule with comment period, in Table 22 below, we are specifying the drugs and biologicals for which pass-through status will expire on December 31, 2004. This listing is the same as that published in the proposed rule.


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3. Drugs and Biologicals With PassThrough Status in CY 2005

As we proposed in the August 16, 2004 proposed rule, we are continuing pass-through status for CY 2005 for 18 drugs and biologicals listed in Table 23 of this final rule with comment period. The APCs and HCPCS codes for drugsand biologicals that will have passthrough status in CY 2005 are assigned
status indicator ‘‘ G ’’ in Addendum A and Addendum B, respectively, to this final rule with comment period.

Section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-through eligible drugs (assuming that no pro rata reduction in pass-through payment is necessary) as the amount determined under section 1842(o) of the Act. Section 303(c) of Pub. L. 108

– 173 amended Title XVIII of the Act by adding new section 1847A. This new
section establishes the use of the average sales price (ASP) methodology for payment for drugs and biologicals described in section 1842(o)(1)(C) of the Act furnished on or after January 1, 2005. Therefore, as we proposed in the August 16, 2004 proposed rule, in CY 2005, we will pay under the OPPS for drugs and biologicals with pass-through status consistent with the provisions of section 1842(o) of the Act as amended by Pub. L. 108

– 173 at a rate that is equivalent to the payment these drugs and biologicals will receive in the physician office setting, and established in accordance with the methodology described in the CY 2005 Physician Fee Schedule final rule published elsewhere
in this issue.

Section 1833(t)(6)(D)(i) of the Act also sets the amount of additional payment for pass-through eligible drugs and biologicals (the pass-through payment amount). The pass-through payment
amount is the difference between the
amount authorized under section 1842(o) of the Act, and the portion of the otherwise applicable fee schedule amount (that is, the APC payment rate) that the Secretary determines is associated with the drug or biological.

In this final rule with comment period, we are adopting as final our proposal to amend § 419.64 of the regulations to conform this section to these changes. Specifically, we are revising paragraph (d) to provide that, subject to any reduction determined
under § 419.62(b), the payment for a drug or biological with pass-through status equals the amount determined under section 1842(o) of the Act, minus the portion of the APC payment amount

that we determine is associated with the drug or biological.

As we explained in the August 16, 2004 proposed rule, we will make separate payment, beginning in CY 2005, for new drugs and biologicals

with an HCPCS code consistent with the provisions of section 1842(o) of the Act, as amended by Pub. L. 108

– 173, at a rate that is equivalent to the payment they would receive in a physician office setting, whether or not we have received a pass-through application for the item. Accordingly, beginning in CY 2005, the pass-through payment amount for new drugs and biologicals that we determine have pass-through status equals zero. That is, when we subtract the amount to be paid for pass-through drugs and biologicals under section 1842(o) of the Act, as amended by Pub. L. 108

– 173, from the portion of the otherwise applicable fee schedule amount, or the APC payment rate associated with the drug or biological that would be the amount paid for drugs and biologicals under section 1842(o) of the Act as


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amended by Pub. L. 108

– 173, the resulting difference is equal to zero.

We have used the second quarter ASP numbers for budget neutrality estimates, impact analysis, and for completing
Addenda A and B because those were
the most recent numbers available to us in time for publication. Changes in program payments due to quarterly updates of ASP for pass-through drugs are factored into our budget neutrality
estimates. To be consistent with the ASP-based payments that will be made when these drugs and biologicals are furnished in physician offices, we plan to make any appropriate adjustments to
the amounts shown in Addendum A and B if later quarter ASP submissions indicate that adjustments to the payment rate are necessary. We will announce such changes in our program instructions to implement quarterly releases and post any revisions to the
Addenda on the http://cms.hhs.gov Web

site.

In the proposed rule, we listed in Table 23 the drugs and biologicals for which we proposed pass-through status continuing in CY 2005. We also
included in Addendum B to the proposed rule the proposed CY 2005 rates for these pass-through drugs and biologicals based on data reported to CMS as of April 30, 2004. Since publication of the proposed rule on August 16, 2004, we have approved two additional drugs and biologicals for pass-through payment beginning on or after October 1, 2004. These products are Vidaza that has been assigned HCPCS code C9218 (Injection, azacitidine, per 1 mg) and Myfortic that has been assigned HCPCS code J7518 (Mycophenolic acid, oral, per 180 mg). ( See Change Request 3420, Transmittal 290 issued August 27, 2004.) In addition, three more products have been approved for pass-through status beginning or after January 1, 2005. They are Orthovice (HCPCS code C9220, Sodium Hyaluronate per 30 mg dose, for intra-articular injection), GraftJacket (Repair)(HCPCS code C9221, Acellular dermal tissue, matrix per 16cm2), and GraftJacket (Soft Tissue)(HCPCS code C9222, Decellularized Soft Tissue Scaffold, per 1 cc). These new eligible pass-through items are listed in Table 23
below.

We received several public comments on the proposed listing and paymentrates for drugs and biologicals for passthrough status continuing in CY 2005.

Comment: Two commenters stated that the proposed payment rate for HCPCS code C9203 (Injection, Perflexane lipid microsphere, per single use vial) is inappropriate and should be re-examined. They state that the methods used to price the drug are
inconsistent with the Pub. L. 108

– 173,which requires that payments for passthrough drugs be based at either 106 percent of reported average sales price (ASP) or 83 percent of the average wholesale price (AWP). Pricing at 95 percent of AWP for C9203 creates a competitive disadvantage for contrastagents no longer being paid as passthrough drugs.

One commenter suggests that CMS create a class of echocardiography contrast agents similar to the class established for anti-emetic drugs. This allows for a uniform methodology to price drugs and ensures patient access to all drugs in the same therapeutic class. An alternative proposal identified by the commenter, is to base the payment for Imagent on the method applicable to the pricing for all other specified covered outpatient drugs (that is, 83 percent of the AWP). Yet another proposal included either maintaining pass-through status for all contrastagents or removing Imagent from passthrough designation. Another
commenter recommended that the payment rate for all contrast agents be
based on median costs reflected in hospital outpatient claims data.

Response: Whereas separate payment was already being made for the contrast agents, either as a pass-through item or

as a ‘‘ specified covered outpatient drug, ’’ the 5HT3 anti-emetic products varied in their payment status, that is, some were packaged and some were paid separately. Although we are making final our proposal to pay separately for the 5HT3 anti-emetic products in CY 2005 in this final rule with comment period, the intent of this policy discussed in section IV.B.2. of this preamble is not to standardize payment for already separately payable drugs. For this reason, the policy does not apply to the echocardiography contrast agents. Therefore, we are not accepting the commenter ’ s recommendation that we create a class of echocardiography contrast agents
similar to the class for anti-emetic drugs.

Other proposals to: (1) Change the pass-through payment status for Imagent

to a ‘‘ specified covered outpatient drug, ’’ (2) extend the pass-through payment status for other contrast agents, or (3) use hospital claims data to establish payment for Imagent are not provided for under the statute. Imagent obtained pass-through status effective on April 1, 2003, and will remain a pass-through drug for CY 2005.

Since the ASP for contrast agents was not reported in time for use in developing the APC payments for this final rule with comment period, the CY 2005 first quarter APC payment for Imagent is based on 95 percent of the AWP reported as of May 1, 2003. As previously stated, we plan to update payments for pass-through drugs on a quarterly basis. Beginning in April 2005, payment for Imagent will be based on 106 percent of the reported ASP.

Comment: Several commenters wrote in support of our proposal to remove 13drugs and biologic agents from the passthrough table as the pass-through period for these items will end on January 1, 2005. Many commenters were very much in favor of our proposal for setting the pass-through payment portion ofdrugs. They wrote that zero passthrough payments ensures pass-though drugs and biologicals receive the full payment while at the same time eliminates the risk of a pro-rata reduction from occurring. Other commenters urged CMS to update ASP based payment rates for therapies with transitional pass-through status on a quarterly basis as is done for the drugs and biologicals administered in physician offices and paid for in accordance with the same statutory requirements as the drugs and biologicals with pass-through status under the OPPS. Otherwise, they argued, patient access to innovative drug and biological therapies in appropriate outpatient settings could be jeopardized.

Response: We appreciate the comments that support our decision to remove 13 drugs pass-through and biologicals for which pass-through status expires at the end of CY 2004 from the table. With respect to those drugs and biologicals that will continue to be on pass-through status or that may be granted pass-through status in CY 2005, we agree that our payment rules
and amounts should be consistent with the ASP-based payments that will be made when these drugs and biologicals are furnished in physician offices since payment for both settings is governed by the same provisions of the Act. Therefore, we plan to make any appropriate adjustments to the amounts
shown in Addendum A and B if later quarter ASP submissions indicate that adjustments to the payment rate are necessary. Changes in total payments due to quarterly updates of ASP for pass-through drugs are factored into our budget neutrality estimates.

In this final rule with comment period, we are not making any changes to the listing as a result of public
comments. Table 23 below lists the drugs and biologicals that will have pass-through status in CY 2005.
Addendum B of this final rule with


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comment period lists the final CY 2005 rates for these pass-through drugs and biologicals, which are assigned status indicator ‘‘ G ’’ based on data reported to CMS as of July 30, 2004.

**BILLING CODE 4120**

**– 01** 

**– P** 

**BILLING CODE 4120**

**– 01** 

**– C** 
B. Drugs, Biologicals, andRadiopharmaceuticals Without PassThrough Status

1. Background

Under the OPPS, we currently pay for drugs, biologicals including blood and blood products, and radiopharmaceuticals that do not have pass-through status in one of two ways: packaged payment and separate payment (individual APCs). We explained in the April 7, 2000 final rule (65 FR 18450) that we generally package the cost of drugs and radiopharmaceuticals into the APC payment rate for the procedure or treatment with which the products are usually furnished. Hospitals do not receive separate payment from Medicare for packaged items and supplies, and hospitals may not bill beneficiaries separately for any packaged items and supplies whose costs are recognized and paid for within the national OPPS payment rate for the associated


### 65779 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

procedure or service. (Program
Memorandum Transmittal A

– 01

– 133, issued on November 20, 2001, explains in greater detail the rules regarding separate payment for packaged services.)

Packaging costs into a single aggregate payment for a service, procedure, or episode of care is a fundamental principle that distinguishes a prospective payment system from a fee schedule. In general, packaging the costs of items and services into the payment for the primary procedure or service with which they are associated encourages hospital efficiencies and also enables hospitals to manage their resources with maximum flexibility. Notwithstanding our commitment to package as many costs as possible, we are aware that packaging payments for certain drugs, biologicals, and radiopharmaceuticals, especially those that are particularly expensive or rarely used, might result in insufficient payments to hospitals, which could adversely affect beneficiary access to medically necessary services. As discussed in the November 7, 2003 OPPS final rule with comment period (68 FR 63445), in CY 2004 we packaged payment for drugs, biologicals, and radiopharmaceuticals into the APCs with which they were billed if the median cost per day for the drug, biological, or radiopharmaceutical was less than $50. We established a separate APC payment for drugs, biologicals, and radiopharmaceuticals for which the median cost per day exceeded $50. Our rationale for establishing a $50
threshold was also discussed in the November 7, 2003 OPPS final rule with comment period (68 FR 63444 through 63447).

2. Criteria for Packaging Payment for Drugs, Biologicals, and Radiopharmaceuticals

Section 621(a)(2) of Pub. L. 108

– 173 amended section 1833(t)(16) of the Act by adding a new subparagraph (B) to require that the threshold for establishing separate APCs for drugs and biologicals be set at $50 per
administration for CYs 2005 and 2006. For CY 2005, we proposed to continue our policy of paying separately for drugs, biologicals, and radiopharmaceuticals whose median cost per day exceeds $50 and packaging the cost of drugs, biologicals, and radiopharmaceuticals whose median cost per day is less than $50 into the procedures with which they are billed.

We calculated the median cost per day using claims data from January 1, 2003, to December 31, 2003, for all drugs, biologicals, and radiopharmaceuticals that had an HCPCS code during this time period and were paid (via packaged or separate payment) under the OPPS. Items such as single indication orphan drugs, certain vaccines, and blood and blood products
were excluded from these calculations
and our treatment of these is discussed separately in sections V.F., E., and I., respectively, of this preamble. In order to calculate the median cost per day for drugs, biologicals, and radiopharmaceuticals to determine their packaging status in CY 2005, in the August 16, 2004 proposed rule, we proposed to use the methodology that
was described in detail in the CY 2004 OPPS proposed rule (68 FR 47996 through 47997) and finalized in the CY 2004 final rule with comment period (68 FR 63444 through 63447). We requested comments on the methodology we proposed to continue to use to determine the median cost per day of
these items.

We proposed to apply an exception to our packaging rule to one particular class of drugs, the injectible and oral
forms of anti-emetic treatments. The HCPCS codes to which our exception to the packaging rule for CY 2005 would apply were listed in Table 24 of the proposed rule (69 FR 50506). Our calculation of median cost per day for these products showed that, if we were to apply our packaging rule to these items, two of the injectible products would be packaged and one would be separately payable. In addition, two of the oral products would be separately payable and one would be packaged. Chemotherapy is very difficult for many patients to tolerate as the side effects are often debilitating. In order for
beneficiaries to achieve the maximum therapeutic benefit from chemotherapy and other therapies with side effects of nausea and vomiting, anti-emetic use is often an integral part of the treatment regimen. We wanted to ensure that our payment rules did not impede a beneficiary ’ s access to the particular
anti-emetic that is most effective for him or her as determined by the beneficiary and his or her physician. Therefore, we proposed to pay separately for all six injectible and oral forms of anti-emetic products in CY 2005.

We received several public comments on our proposed criteria for packaging payment for drugs, biologicals, and radiopharmaceuticals.

Comment: Many commenters supported our proposal to continue paying separately for drugs, biologicals, and radiopharmaceuticals whose median costs per day exceed $50. The commenters encouraged CMS to
continue to maintain the threshold at $50 after CY 2006 and recommended that any additional packaging threshold be examined carefully prior to future implementation so that beneficiary access to therapies will not be compromised as a result. One of the commenters, however, remained concerned about the packaging of other drugs and biologicals that fell below the $50 threshold and recommended that CMS make separate payments for drugs and biologicals that meet one or both of the following criteria: products with median cost per day of at least $50; or products that are eligible for separate payment in other outpatient sites of care and that received a separate payment previously under the OPPS. Another commenter expressed concern about the site of service incentives presented by some drugs being paid when furnished in the physicians ’ offices, while being packaged in the hospital setting. The commenter urged CMS to consider several options, including: Making separate payment for all drugs in CY 2005 that were separately paid under a previous OPPS payment rate and are separately paid for in physicians ’ offices; lowering the packaging threshold, for example, to $10 or $20; paying separately for all drugs for which the 106 percent of ASP payment amount in the physicians ’ office is at least $10; or establishing procedures to ensure that drugs used for similar indications (including off-label uses) are either all packaged or all paid separately. MedPAC, to the contrary, expressed concern about the use of an arbitrary cut-off of $50 per administration for separate payment of drugs. It stated that separate payment for certain more expensive drugs gave hospitals an incentive to use those drugs rather than those that are packaged, and the threshold also gave manufacturers an incentive to price their drugs to ensure that they are above $50 per
administration. MedPAC recommended that CMS should carefully analyze
alternative thresholds or the creation of larger bundles to allow for alternative approaches once the MMA provision requiring a $50 threshold expires in CY

2007.

Response: We appreciate the support of many commenters for our packaging policy for CY 2005. Section 621(a)(2) of
Pub. L. 108

– 173 requires that the threshold for establishing separate APCs for drugs and biologicals be set at $50 per administration for CYs 2005 and 2006. Therefore, we cannot change the
threshold amount for CY 2005 as some of the commenters have suggested. We
will take all of the commenters ’
recommendations into consideration as


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we work on our packaging proposal for

the CY 2007 OPPS.

However, in light of the commenters ’ concerns, we have decided to apply our equitable adjustment authority to establish several exceptions to the packaging threshold. We note that there were seven drugs and biologicals that we proposed to pay separately for in our proposed rule. However, when we recalculated their median costs per day using all of the hospital claims used for this final rule with comment period, their median costs per day were less than $50. We considered several payment options for these drugs and biologicals, such as packaging all of the items in CY 2005 or paying separately for all of them as we had proposed. However, after evaluating these drugs carefully, we decided to finalize the following payment policy for these

items:

• Drugs and biologicals that were paid separately in CY 2004 and have median costs per day less than $50 based on the hospital claims data being
used for the CY 2005 final rule with comment period would continue to receive separate payment in CY 2005.

• Those drugs and biologicals that are packaged in CY 2004 and that have median costs per day less than $50 based on the hospital claims data being
used for the CY 2005 final rule with comment period would remain packaged in CY 2005.

We believe these policies are the most equitable for this particular set of drugs given the fluctuations in median hospital cost relative to the $50
threshold and their status in CY 2004.

Table 24 lists the seven drugs and biologicals to which this policy will apply along with their CYs 2004 and 2005 payment status indicator. The four items that will be separately paid under this policy meet the definition of sole

source ‘‘ specified covered outpatient drugs ’’ and will be paid between 83 percent and 95 percent of their AWP in

CY 2005.

Comment: One commenter indicated that CMS was proposing a packaging policy that appeared to be different from the MMA requirement because a particular drug may be administered more than once per day. Therefore, the commenter added, a drug with a cost per administration of less than $50 that is administered more than once per day would qualify for separate payment
under CMS ’ proposed policy, but would not qualify for separate payment under the MMA requirement. The commenter indicated that the overall impact of this discrepancy is that there will be less packaging of drugs under the OPPS than Congress intended. The commenter was
unclear as to whether CMS had the authority to deviate from the statute in this way.

Response: We note that the hospital
claims data do not indicate whether there were multiple administrations of the same drug on a single day. Accordingly, we must assume that for all cases there was only a single administration of each drug per day. For packaging purposes, the median cost per day for each drug and biological must, therefore, serve as a proxy for its cost per administration. We will, however, continue to explore ways to distinguish single versus multiple drug
administrations for future OPPS updates.

Comment: Numerous commenters, including several manufacturers of pharmaceutical products, individual hospitals, and hospital associations, strongly supported CMS ’ proposed exception to exclude the six injectible
and oral forms of 5HT3 anti-emetic products from the packaging threshold and allow separate payment for all of them. One commenter indicated that

CMS ’ claims data used to determine median cost per day may not be a
reliable source for accurate median costs for these products and may understate their actual acquisition and related
costs. Another commenter stated that if the $50 threshold were applied to this class of drugs, it would have created an incentive for hospitals to choose therapies based on the opportunity for payment and not their appropriateness for each individual patient. The commenters agreed that this policy would help to ensure beneficiary access to the most appropriate anti-emetic drug
for cancer care. Several commenters also urged CMS to give careful thought to the effects of packaging on patient access to other types of drugs and biological therapies. However, one commenter indicated that, in recent months, the


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wholesale acquisition cost for one of the injectible anti-emetic drugs specified in the proposed exception was reduced by the manufacturer by seventy-three percent. If the proposed exception were applied to this drug, the payment would provide a margin of over one hundred
dollars for each dose administered and the outcome would be contrary to the stated intent of the proposal. The
commenter believed that CMS could not have anticipated the perverse payment
situation that would result under such an exception and recommended that
CMS reconsider and withdraw the exception to the packaging rule for this class of drugs.

Response: We appreciate the

commenters ’ support of our proposal to pay for the six 5HT3 products separately. We also recognize the concerns raised by a commenter informing us of the price reduction for one of the injectible products. However, we firmly believe that packaging some of the 5HT3 anti-emetic products and paying separately for others may negatively impact a beneficiary ’ s access to the particular anti-emetic that is most
effective for him or her as determined by the beneficiary and his or her physician. Therefore, we are finalizing our policy to pay separately for all six injectible and oral forms of anti-emetic products in CY 2005. We note that this policy only affects drugs of a particular class (in this case, 5HT3 anti-emetic products) that vary in their payment status (that is, packaged or paid separately), and our intent is not to generally standardize payment methodologies for separately payable drugs of the same class.

Comment: One commenter expressed operational concerns about billing for
oral anti-emetics associated with chemotherapy. The commenter indicated that it will be extremely difficult to bill for these drugs when the
same HCPCS codes are used for the drugs ’ use in nausea not associated with chemotherapy and requested that CMS consider establishing a separate HCPCS code or an edit that will only allow payment when a cancer diagnosis is on
the claim.

Response: The following HCPCS codes are those hospitals use to report the six 5HT3 products irrespective of their use: J1260 (Injection, Dolasetron, Mesylate, 10 mg), Q0180 (Dolasetron Mesylate, 100 mg, oral), J1626 (Injection, Graniestron Hydrochloride, 100 mcg), Q0166 (Granisetron Hydrochloride, 1 mg, oral), J2405 (Injection, Ondansetron Hydrochloride, per 1 mg), and Q0179 (Ondansetron Hydrochloride 8 mg, oral). The policy discussed above applies only to the packaging status of these products, not to their coverage status. Hospitals should continue billing in accordance with existing coverage rules.

Comment: We received comments on the packaging status of several drugs, biologicals, and radiopharmaceutical agents where the commenters indicated that the items were incorrectly packaged and should be paid separately as sole

source ‘‘ specified covered outpatient drugs. ’’ Specific items mentioned in the comments were HCPCS codes A9524, Q3010, J2790, and J7525. The
commenters asserted that the median cost per day calculations for these products were based on inaccurate and incomplete hospital claims data because the hospitals were not likely to have been charging appropriately for the products or billing the correct number
of units. One of the commenters also cited changes in HCPCS code descriptors and the lag time in hospitals updating their charge masters to reflect revised code descriptors as possible reasons for why the hospital claims data may be skewed and may not be reflective of hospitals ’ actual acquisition
costs. Another commenter asserted that since many of these drugs were packaged in CY 2003, the claims data did not capture the drugs ’ actual costs. Commenters urged CMS to review only
the ‘‘ correctly coded ’’ claims when determining median cost per day for these products, use external data to help determine appropriate payment rates, or pay for the drugs separately as sole

source ‘‘ specified covered outpatient drugs ’’ since these items meet that
definition. Another commenter requested that CMS retain the CY 2004 payments until there is enough data to accurately determine payment rates.

Response: We understand

commenters ’ concerns about the median cost per day for these particular items. To determine which claims for drugs, biologicals and radiopharmaceuticals

are ‘‘ correctly coded ’’ would require that we attempt to assess which claims
indicate that the number of units billed were or were not clinically reasonable. Given variations among patients with respect to the appropriate doses, the variety of indications with different dosing regimens for some agents, our lack of information about how many doses were administered on a given day, the possibility of off-label uses, and our desire not to question the clinical judgment of the prescribing providers on these issues, we do not believe that an approach that attempts to identify and use only ‘‘ correctly coded ’’ claims is feasible. The hospital claims database is the best and most complete source of data we have for establishing median hospital costs for the services and items paid for under the OPPS.

In section III.B. of this final rule with comment period, we discuss comments concerning our methodology for units trimming. It is possible that some other approaches to units trimming could increase the derived cost per day for some drugs but could also result in decreases for some. For others, it could result in no difference for the drug in relation to the $50 threshold. As a test, we applied several different unit trim approaches to one of the codes for
which we received comments and still did not achieve a median cost per day above $50. Nevertheless, we appreciate the thoughtful comments we have received on this topic and will consider the issue of units trimming in later development of our OPPS payment rates. For our final policy for CY 2005, however, we retain the methodology that we proposed. We will also encourage hospitals to carefully consider the descriptions of each HCPCS code when determining the number of units to bill for drugs, biologicals and radiopharmaceuticals. We will consider special efforts related to particular items. We would note, also, that the payment hospitals receive for a particular drug is based on the number of units billed. If a hospital underreports
the number of units administered to a patient due to a misunderstanding about the definition of the code, the hospital
will not receive the full amount to which it is entitled. Conversely, hospitals should not report more units than appropriate based on the coding description and the amount required to treat the patient.

3. Payment for Drugs, Biologicals, andRadiopharmaceuticals Without PassThrough Status That Are Not Packaged

a. Payment for Specified Covered Outpatient Drugs

Section 621(a)(1) of Pub. L. 108

– 173 amended section 1833(t) of the Act by adding a new subparagraph (14) that requires special classification of certain separately paid radiopharmaceutical agents and drugs or biologicals and mandates specific payments for these items. Under section 1833(t)(14)(B)(i), a

‘‘ specified covered outpatient drug ’’ is a covered outpatient drug, as defined in section 1927(k)(2) of the Act, for which a separate APC exists and that either is a radiopharmaceutical agent or is a drug or biological for which payment was made on a pass-through basis on or before December 31, 2002.

Under section 1833(t)(14)(B)(ii) of the Act, certain drugs and biologicals are designated as exceptions and are not


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included in the definition of ‘‘ specified covered outpatient drugs. ’’ These exceptions are:

• A drug or biological for which payment is first made on or after January 1, 2003, under the transitional pass-through payment provision in section 1833(t)(6) of the Act.

• A drug or biological for which a temporary HCPCS code has not been assigned.

• During CYs 2004 and 2005, an orphan drug (as designated by the Secretary).

Section 1833(t)(14)(A)(i) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, specifies payment limits for three categories of specified covered outpatient drugs in CY 2004. Section 1833(t)(14)(F) of the Act defines the three categories of specified covered outpatient drugs based on section 1861(t)(1) and sections 1927(k)(7)(A)(ii), (k)(7)(A)(iii), and (k)(7)(A)(iv) of the Act. The categories of drugs are ‘‘ sole source drugs, ’’ ‘‘ innovator multiple source drugs, ’’ and ‘‘ noninnovator multiple source drugs. ’’ The definitions of these specified categories for drugs, biologicals, and radiopharmaceutical agents under Pub. L. 108

– 173 were discussed in the January 6, 2004 OPPS interim final rule with comment period (69 FR 822), along with our use of the Medicaid average manufacturer price database to determine the appropriate classification of these products. Because of the many comments received on the January 6, 2004 interim final rule with comment period, the classification of many of the drugs, biologicals, and radiopharmaceuticals changed from that initially published. These changes were announced to the public on February 27, 2004, Transmittal 112, Change Request 3144. Additional classification changes were implemented in
Transmittals 3154 and 3322.

We received 25 public comments associated with the January 6, 2004 interim final rule with comment period. These public comments are summarized under section V.B.4. of this preamble.

Section 1833(t)(14)(A) of the Act, as added by section 621(a)(1) of Pub. L.

108

– 173, also provides that payment for these specified covered outpatient drugs
is to be based on its ‘‘ reference average wholesale price, ’’ that is, the AWP for the drug, biological, or radiopharmaceutical as determined under section 1842(o) of the Act as of May 1, 2003 (section 1833(t)(14)(G) of the Act). Section 621(a) of Pub. L. 108

– 173 also amended the Act by adding section 1833(t)(14)(A)(ii), which requires that:

• A sole source drug must, in CY 2005, be paid no less than 83 percent and no more than 95 percent of the
reference AWP.

• An innovator multiple source drug must, in CY 2005, be paid no more than 68 percent of the reference AWP.

• A noninnovator multiple source drug must, in CY 2005, be paid no more than 46 percent of the reference AWP.

Section 1833(t)(14)(G) of the Act
defines ‘‘ reference AWP ’’ as the AWP determined under section 1842(o) as of May 1, 2003. We interpreted this to mean the AWP set under the CMS single drug pricer (SDP) based on prices published in the Red Book on May 1,

2003.

For CY 2005, we proposed to determine the payment rates for specified covered outpatient drugs under the provisions of Pub. L. 108

– 173 by comparing the payment amount
calculated under the median cost methodology as done for procedural APCs (described previously in the preamble) to the AWP percentages specified in section 1833(t)(14)(A)(ii) of
the Act.

Specifically, for sole source drugs, biologicals, and radiopharmaceuticals, we compared the payments established under the median cost methodology to their reference AWP. We proposed to determine payment for sole source items as follows: If the payment falls below 83 percent of the reference AWP, we would increase the payment to 83 percent of the reference AWP. If the payment exceeds 95 percent of the reference AWP, we would reduce the payment to 95 percent of the reference AWP. If the payment is no lower than 83 percent and no higher than 95 percent of the reference AWP, we would make no change.

Comment: A few commenters strongly opposed the decrease in the payment floor for sole source specified covered outpatient drugs from 88 percent of AWP in CY 2004 to 83 percent of AWP
in CY 2005. The commenters believed that the decrease was inappropriate and lacked sound policy justification. The
commenters recommended that for CY 2005 the payment floor for sole source specified covered outpatient drugs be maintained at 88 percent of AWP. One commenter, however, was concerned about the proposed payment rate for HCPCS code J9395 (Injection, Fulvestrant, 25 mg), which is based on 83 percent of AWP instead of 85 percent of AWP that is the CY 2004 payment
level. The commenter asserted that

CMS ’ s use of median cost data to establish appropriate payment rates for specified covered outpatient drugs is faulty for this drug because of concerns about the accuracy of the hospital
median cost data. The commenter also indicated that several payment changes affecting this drug were likely to have created a significant degree of confusion among hospitals that may have negatively skewed hospital median cost
data and led CMS to correlate the data to an AWP-based payment percentage
that is too low. Another commenter urged CMS to create an exceptions process that would provide for appropriate adjustments within the MMA-specified payment corridor upon submission of data documenting potential access problems or a payment rate significantly lower than the acquisition cost of the drug. The commenter indicated that creating such an approach would help to minimize disruption to patient access to drugs in the hospital outpatient setting. To the contrary, several commenters were pleased with the payment rates for certain products at 83 percent of their

AWPs.

Response: Section 621(a) of Pub. L.

108

– 173 is very specific in requiring that a sole source drug must be paid no less than 83 percent and no more than 95 percent of the reference AWP in CY 2005. We used the 83 percent of AWP as the payment floor to set payment rates for sole source drugs, unless payments based on median costs were higher, as we lack any data to determine what would be the appropriate payment level between 83 percent and 95 percent of AWP for all sole source drugs. We set up a payment floor to avoid paying for these drugs at different arbitrarily determined payment levels. We note that if data show that the payment rate for a drug falls between the 83 percent floor and 95 percent ceiling, the drug is paid at the payment rate.

We have responded to comments about the relative hospital data from our
claims above and in other sections of this preamble. While we certainly share the desire to provide beneficiaries with access to the drugs that are reasonable and necessary for the treatment of their conditions, we do not agree with the comments that we should pay above the 83 percent floor established by the MMA for sole source drugs if the median hospital cost falls below this
floor. We believe the intent of the law is to use hospital cost data as the best available information in setting the payment rates for most items paid for
under the OPPS. In the case of sole source specified covered outpatient drugs, the MMA provides for a floor of 83 percent of the reference AWP for those items for which the payment based on relative hospital costs would fall below 83 percent of the AWP and a ceiling of 95 percent of the reference
AWP for items where the relative


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hospital costs from our claims data
exceed that amount. We are not convinced that the 83 percent AWP floor is a barrier to appropriate

treatment.

Comment: One commenter, the
manufacturer of AGGRASTAT 

, requested that CMS convert the current temporary outpatient HCPCS code C9109 (Injection, Tirofiban HCl, 6.25 mg) to a permanent national HCPCS code with a base dose of 5 mg and continue to maintain the permanent national HCPCS code J3245 (Injection, Tirofiban HCl, 12.5 mg). The commenter
asserted that HCPCS codes with units of 5 mg and 12.5 mg would properly
reflect the actual doses of

AGGRASTAT  that currently exist in
the market.

Response: For 2005, the National
HCPCS Panel decided to delete HCPCS codes C9109 and J3245 and create a new HCPCS code J3246 (Injection, Tirofiban HCl, 0.25 mg). We hope that the creation
of this new HCPCS code will ameliorate
the commenter ’ s concerns about appropriate coding for this product.

Comment: We received a number of comments on the packaging status of HCPCS codes J7505 (Muromonab-CD3, parenteral, 5 mg) and J9266 (Pegaspargase, single dose vial). The
commenters stated that these two products were incorrectly packaged
because the data used to determine packaging status were flawed and requested that both products be paid separately as sole source drugs at a rate between 83 percent and 95 percent of
their AWPs.

Response: There were several drugs and biologicals that we proposed to package in the proposed rule, including the two products mentioned in the comments. However, when we recalculated their median costs per day using all of the hospital claims from CY

2003 used for this final rule with comment period, we determined that their median costs per day were greater than $50. Therefore, for CY 2005, we will pay for these drugs and biologicals separately. Items that meet the

definition of ‘‘ specified covered outpatient drugs ’’ (SCOD) will be paid according to the payment methodologies established in the MMA, and payment

for items that do not meet the definition

will be based on their median unit cost. Table 25 lists the drugs and biologicals that were proposed as packaged drugs and biologicals but will be paid separately in CY 2005. The table also indicates the methodology that will be used to determine their APC payment

rates in CY 2005.

Comment: One commenter was concerned about the proposed payment rates for HCPCS codes A9502 (Supply of radiopharmaceutical diagnostic imaging agent, technetium Tc 99m tetrofosmin, per unit dose) and Q3005 (Supply of radiopharmaceutical diagnostic imaging agent, technetium Tc-99m mertiatide, per mci). The commenter indicated that payment corrections made for these two products in the February 27, 2004 CMS Transmittal 113 resulted in significant payment reductions. The commenter was concerned that significant payment
fluctuations and reductions were counter-productive to the provision of quality care and will negatively impact the operational viability of nuclear medicine departments. Therefore, the commenter urged CMS to reconsider their proposed payments for these two products.

Response: We understand the

commenter ’ s concern about the impact of fluctuations in payment rates for HCPCS codes A9502 and Q3005. However, we note that the payment rates that were listed in the January 6,

2004 interim final rule with comment period for these products were calculated using incorrect reference AWPs as indicated in the February 27, 2004 CMS Transmittal 113. Therefore,

we made corrections to the AWPs for these products and recalculated their payment rates according to the payment methodology required by the MMA for

sole source ‘‘ specified covered outpatient drugs ’’

. Comment: One commenter requested that CMS support a decision by the HCPCS Alpha-Numeric Editorial Panel to issue separate permanent and universal drug codes for echocardiography contrast agents for which applications have been submitted. Specifically, the commenter recommended that CMS support the application submitted for the creation of a J-code for Definity, which is currently being reported as HCPCS code C9112 (Injection, perflutren lipid microsphere, per 2 ml vial).

Response: Decisions regarding the creation of permanent HCPCS codes are coordinated by the National HCPCS
Panel. Comments related to the HCPCS code creation process and decisions made by the National HCPCS Panel are


### 65784 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

outside the scope of this rule; therefore, we will not respond to this comment. We note that until a J-code is established for this product, hospitals can continue to bill for this product using the HCPCS code C9112.

Comment: Several commenters expressed concern about the proposed payment for intravenous immune globulin. They were concerned that
CMS calculated the reference AWP for this code using AWPs for one or more products that were no longer commercially available. For example, Carimune and Panglobulin were removed from the market and replaced with Carimune NF and Panglobulin NF, respectively. The commenters requested that CMS review the current pricing data on the brand products that are currently in the market place and recalculate payment for IVIG as a sole source specified covered outpatient drug. Another commenter was concerned about the proposed paymentrate for HCPCS code J7198 (Antiinhibitor, per IU). The commenter
indicated CMS calculated the reference AWP for this code using an AWP for a product called Autoplex that was discontinued from the market in May
2004 and recommended that CMS calculate payment for this HCPCS code using cost data associated with the product Feiba VH that currently exists
in the market.

Response: We agree with the comments and accordingly recalculated the base AWP for HCPCS code J1563 (Immune globulin, intravenous, 1 g) excluding AWPs for the two discontinued products, Panglobulin and Carimune. Similarly, we excluded the AWP for the discontinued product, Autoplex, when redetermining the baseAWP for HCPCS code J7198 (Antiinhibitor, per IU). We then recalculated their payment rates as sole source

‘‘ specified covered outpatient drugs. ’’ We note that these changes resulted in
an increase in the base AWPs for both products.

Comment: One commenter, the maker of the product billed under HCPCS code C9201 (Dermagraft, 37.5 cm2), requested that CMS set its CY 2005 payment rate
under the OPPS identical to the payment rate in the physician office setting. The commenter anticipated a payment rate of $574.41 (third quarter ASP plus 6 percent) when it is used in the physician office setting during CY 2005; however, the proposed payment rate as a sole source drug under the OPPS was $529.54. The commenter indicated that Dermagraft ’ s cost to all customers is identical regardless of the site of service and establishing a payment rate under the OPPS below the cost of the product to hospitals would
hinder their access to medical technologies for which they will not recover their costs. Additionally, we
received comments from an association representing a group of specialty hospitals and a professional association expressing concern about the proposed payment level for HCPCS code J3395 (Injection, verteporfin, 15 mg). The commenters indicated that the payment rate for this product is significantly less than the acquisition cost for outpatient facilities and requested that CMS pay
for it at a rate that covers the cost of acquiring the drug. The commenter also stated that accurate pricing information for the drug should be available when
CMS receives final data from the manufacturer on October 31, 2004 and that the final OPPS payment rate should be reflective of the pricing data.

Response: The products described by HCPCS codes C9201 and J3395 meet the
definition of sole source ‘‘ specified covered outpatient drugs. ’’ The MMA specifies the methodology that determines payment for this group of drugs under the OPPS where, for CY 2005, sole source drugs must be paid between 83 percent and 95 percent of their reference AWP. Since payments for these two products based on the median cost methodology were less than 83 percent of their AWPs, their CY 2005 payment levels were established at 83 percent of their AWP. In these cases, we believe the statute specifically addresses the payment methodology for these drugs.

Comment: A few commenters were concerned about the proposed payment rates for some separately payable drugs and biologicals that did not fall under the category of ‘‘ specified covered outpatient drugs. ’’ These products would be either paid as pass-through items or their payment rates were based on median cost data; however, the commenters requested that the products be paid as sole source ‘‘ specified covered outpatient drugs. ’’ One of the commenters requested that external data be used to correct the payment rate for their product. Several rationales were cited for this request to change the payment methodology, such as the use of inaccurate and incomplete hospital claims data to determine payment rates that are lower than actual hospital acquisition costs and eliminating payment differentials between drugs of
the same class.

Response: We believe that the MMA
defines the items that are to be
considered ‘‘ specified covered outpatient drugs ’’ for payment purposes under the OPPS, and these drugs do not meet the definition. We also recognize that classifying these products as sole

source ‘‘ specified covered outpatient drugs ’’ would increase their payments; however, we are not convinced that the payment rates for these products calculated under current methodologies
are insufficient.

In developing our August 16, 2004 proposed rule, there was one sole source item, Co 57 cobaltous chloride (HCPCS code C9013), for which we could not find a reference AWP amount. However,
we had CY 2003 claims data for HCPCS code C9013, and therefore, we proposed to derive its payment rate using its median cost per unit. We requested comments on our proposed methodology for determining the payment rate for HCPCS code C9013.
We received a few comments in response to our proposal.

Comment: The manufacturer of the product billed under HCPCS code C9013 (Supply of Co 57 cobaltous chloride, radiopharmaceutical diagnostic imaging agent), Rubatrope, along with other commenters, indicated that Rubatrope is an FDA-approved radiopharmaceutical and a sole source drug that meets the definition of a

‘‘ specified covered outpatient drug; ’’ therefore, it should be paid between 83 percent and 95 percent of AWP. The manufacturer of Rubatrope indicated that it had experienced problems with the production of this product in the past 2 years and thus production was discontinued. However, the product will be commercially available from
November 2004. The commenter also
indicated that it would send CMS an AWP for this product once it becomes available. Therefore, for CY 2005, the commenters strongly urged CMS to establish payment for C9013 as a sole source drug at 83 percent of AWP.

Response: We understand the

commenters ’ concern about the payment rate for this product and note that
HCPCS code C9013 was considered a
sole source ‘‘ specified covered outpatient drug ’’ in the proposed rule. However, as we were not able to
determine a reference AWP for this product, we based its proposed payment
rate on its median cost from the claims data. At the time of the publication of this final rule, we were still unable to find an AWP for this product, and thus,
in the absence of an AWP for this product, as proposed we will use the product ’ s median cost to base its CY 2005 payment rate. However, if we
determine an AWP for HCPCS code C9013, we will issue a change to its payment accordingly in a quarterly update of the OPPS.

We note that there are three radiopharmaceutical products for which


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we proposed a different payment policy in CY 2005. These products are represented by HCPCS codes A9526 (Ammonia N

– 13, per dose), C1775 (FDG, per dose (4

– 40 mCi/ml), and Q3000 (Rubidium

– Rb

– 82). Radiopharmaceuticals are classified as a

‘‘ specified covered outpatient drug ’’ according to section 1833(t)(14)(B)(i)(I) of the Act and their payment is dependent on their classification as a single source, innovator multiple source, or noninnovator multiple source product as defined by sections 1927 (k)(7)(A)(iv), (ii), and (iii) of the Act. Upon further analysis of these items, we determined that these three products do not meet the statutory definition of a sole source item or a multiple source
item. Pub. L. 108

– 173 requires us to pay
for ‘‘ specified covered outpatient drugs ’’ using specific payment methodologies
based on their classification and does not address how payment should be
made for items that do not meet the definition of a sole source or multiple source item. Therefore, in the August 16, 2004 proposed rule, we proposed to set the CY 2005 payment rates for these three products based on median costs derived from CY 2003 hospital outpatient claims data, which would reflect hospital costs associated with these products. With regard to HCPCS code A9526, we have no hospital outpatient cost data for this HCPCS code. We received correspondence from an outside source stating that
Rubidium

– Rb

– 82 (HCPCS code Q3000) is an alternative product used for procedures for which Ammonia N

– 13 is also used and these two products are similar in cost. Therefore, we proposed to establish a payment rate for Ammonia

N

– 13 that is equivalent to the payment
rate for Rubdium Rb

– 82.

We listed the proposed CY 2005 payment rates for these three items in Table 25 of the proposed rule (69 FR 50507), requested comments on the proposed payment rates and invited
commenters to submit external data if they believe the proposed CY 2005 payment rates for these items do not adequately represent actual hospital

costs.

We received many public comments on the proposed payment rates for the
three items.

Comment: Many commenters were concerned about the proposed reduction in the payment rate for FDG in CY 2005. They stated that FDG meets the
definition of ‘‘ specified covered outpatient drugs, ’’ and the MMA requires that ‘‘ specified covered outpatient drugs ’’ be classified as sole source drugs, innovator multiple source drugs, or noninnovator multiple source drugs, and be reimbursed according to a percentage of the reference AWP during CY 2005. Several commenters understood the difficulty CMS had in classifying FDG into one of the three categories of ‘‘ specified covered outpatient drugs. ’’ However, one of the
commenters was concerned that CMS abandoned the methodology prescribed by the MMA and created another payment category for ‘‘ specified covered outpatient drugs, ’’ which the commenter believed is outside the scope
of the MMA.

A commenter suggested that CMS assign FDG to the category that most closely reflects the underlying regulatory and economic environment for the production of FDG, which is the innovator multiple source drug category. The commenter explained that the production and sale of FDG is unusual in that the FDA does not yet require an approved New Drug Application (NDA) or Abbreviated New Drug Application (ANDA). The
commenter also stated that the FDA is currently drafting special criteria to govern NDAs and ANDAs for the production and marketing of FDG, and eventually, manufacturers will be required to submit either an NDA or ANDA in order to sell FDG. Right now, there are no approved ANDAs or

‘‘ generics ’’ for FDG, and none of the FDA approved products is therapeutically equivalent. The
commenter indicated that FDG is sold commercially by at least three manufacturers and is produced by numerous hospitals and academic medical centers for their own use, thus making it a multiple source drug. However, until the FDA finalizes its requirements for NDAs and ANDAs for
FDG and all manufacturers have an opportunity to comply with those regulations, all FDG marketed in the
United States should be considered a

‘‘ brand ’’ version. Although the different FDG products distributed are not rated as equivalent by the FDA, FDG was originally marketed under an NDA, and currently there are multiple distributors. Thus, although FDG does not meet all aspects of the multiple source innovator drug definition, given the inaccuracies of the hospital outpatient claims data, this commenter, along with several others, recommended that FDG be paid under the MMA at 68 percent of its AWP. Alternatively, some commenters requested that CMS keep the CY 2005 payment for FDG at its CY 2004 level until the completion of the GAO hospital acquisition cost survey, which
will allow for a more reliable basis for setting payment based on average acquisition cost. One commenter stated
that CMS should use external data submitted by hospitals to determine the true costs of this product. External data from a survey of 2002 nuclear medicine costs reported by hospitals were submitted, and the results indicated that median cost to hospitals for one dose of FDG is $425. Another commenter stated that their current cost for administering one dose of FDG to patients receiving PET scans is $450 and that CMS should
research real market costs for this product before reducing payment by $126 from the current CY 2004 payment

rate

The commenters all agreed that CMS should not use CY 2003 hospital claims data to calculate payment for FDG in CY 2005 because the reported data fails to accurately capture the actual acquisition cost to hospitals along with all the reasonable costs needed to safely prepare, store, administer, and dispose of the product. Commenters indicated that the HCPCS code descriptor for C1775 is written in a way that requires hospitals to use the same code to report
FDG with a concentration of 4mci/ml as they use to report FDG with a concentration of 40 mci/ml, thus making the claims data unreliable, and also, hospitals did not have clear billing and charging guidance. Thus, the
commenters claimed that the FDG data from CY 2003 are a flawed basis upon which to make a payment determination and would significantly underpay hospitals. Commenters noted that a reduction in payment for FDG to the proposed payment rate would limit
utilization and access to FDG PET
because of the financial losses the providers will suffer.

Response: We appreciate these thoughtful comments on our proposed payment rate for FDG. Based on the unique regulatory processes that affect the manufacturing and marketing of FDG, we believe that it is reasonable for us to classify FDG as an innovator multiple source drug. Therefore, we will
not reinstate the HCPCS code C9408 (FDG, brand, per dose), which we inadvertently deleted as stated in the October 2004 Update of the OPPS (CMS Transmittal 290). In CY 2005, hospitals
should use C1775 to bill for all FDG products.

With respect to calculating payment for FDG in CY 2005, the MMA requires that an innovator multiple source drug must be paid no more than 68 percent
of the reference AWP. The MMA sets forth a payment ceiling for the brand innovator multiple source drugs, but does not provide a payment floor for
them. We believe that the intent of the statute is to use available hospital


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claims to set payment rates for most items paid under OPPS; therefore, we apply the ceiling only when the payment for an item based on the median hospital cost for the drug exceeds the ceiling. As we described in
section V.A.3.a. of this final rule with comment period, for innovator multiple source drugs, we set the payment rate at the lower of the payment rate calculated
under the standard median cost methodology or 68 percent of the AWP. We have applied this methodology to all of the other innovator multiple source drugs; therefore, we do not believe that it would be appropriate for us to exempt FDG from this methodology and pay for it at 68 percent of AWP, the ceiling for innovator products. We believe that basing payment for this item on relative hospital costs, with the application as appropriate of the previously mentioned ceiling, not only meets the intent but also the requirements of the MMA. The payment rate for C1775 in CY 2005 will be $221.11.

Comment: The manufacturer of
CardioGen

– 82, also known as Rubidium
Rb

– 82, along with other commenters asserted that this product does meet the classification of a sole source drug as defined by the MMA. The commenters indicated that FDA approval for this product was received under an NDA, and there is currently only one manufacturer of the Cardiogen

– 82 generators used to produce Rubidium
Rb

– 82. Also, there is no FDA-approved generic product for Rubidium Rb

– 82. One of the commenters indicated that a survey was conducted to obtain data on actual hospital costs for Rubidium Rb

– 82, which showed that the median per dose cost to hospitals was $244.73. Thus, the commenter believed that CMS hospital cost data were flawed and do not represent true hospital costs; therefore, the hospital claims cost data should not be used to set the payment
rate for Rubidium Rb

– 82 in CY 2005.
Other commenters indicated that median cost data used by CMS to calculate the payment rate for Rubidium
Rb

– 82 underreport the actual and reasonable hospital costs needed to safely prepare, store, administer, and dispose of the product. The commenters urged CMS to recognize HCPCS code Q3000 (Supply of radiopharmaceutical diagnostic imaging agent, Rubidium Rb

– 82, per dose) as a sole source drug and set its payment at 83 percent of its AWP, or at minimum, retain the CY 2004 payment rate.

Response: We appreciate these
comments. Based on further evaluation of the appropriate classification for this product, we agree with the commenters
that Rubidium Rb

– 82 should be classified as a sole source product. Therefore, payment for Q3000 will be made at 83 percent of AWP as its payment based on the median cost methodology is less than 83 percent of AWP. The payment rate for Rubidium
Rb

– 82 in CY 2005 will be $153.39 per
dose.

Comment: Numerous commenters were concerned about the proposed payment rate for HCPCS code A9526 (Ammonia N

– 13, per dose). Some of the commenters stated that CMS proposed to treat HCPCS codes Q3000 (Rubidium
Rb

– 82, per dose) and A9526 under a

‘‘ presumptive functional equivalence ’’ in setting the same payment rate for these products when they are not functionally equivalent. It was also
stated that Rubidium Rb

– 82 and

Ammonia N

– 13 are used for similar procedures, but they have different costs, clinical composition, and utilization patterns. Another commenter
indicated that Rubidium Rb

– 82 significantly differs from the other PET radiopharmaceuticals as it is produced by a radionuclide generator system, compared to FDG and Ammonia N

– 13 that are made in cyclotrons. A
commenter also stated that Ammonia

N

– 13 has no commercial vendors; whereas, Rubidium Rb

– 82 is produced and distributed by one commercial vendor. Some commenters suggested that CMS pay for A9526 separately,
similar to other ‘‘ specified covered outpatient drugs. ’’ On the other hand, other commenters recommended that, in
the absence of reliable cost data or a published AWP, CMS should use the cost of FDG as a proxy for the cost of

Ammonia N

– 13, since these products have equivalent production costs.

Response: We recognize the concerns raised by commenters about our proposal to pay for Ammonia N

– 13 at the same payment rate as Rubidium Rb

– 82. We acknowledge that Ammonia N

– 13 meets the definition of ‘‘ specified covered outpatient drugs; ’’ however, we
have not been able to determine an AWP for this product. Thus, we cannot set a payment rate for this product based on a percentage of its AWP. While some
of the commenters recommended that we set the payment rate for Ammonia

N

– 13 at the same level as that for FDG, we are aware this would give rise to the same concerns raised by commenters regarding payment for Ammonia N

– 13 and Rubidium Rb

– 82. Therefore, we are not adopting our proposed payment policy for Ammonia N

– 13. Based on the complete CY 2003 hospital claims data
that were used for this final rule with comment period, we were able to identify claims submitted for Ammonia

N

– 13; therefore, for CY 2005, we will use median cost derived from the claims data to set the payment for this product. The CY 2005 payment rate for A9526 will be $109.86 per dose.

Comment: A number of commenters, including several cancer research
centers and trade associations representing the radionuclide and radiopharmaceutical industry, biomedical science, and the biotechnology industry, as well as the manufacturers of Bexxar (billed using HCPCS codes C1080, C1081, and G3001) and Zevalin (billed using HCPCS codes C1082 and C1083), expressed concern that 83 percent of AWP is insufficient to reimburse hospitals for the cost of acquiring Zevalin and Bexxar. Several commenters, including the manufacturer of Zevalin, were concerned that the proposed payment rates for Zevalin are inadequate to facilitate patient access to this critical therapy. One commenter stated that,
because Zevalin is a radioimmunotherapy, its purchase and use are subject to state regulatory safeguards that limit its availability in the oncology practices; therefore, its access in the hospital outpatient setting is crucial. The commenter urged CMS to maintain the 2004 payment rates for Zevalin, which are at 88 percent of AWP, into CY 2005, and indicated that this stability would make treatment with Zevalin more economically feasible for hospitals.

One commenter, the manufacturer of Bexxar, expressed concern about what they identified as several ‘‘ inequities ’’ in the coding and proposed payments for Bexxar and Zevalin. Specifically, the commenter pointed out that the payment proposed for Bexxar in CY 2005 is more than $1500 less than the payment proposed for Zevalin. This
commenter further recommended that payment for Bexxar be set at its wholesale acquisition cost, which is $19,500, or 95 percent of the RAWP, which would be $22,230. Several
commenters indicated that CMS has the option to exceed the floor of 83 percent
of AWP established under the MMA for sole source specified covered outpatient drugs, which would enable CMS to set
a rate for Bexxar and Zevalin
commensurate with their cost.

Two commenters recommended that
CMS consider external data where available to supplement its payment
determinations for Bexxar and Zevalin.

Response: We share the commenters ’ concerns that Medicare payment rates not be a barrier to beneficiary access to radioimmunotherapy for the treatment of non-Hodgkins lymphoma. However, we do not agree with the comments that we should set the OPPS payment rates


### 65787 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

for Zevalin and Bexxar based on their CY 2004 payment levels, on external data, on their WAC, or on any payment
amount other than that which is consistent the designation of radiopharmaceuticals in the MMA as specified covered outpatient drugs.

Zevalin and Bexxar are radiopharmaceuticals, and the MMA
includes them as ‘‘ specified covered outpatient drugs ’’ for the OPPS payment purposes. Each meets the definition of a sole source drug. We believe the intent of the law is that we set payment rates for most items paid for under the OPPS using hospital cost data from the best and most recent information available, unless the statute directs otherwise, as in the case of drugs with pass-through status or new drugs without HCPCS codes. The MMA provides a floor of 83 percent of the reference AWP in CY 2005 for sole source specified covered outpatient drugs for which payment based on relative hospital costs would be less. Similarly, the MMA provides a cap of 95 percent of the reference AWP in CY 2005 for sole source specified covered outpatient drugs for which payment based on relative hospital costs would be higher. The statute provides a payment floor and ceiling for sole

source ‘‘ specified covered outpatient drugs, ’’ at no lower than 83 percent of AWP or higher than 95 percent of AWP; the statute does not require a payment
at some intermediate level that falls between 83 percent and 95 percent of

AWP.

Payment for Zevalin based on relative hospital costs drawn from CY 2003 claims data would fall below 83 percent
of the reference AWP. As we did in the case of other sole source drugs for which payment based on hospital claims would be lower than 83 percent of AWP, we proposed to set payment for Zevalin at 83 percent of the reference AWP. We also proposed to set payment
for Bexxar in CY 2005 as a sole source radiopharmaceutical at 83 percent of AWP because, like Zevalin, it is a radiopharmaceutical and, therefore, a sole source specified covered outpatient drug under the MMA. We discuss in
section V.G. of this final rule with comment period that we are making final our proposal to treat radiopharmaceuticals the same as we treat drugs and biologicals for purposes of ratesetting, with two exceptions: We will set payment for new radiopharmaceuticals for which we have no claims data, and for new radiopharmaceuticals with pass-through status effective on or after January 1, 2005, based on the MMA CY 2005 payment requirements for specified covered outpatient drugs. We have no
ASP for Bexxar because it is a radiopharmaceutical, and manufacturers have not been required to submit ASP for radiopharmaceuticals. We have no
claims data from which to calculate relative hospital costs for Bexxar because of the newness of the product. Therefore, we are setting payment for
Bexxar in accordance with the MMA requirement that a sole source specified covered outpatient drug be paid no less than 83 percent of AWP in CY 2005.

Comment: A number of commenters, including several cancer centers and a nuclear medicine trade association, asked that CMS provide payment to hospitals for the cost of compounding each patient-specific dose of Bexxar, noting that the compounding costs
amount to several thousand dollars in addition to the cost of the drug itself.
One of these commenters recommended that the cost of compounding Bexxar be included in the payment for the product and that C1080 and C1081 be assigned to a new technology APC to reflect the total cost of the product plus compounding. One commenter, the manufacturer of Bexxar, is concerned because the payment proposed for
Bexxar in CY 2005 does not include payment for the cost of compounding that is required to prepare patient specific doses of diagnostic and therapeutic I

– 131 tositumomab, whether done by the hospital ’ s own radiopharmacy or by a commercial radiopharmacy. The commenter estimates that hospitals incur a compounding cost of $2,000

– $3,000 to furnish Bexxar to a single patient when a commercial radiopharmacy does the compounding. The commenter
recommends that CMS either base payment for Bexxar on 95 percent of AWP, continue payment for Bexxar at the CY 2004 level, or establish a new code to enable hospitals to bill separately for Bexxar compounding

costs.

Response: Because Zevalin and Bexxar are radiopharmaceuticals that fall under the category of sole source specified covered drugs established by the MMA, the payment rates for these products are based on AWP, as required by the MMA. To the extent that compounding costs are reflected in the AWP, the payment rate includes these costs. If hospitals incur additional compounding costs for the radiolabeled monoclonal antibodies, those costs could be reported as a separate line item charge with an appropriate revenue code or packaged into the charge for CPT codes 78804 and 79403, which could result in an outlier payment if the outlier threshold for those services was exceeded. The MMA requires that MedPAC submit a report to the Secretary by July 1, 2005 on adjustment of payment for ambulatory payment classifications for specified covered outpatient drugs to take into account overhead and related expenses, such as pharmacy services and handling costs. We look forward to receiving this report in anticipation that the data collected byMedPAC will enable us to address drugrelated overhead costs in future OPPS updates.

Comment: Several commenters expressed concerns that the payment rates proposed for Bexxar could result in clinicians having to make treatment decisions based upon payment
considerations rather than medical considerations, and could result in physicians having to deny patients a potential life-saving therapy. The same
commenters were concerned that the payment proposed for Zevalin and Bexxar does not recognize all of the
additional costs associated with the provision of radiolabeled antibody therapy or radioimmunotherapy (RIT) for the treatment of non-Hodgkins lymphoma. These commenters urged
CMS to consider all of the costs associated with this therapy when setting payment rates for each component of the regimen and
recommended that CMS ensure that total payment to hospitals be
commensurate with all of the actual costs that hospitals incur to acquire, prepare, and administer radiolabeled antibodies and to perform all of the additional procedures associated with RIT, thereby ensuring that patient access to these vital therapies will not be jeopardized.

Response: We share the commenters ’
concerns about the extent to which payment considerations influence treatment decisions. However, we
believe that to the extent that radioimmunotherapy proves to be an efficacious treatment for patients with certain forms of non-Hodgkins lymphoma, payment in the aggregate for the full array of procedures and services
associated with this new form of treatment affords hospitals sufficient flexibility to ensure that payment is not a barrier to beneficiary access when it is deemed reasonable and necessary.

Table 26 below lists the final APC payment rates for sole source drugs, biologicals, and radiopharmaceuticals effective January 1, 2005 to December

31, 2005.

**BILLING CODE 4120**

**– 01** 

**– P** 


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### 65791 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

In order to determine the payment amounts for innovator multiple source and noninnovator multiple source forms of the drug, biological, or radiopharmaceutical, we compared the payments established under the median cost methodology to their reference AWP. For innovator multiple source items, we proposed to set payment rates at the lower of the payment rate calculated under our standard median cost methodology or 68 percent of the

reference AWP. For noninnovator multiple source items, we proposed to set payment rates at the lower of the


### 65792 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

payment rate calculated under our standard median cost methodology or 46 percent of the reference AWP. We followed this same methodology to set payment amounts for innovator multiple source and noninnovator multiple source ‘‘ specified covered outpatient drugs ’’ that were implemented by the January 6, 2004 interim final rule with comment period. We listed the proposed payment amounts in Table 26 of the proposed
rule.

Comment: One commenter, an association of cancer centers, indicated that CMS proposed the same payment rate for both the brand name and generic versions of a drug. Given that CMS does not have separate HCPCS code level data for brand versus generic drugs in the CY 2003 claims data, the commenter
indicated that it did not understand
how CMS could use claims data to justify equivalent payment levels for both brand and generic versions of a drug. The commenter was also concerned about the adequacy of using
the CY 2003 claims data to calculate the costs of these products and making comparisons to the payment rateceilings set forth by the MMA for multisource drugs, especially for the brand name drugs. Therefore, the commenter requested that CMS pay for all brand name drugs at 68 percent of AWP and pay for generics by comparing the calculated cost using the claims data to the 46 percent of AWP threshold and selecting the lower of the two as the payment rate.

Response: For CY 2005, as for the current year, the MMA sets forth different payment ceilings for the brand and generic versions of the drug. The MMA does not provide a payment floor for either the brand or generic versions of such items. Only sole source drugs have a payment floor and ceiling. As
stated elsewhere in this final rule with comment period, the CY 2005 payment rate for innovator multiple source (brand name) drugs may not exceed 68 percent of the reference AWP. The payment for noninnovator multiple source (generic) drugs may not exceed 46 percent of the reference AWP. In determining payment rates, we apply those ceilings only when the payment
for an item based on the median hospital cost for the drug exceeds one of these ceilings. In some cases, the payment based on the median hospital cost falls below the 46 percent ceiling for generic drugs. In such cases, the payment rate would be the same for brand and generic versions. However, we believe that basing payment for these items on relative hospital costs, with the application as appropriate of the previously mentioned ceilings not only
meets the intent but also the requirements of the MMA.

Comment: A few commenters indicated that the proposed payment rate of $410.45 for HCPCS code A9600 (Supply of therapeutic radiopharmaceutical, Strontium-89, per mci) would underpay hospitals for this product since the payment rate was
based on flawed CMS median cost data that do not accurately reflect the real acquisition cost of this drug by hospitals. The commenters believed that hospital costs for A9600 are approximately $800 per mci and requested that CMS adjust the payment accordingly. One commenter, who was the manufacturer of this product, asserted that the product is expensive
and difficult to manufacture since it is produced in small quantities. The
commenter also indicated that the reduction in the payment rate for this product is driving the underutilization of this product and increasing the use of costly narcotic analgesics, thus resulting in a decrease in quality of life and a rise
in the cost of health care. Another
commenter stated that the HCPCS codes for diagnostic and therapeutic iodine products (C1064, C1065, C1188, C1348,
A9528, A9529, A9530, A9531, A9517 and A9518) all describe in various years and forms diagnostic and therapeutic
Iodine 131 and that these codes have had varying descriptions that have
resulted in flawed cost data. The commenter submitted data indicating
that the cost for I

– 131 in the capsule form is higher than for solution, and
recommended that CMS use external data to restore and correct payment rates for the Iodine 131 product so that the payment more accurately reflects actual hospital costs.

Response: We understand the

commenters ’ concerns about establishing appropriate payment rates for these products. We believe that the
intent of the statute is to use available hospital claims to set payment rates for most items paid under the OPPS. In the case of multiple source drugs such as these products, the MMA requires that innovator and noninnovator multiple source drugs be paid no more than 68 percent and 46 percent of their AWP, respectively.

As previously stated, for innovator multiple source drugs, we set the payment rate at the lower of the payment rate calculated under the standard median cost methodology or 68 percent of the AWP; and for noninnovator multiple source drugs, we set the payment rate at the lower of the payment rate calculated under the standard median cost methodology or 46 percent of the AWP. Using the most recent available data, we determined that the payment rates based on median cost for these drugs were lower than both 68 percent and 46 percent of their AWPs; therefore, the payment rates for
both the innovator and noninnovator forms of these products were based on
their median costs.

Comment: One commenter, the maker of one of the viscosupplement drugs, was concerned that the proposed payment rates for the four competitive products are inequitable and will harm beneficiary access to these therapies. The commenter indicated that currently two of the products, Hyalgan and Supartz, are billed using HCPCS code J7317 (Sodium Hyaluronate, per 20 to 25 mg dose for intra-articular injection),
and this HCPCS code has been classified as a multi-source drug. The commenter assumed that another product, Orthovisc, would also be billed under HCPCS code J7317. However, the fourth product, Synvisc, is classified as a sole source drug and billed under HCPCS code J7320 (Hylan G

– F20, 16 mg, for intra-articular injection). The commenter strongly believed that classifying these products differently resulted in payment rates that will create significant payment inequities and unjustified market distortions. To correct the payment inequity across the class of viscosupplements, the
commenter recommended that CMS create separate HCPCS codes for these products and treat each product as a sole source drug. Another commenter strongly recommended that Orthovisc, anew product, be recognized as a passthrough under the OPPS, and be assigned a separate C-code for payments under that system.

Response: We recognize the

commenter ’ s concern about payment for these viscosupplement drugs under the
OPPS. The National HCPCS Panel coordinates decisions regarding the creation of permanent HCPCS codes; therefore, comments related to the HCPCS creation process and decisions made by the National HCPCS Panel are outside the scope of this rule. However, we note that the product Orthovisc received approval for pass-through status under the OPPS effective January 1, 2005, and a new temporary C-code has been established to allow hospitals to receive pass-through payments for this product.

Comment: A commenter requested that CMS show three separate tables for the nonpass-through drugs; that is, one for sole source drugs, one for innovator multiple source drugs, and one for noninnovator multiple source drugs.


### 65793 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

Response: We have accepted the

commenter ’ s suggestion and created three distinct tables listing the sole source drugs, innovator multiple sources drugs, and noninnovator multiple source drugs.

Tables 27 and 28 below list the final payment amounts for innovator and noninnovator multiple source drugs, biologicals, and radiopharmaceuticals, respectively, effective January 1, 2005 to December 31, 2005.

**BILLING CODE 4120**

**– 01** 

**– P** 


### 65794 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

**BILLING CODE 4120**

**– 01** 

**– C** 

b. Treatment of Three Sunsetting PassThrough Drugs as Specified Covered Outpatient Drugs

As we discussed in the August 16, 2004 proposed rule, there are 13 drugs and biologicals whose pass-through status will expire on December 31, 2004. Table 29 below lists these drugs and biologicals. Pass-through payment was made for 10 of these 13 items as of December 31, 2002. Therefore, these 10 items now qualify as specified covered outpatient drugs under section 1833(t)(14) of the Act, as added by section 621(a) of Pub.

L. 108

– 173, as described above. However, pass-through status for three of the pass-through drugs and biologicals that will expire on December 31, 2004 (C9121, Injection, Argatroban; J9395, Fulvestrant; and J3315, Triptorelin pamoate), was first made effective on January 1, 2003. These items are specifically excluded from the

definition of ‘‘ specified covered outpatient drugs ’’ in section 1833(t)(14)(B)(ii) of the Act, because they are not drugs or biologicals for which pass-through payment was first made on or before December 31, 2002.

Pub. L. 108

– 173 does not address how


### 65795 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

to set payment for items whose passthrough status expires in CY 2004, but for which pass-through payment was not made as of December 31, 2002.

Therefore, we proposed to pay for the three expiring pass-through items for which payment was first made on January 1, 2003, rather than on or before December 31, 2002 using the methodology described under section 1833(t)(14) of the Act for specified covered outpatient drugs. We believed that this methodology would allow us to determine appropriate payment amounts for these products in a manner that is consistent with how we pay fordrugs and biologicals whose passthrough status was effective as of December 31, 2002, and that does not penalize those products for receiving pass-through status beginning on or after January 1, 2003 and expiring December 31, 2004. In Table 27 in the proposed rule, we listed the CY 2005 OPPS payment rates that we proposed for these three drugs and biologicals.

Of the 13 products for which we proposed that pass-through status expire on December 31, 2004, we proposed to package two of them (C9113, Inj. Pantoprazole sodium and J1335, Ertapenum sodium) because their median cost per day falls below the $50 packaging threshold. We proposed to pay for the remaining 11 drugs and biologicals as sole source items according to the payment methodology for sole source products described
above.

We note that darbepoetin alfa (Q0137)
will be considered a ‘‘ specified covered outpatient drug ’’ in CY 2005. Payment for these drugs is governed under section 1833(t)(14) of the Act. Specifically, we proposed that darbepoetin alfa would be paid as a sole source drug at a rate between 83 percent and 95 percent of its reference AWP. Accordingly, we specifically solicited comments on whether we should again apply an equitable adjustment, made pursurant to section 1833(t)(2)(E) of the Act, to the price for this drug.

Comment: Numerous commenters applauded CMS for proposing a fair and consistent payment methodology fordrugs and biologicals whose passthrough status expires on December 31, 2004, and supported the proposal to treat these three therapies as specified covered outpatient drugs. They also encouraged CMS to expand this treatment to all separately paid drugs and biologicals in the future. A few commenters, including MedPAC, disagreed with our proposal to pay for the three expiring pass-through items for which payment was first made on January 1, 2003, as ‘‘ specified covered outpatient drugs. ’’ One commenter indicated that because these three drugs were excluded from the statutory
definition of ‘‘ specified covered outpatient drug, ’’ it did not believe that CMS had the authority to treat newer drugs expiring out of pass-through status as specified covered outpatient drugs. Therefore, the commenter believed that CMS should pay for newer drugs expiring from pass-through status at 106 percent ASP, the rate applicable to the physician setting. MedPAC expressed concern about treating these 3 expiring pass-through drugs differently from the older, historically packaged drugs that are now eligible for separate payment and whose payments will be
based on the median cost from the
claims data. MedPAC indicated that the purpose of the pass-through payments is
to allow time to accumulate data on
costs and that there seemed to be no
reason to believe that claims data are more accurate for one category of drugs that the other. Therefore, the drugs coming off pass-through, which do not fall under the SCOD category, and the older drugs should be paid consistently.

Response: We appreciate the

commenters ’ support for our proposal totreat the three items for which passthrough status expires on December 31,2004, but that were approved for passthrough status effective January 1, 2003, similar to the other drugs and biologicals whose pass-through status expires December 31, 2004, but that were approved for pass-through status on or before December 31, 2002. The statute does not address payment fordrugs and biologicals that had passthrough status effective on January 1, 2003, but not on or before December 31, 2002. These items are newer drugs than the older products that never received pass-through status. We have
accumulated cost data for these three drugs throughout the same 2-year period during which we accumulated cost data for the other drugs and biologicals whose pass-through status expires on December 31, 2004. Therefore, noting that the statute does not address drugs whose pass-through status likewise expires on December 31, 2004, but was approved on January 1, 2003, we believe it is reasonable to pay for these three drugs in a manner consistent with howwe pay for the other drugs whose passthrough status likewise sunsets on December 31, 2004.

Comment: We received a number of comments concerning our proposal to pay for both epoetin alfa (marketed under trade name of Procrit) and darbepoetin alfa (marketed under the trade name of Aranesp  ) based on 83 percent of their individual reference AWPs. A number of commenters also wrote in response to our solicitation for comments concerning the application of our equitable adjustment authority in determining the payment rate for darbepoetin alfa. Commenters acknowledged that both biologicals meet the MMA definition of specified covered outpatient drug (SCOD) and that the pass-through status of darbepoetin alfa ends on January 1, 2005. One of the commenters supported the proposal to establish payment for darbepoetin alfa as a SCOD, to base CY 2005 payment on its reference AWP, and to discontinue the application of an equitable adjustment to reduce the statutorily mandated payment for any product paid under the OPPS in CY
2005. This commenter stated the proposed payment for darbepoetin alfa as a sole source SCOD is fully consistent
with section 621 of the MMA and that
this is consistent with the method of payment for all other sole source
SCODs. The commenter further stated that when drafting the language for section 622 of the MMA, Congress
intended to ensure that considerations of functional equivalence were not applied to darbepoetin alfa after its pass-through status expired. This commenter acknowledges that section 1833(t)(2)(E) of the Act permits CMS to
make ‘‘ adjustments as determined to be necessary to ensure equitable payments. ’’ However, this commenter stated that payments for the two products are already inherently equitable at the proposed rates because they are comparably priced and because CMS proposed to set the payment rates for the two products using the same methodology. The commenter noted that when CMS first applied the equitable adjustment for darbepoetin alfa, in CY 2003, CMS had only three choices for establishing drug payments under the OPPS: (1) Packing payment with related services; (2) using charges from outpatient claims to derive median cost; and (3) paying separately under the pass-through provisions, at 95 percent
of AWP. The commenter notes the new payment methodology for all sole source

‘‘ specified covered outpatient drugs ’’ and argues that by applying this methodology to both of these biologicals, CMS would establish a levelplaying field and assure that marketbased forces remain operable. This commenter also provided data concerning the clinical efficacy of darbepoetin alfa.

Many of the other commenters stated
that CMS ’ application of its equitable adjustment authority deviated from the

MMA ’ s intent to pay for sole source


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products and multi-source products under separate payment methodologies.
The commenters were concerned about the significant impact that application of such authority may have on a

company ’ s decision to continue developing innovator products. The commenters also argued that applying such a policy could inject CMS into clinical decisions based solely on
economic considerations and create payment incentives that distort patient decisions properly entrusted to treating physicians. One commenter recommended that if CMS plans to utilize this authority again, then CMS should hold a public forum and provide interested parties with an opportunity to
submit written comments about the
standards that will be used to determine equitable adjustment. Other commenters argued that CMS should comply with the MMA and protect patient access to innovative therapies by not applying functional equivalence or a similar standard to any drug in 2005 or future

years.

One commenter on this topic also provided detailed results of clinical
studies that the commenter believes support the necessity of a continuation of the equitable payment adjustment.
This commenter further stated that the clinical data support the use of a particular conversion ratio in making such an adjustment. The commenter noted that without an equitable adjustment policy, both drugs would be paid at 83 percent of each product ’ s AWP. The commenter estimated weekly payments for the two drugs under four scenarios: an equitable adjustment
based on three different conversion ratios and the proposed policy of treating each drug independently without application of an equitable adjustment. According to this commenter, overall Medicare expenditures and beneficiary coinsurance payments would increasefor the treatment of chemotherapyinduced anemia in the absence of an equitable payment adjustment. The

commenter ’ s estimates assume a 50 percent market share for each of the two drugs and estimated 2005 spending
based on 2003 OPPS claims data with anemia market unit growth assumptions of 35 percent in 2004 and 22 percent in
2005. The commenter also noted that the MMA did not remove the Secretary ’ s authority to establish adjustments to ensure equitable payments and that the Secretary retains the authority to determine the CY 2005 payment rate for darbepoetin alfa using the equitable payment policy applied in CY 2003 and CY 2004. This commenter also argued that the MMA prohibition on the use of a functional equivalence standard applies only to pass-through drugs and only to future implementation.

A comment from MedPAC on this
issue indicated that as costs to the Medicare program continue to grow, the program will need to examine tools for obtaining value in its purchasing. MedPAC believed that, absent evidence
that the CMS ’ use of its equitable adjustment to set equivalent payment rates for Procrit and Aranesp  denied
beneficiaries ’ access to neededtreatments, CMS should pursue valuebased purchasing where possible.

Response: As the commenters noted, while we proposed a payment rate for darbepoetin alfa as a sole source SCOD based on its reference AWP, we also specifically solicited comments on whether we should again apply an equitable adjustment, made pursuant to section 1833(t)(2)(E) of the Act, to establish the payment for this drug in
CY 2005. After careful consideration of the thoughtful and well-documented comments concerning this issue, we
have concluded that it is still appropriate to apply an adjustment to the payment for darbepoetin alfa under our authority in section 1833(t)(2)(E) of the Act to ensure that equitable payments for these two products under
the OPPS continue in CY 2005. We agree with those commenters that argued that section 1833(t)(2)(E) of the Act was not affected by the provisions
of the MMA and that we retain our authority to make such adjustments to payments under the OPPS. As we have done previously, we will reassess the need to exercise our adjustment authority when we next review the payment rates under the OPPS.

To apply an equitable adjustment for CY 2005, we reviewed the analysis we conducted during 2003 and the
additional data we received in 2004. As
we discussed in further detail in our November 7, 2003 final rule with comment period for the 2004 update to the OPPS (68 FR 63455) and our November 1, 2002 final rule with comment period for the 2003 update (67 FR 66758), because darbepoetin alfa hastwo additional carbohydrate sidechains, it is not structurally identical to epoetin alfa. The addition of these two carbohydrate chains affects the biologic half-life of the compound. This change in turn affects how often the biological can be administered, which yields a different dosing schedule for darbepoetin alfa by comparison to epoetin alfa. Amgen has FDA approval to market darbepoetin alfa under the
trade name  for treatment of anemia
related to chronic renal failure (including patients on and not on dialysis) and for treatment of chemotherapy-related anemia in cancer patients. Epoetin alfa, which is marketed by Ortho Biotech under the trade name Procrit, is approved by FDA for marketing for the following conditions: (1) Treatment of anemia of chronic renal failure (including for patients on and not on dialysis); (2)
treatment of Zidovudine-related anemia in HIV patients; (3) treatment of anemia in cancer patients on chemotherapy; and (4) treatment of anemia related to allogenic blood transfusions in surgery patients.

The two biologicals are dosed in different units. Epoetin alfa is dosed in Units per kilogram (U/kg) of patient weight and darbepoetin alfa in micrograms per kilogram (mcg/kg). The difference in dosing metric is due to differences in the accepted convention at the time of each product ’ s development. At the time epoetin alfa was developed, biologicals (such as those like epoetin alfa that are produced by recombinant DNA technology) were typically dosed in International Units (or Units for short), a measure of the product ’ s biologic activity. They were not dosed by weight (for example, micrograms) because of a concern that weight might not accurately reflect their standard biologic activity. The biologic activity of such products can now be accurately predicted by weight, however, and manufacturers have begun specifying the doses of such biologicals by weight. No standard formula exists for converting amounts of a biologic dosed in Units to amounts of drug dosed by weight.

The process that we used in 2003 to define the payment conversion ratio between the two biologicals for CY 2004 is described in the November 7, 2003 final rule with comment period. We refer readers to that discussion, found at 68 FR 63455, for more complete details on that process and the data received and reviewed by CMS during the process. At the conclusion of the 2003 process, we established a conversion ratio of 330 Units of epoetin alfa to 1 microgram of darbepoetin alfa (330:1) for establishing the CY 2004 payment rate for darbepoetin alfa.

During the comment period, each company presented additional data concerning their products. Based upon our analysis to date, we continue to
believe that the conversion ratio used for CY 2004 is appropriate for purposes of establishing equitable payment under the OPPS for both epoetin alfa and darbepoetin alfa for CY 2005. Initial review of new information submitted by the commenters provides no compelling


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evidence that the conversion ratio of 330:1 is unreasonable. Therefore, for this final rule with comment period, we have established payment for darbepoetin alfa by applying the conversion ratio of 330:1 to 83 percent of the AWP for epoetin alfa. The resulting payment rate for darbepoetin alfa is $3.66 per microgram. We will
continue to assess the data we have
received thus far and invite the
submission of additional information. In order to fully evaluate and assess this issue in determining whether any further adjustment of the conversion ratio is necessary, additional analysis will be required. If, after additional review and analysis, we determine that
a different conversion ratio is more appropriate, we will make a change in the payment rate for darbepoetin alfa to reflect the change in ratio as soon as possible. We do not believe that our application of an equitable adjustment will create a
barrier to treatment for the conditions for which these products are prescribed or to the product of choice of the beneficiary and his or her treating physician. According to the most recent average sales price (ASP) information collected by CMS and available in time for this final rule with comment period, 106 percent of ASP for darbepoetin alfa is $3.69 per microgram. This amount would have been the basis for payment under the OPPS on January 1, 2005 if pass-through status did not expire and if we did not apply an equitable adjustment. Furthermore, as we have emphasized in prior rulemaking on this topic, our conversion of amounts of a biologic dosed in Units to amounts of a drug dosed by weight strictly for the purpose of calculating a payment rate should not in any way be viewed as a statement regarding the clinical use of either product. The method we use to convert Units to micrograms in order to establish equitable payments is not intended to serve as a guide for dosing individual patients in clinical practice. By using a conversion ratio solely for the purpose of establishing equitable payments, CMS is not attempting to establish a lower or upper limit on the amount of either biological that a physician should prescribe to a patient. We expect that physicians will continue to prescribe these biologicals based on their own clinical judgment of the needs of individual patients.

Table 29 below lists the final CY 2005 OPPS payment rates for the three sunsetting pass-through drugs and biologicals that will be treated as specified covered outpatient drugs.

c. CY 2005 Payment for Nonpassthrough Drugs, Biologicals, and Radiopharmaceuticals With HCPCS Codes, But Without the OPPS Hospital
Claims Data

Pub. L. 108

– 173 does not address the OPPS payment in CY 2005 for new drugs and biologicals that have assigned HCPCS codes, but that do not have a reference AWP or approval for payment as pass-through drugs or biologicals. Because there is no statutory provision that dictates payment for such drugs and biologicals in CY 2005, and because we have no hospital claims data to use in establishing a payment rate for them, we investigated other possible options to pay for these items in CY 2005. Clearly, one option is to continue packaging payment for these new drugs and biologicals that have their own
HCPCS codes until we accumulate
sufficient claims data to calculate
median costs for these items. Another option is to pay for them separately using a data source other than our claims data. The first option is consistent with the approach we have taken in prior years when claims data
for new services and items have not
been available to calculate median costs. However, because these new drugs and biologicals may be expensive, we are concerned that packaging these new drugs and biologicals may jeopardize beneficiary access to them. In addition, we do not want to delay separate payment for a new drug or biological solely because a pass-through application was not submitted.

Therefore, for CY 2005, we proposed to pay for these new drugs and biologicals with HCPCS codes but which do not have pass-through status at a rate that is equivalent to the payment they would receive in the physician office setting, which would be
established in accordance with the methodology described in the CY 2005 Medicare Physician Fee Schedule proposed rule (69 FR 47488, 47520 through 47524). We noted that this payment methodology is the same as the methodology that will be used to calculate the OPPS payment amount that pass-through drugs and biologicals will be paid in CY 2005 in accordance with section 1842(o) of the Act, as amended by section 303(b) of Pub. L.

108

– 173, and section 1847A of the Act. Thus, we proposed to treat new drugs and biologicals with established HCPCS codes the same, irrespective of whether pass-through status has been determined. We also proposed to assign
status indicator ‘‘ K ’’ to HCPCS codes for new drugs and biologicals for which we have not received a pass-through application.

In light of our August 16, 2004 proposal, we understood that manufacturers might be hesitant to apply for pass-through status. However, we did not believe there would be many
instances in CY 2005 when we would not receive a pass-through application for a new drug or biological that has an HCPCS code. To avoid delays in setting an appropriate payment amount for new drugs and biologicals and to expedite the processing of claims, we strongly encouraged manufacturers to continue submitting pass-through applications for new drugs and biologicals when FDA


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approval for a new drug or biological is imminent to give us advance notice to begin working to create an HCPCS code and APC. The preliminary application would have to be augmented by FDA approval documents and final package
inserts once such materials becomeavailable. However, initiating the passthrough application process as early as possible would enable us to expedite coding and pricing for the new drugs and biologicals and accelerate the process for including them in the next available OPPS quarterly release.

In the August 16, 2004 proposed rule, we discussed how we proposed to pay in CY 2005 for new drugs and biologicals between their FDA approval date and assignment of an HCPCS code
and APC. We shared the desire of providers and manufacturers to incorporate payment for new drugs and biologicals into the OPPS as expeditiously as possible to eliminate potential barriers to beneficiary access
and to minimize the number of claims that must be processed manually under the OPPS interim process for claims
without established HCPCS codes and APCs, and we solicited public comments on our proposal.

Comment: Several commenters
commended CMS ’ s proposal to set payment rates for new drugs with HCPCS codes using the same methodology proposed to set payment for drugs with pass-through status, regardless of whether a pass-through application has been submitted for the new drug. They applauded CMS for acknowledging that packaging payment for these new therapies might jeopardize beneficiary access to them. However, a
comment from MedPAC indicated that

CMS ’ s proposal to pay 106 percent of ASP for this particular group of drugs and biologicals represented a change in policy where drugs of this nature were previously packaged until sufficient
claims data were accumulated to calculate payment rates, unless they received pass-through status via an application process. MedPAC was concerned that the newly approved drugs and biologicals that do not go through the pass-through payment
mechanism will be added to the OPPS system without any control on spending since this policy does not have a budgetneutrality provision, similar to passthrough payments. Given that the passthrough policy existed as a controlled mechanism for introducing new drugs into the OPPS, these drugs should either be treated through the pass-through process or continue to be packaged under the previous policy.

Response: We appreciate the

commenters ’ support for our proposal to pay for new drugs with HCPCS codes, but without pass-through status and hospital claims data under the same methodology that will be used to pay for them in the physician office setting. We
also understand MedPAC ’ s concern about budget neutrality associated with this policy. Our intent in paying for new drugs and biologicals with HCPCS codes, but without pass-through status and hospital claims data, separately, was that we recognized that some of these new products would be important new therapies in treatment of such
diseases as cancer. We also believe that the MMA provision that requires CMS to pay for new drugs and biologicals before a code is assigned indicates that Congress intended for us to pay separately for new items until we have hospital claims data that would allow us to determine whether the product should be packaged. We are concerned that packaging their payments may prevent hospitals from acquiring these products and in turn harm beneficiaries ’ access to them. We do not expect the volume of new drugs and biologicals to which we would apply this policy in CY 2005 to be so significant as to have an effect on budget neutrality. Moreover, we would not expect this policy to have a differential impact on budget neutrality any more than payment for the drugs would affect pass-through spending had the drugs been approved for pass-through status. We also believe (and strongly encourage) that stakeholders will continue to apply for pass-through status for new drugs, biologicals and radiopharmaceuticals as a means of ensuring that we have all of the information required to establish accurate payments for these items as quickly as possible. At the same time, if we were to package all such items, we are concerned that it would provide a
disincentive for manufacturers to come forward and request codes for new items. Under the MMA provision described above, we are required to pay for new drugs and biologicals without HCPCS code at 95 percent of AWP, which we would expect to generally be higher than 106 percent of ASP. We also believe the MMA provision regarding drugs without HCPCS codes indicates that Congress clearly intended that we pay separately for new drugs and biologicals. Therefore, for CY 2005 we will finalize the policy that we proposed to pay separately for new drugs and biologicals with HCPCS codes but without pass-through status and hospital claims data based on the payment for the same new products in a physician office.

We will, however, monitor this carefully during the course of CY 2005 and reassess the policy for CY 2006. In CY 2005, payment for these new drugs and biologicals will be based on 106 percent of ASP. In the absence of ASP data, we will use wholesale acquisition cost (WAC) for the product to establish the initial payment rate. If WAC is also unavailable, then we will calculate payment at 95 percent of the May 1, 2003 AWP or the first reported AWP for the product. We have used the second quarter ASP data from CY 2004 because
those were the most recent numbers
available to us in time for the publication for this rule. To be
consistent with the ASP-based payments that will be made when these drugs and biologicals are furnished in the physician offices, we plan to make any appropriate adjustments to the
amounts shown in Addendum A and B if later quarter ASP submissions indicate that adjustments to the payment rates are necessary. We will announce such changes in our program instructions to implement quarterly releases and post any revisions to the
addenda on the www.cms.hhs.gov Web site. We will similarly adjust payment
for items for which we used AWP or
WAC because ASP was not available if
ASP becomes available from later quarter submissions.

For CY 2005, we will apply this policy to three drugs and biologicals that are new effective January 1, 2005 and do not have pass-through status and hospital claims data. These drugs will be separately payable under the OPPS, and thus, we have assigned them to
status indicator ‘‘ K ’’ . Table 30 below lists these drugs and biologicals and the payment methodologies used to calculate their APC payments listed in
Addendum A and B of this rule.


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We have also identified several drugs and biologicals with new HCPCS codes created effective January 1, 2004, that do

not meet the definition of ‘‘ specified covered outpatient drugs ’’ and for

which we would not have CY 2003 hospital claims data. These items are packaged in CY 2004, and we also proposed to package them for CY 2005 in the proposed rule. To avoid negatively impacting beneficiary access to these new products by packaging them, we will be paying for these drugs

in CY 2005 under the same methodology that will be used to pay for them in the physician office setting. The rules for determining payment for these drugs will be the same as the rules for new drugs with HCPCS codes but without pass-through status in CY 2005. In CY 2005, these drugs will be separately payable under the OPPS, and thus, we have assigned status indicator

‘‘ K ’’ to these drugs. Table 31 below lists these drugs and biologicals and the payment methodologies used to calculate their APC payments listed in
Addendum A and B of this rule.

We note that CPT 90715 (Tdap vaccine > 7 im) was newly created in 2004; however, we will not apply this payment policy to this code because all of the vaccines similar to this product are packaged in CY 2004 and will remain packaged in CY 2005. This payment policy also will not apply to new radiopharmaceuticals since all radiopharmaceuticals meet the

definition of ‘‘ specified covered outpatient drugs ’’ . Therefore, payment for new radiopharmaceuticals will be made according to the payment methodologies established for

‘‘ specified covered outpatient drugs ’’ under section 1833(t)(14)(A)(ii) of the

Act.

Comment: One commenter noted that CMS historically had declined to process pass-through applications prior to FDA approval, consequently many manufacturers have ceased submitting early applications. The commenter stated that manufacturers may be uncomfortable submitting the detailedinformation required for the passthrough application prior to securing FDA approval. The commenter suggested that a more realistic expectation of the timeframe for passthrough application would be at or subsequent to FDA approval, when the product launch is imminent.

Response: We recognize that some manufacturers may be concerned about submitting detailed information for pass-through application in advance of

FDA ’ s approval for their product. However, we reiterate that we strongly encourage manufacturers to continue submitting pass-through applications when FDA approval for a new drug or biological is imminent to give us advance notice to begin working to

create a HCPCS code and an APC for their product. While we will not be ableto give final approval to the passthrough application prior to FDA approval, early notification about the product prior to FDA approval canexpedite the granting of a new productspecific code and implementation of


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that code and appropriate payment rate within our system.

d. Payment for Separately Payable NonPass-Through Drugs and Biologicals

As discussed in section V.B.2. of the August 16, 2004 proposed rule, for CY 2005, we used CY 2003 claims data to calculate the proposed median cost per day for drugs, biologicals, and radiopharmaceuticals that have an assigned HCPCS code and are paid either as a packaged or separately payable item under the OPPS. Section 1833(t)(14) of the Act, as added by section 621(a) of Pub. L. 108

– 173, specified payment methodologies for most of these drugs, biologicals, and radiopharmaceuticals. However, this provision did not specify how payment was to be made for separately payable drugs and biologicals that never received pass-through status and that
are not otherwise addressed in section 1833(t)(14) of the Act. Some of the items for which such payment is not specified are (1) those that have been paid separately since implementation of the OPPS on August 1, 2000, but are not eligible for pass-through status, and (2) those that have historically been packaged with the procedure with which they are billed but, based on the CY 2003 claims data, their median cost per day is above the legislated $50 packaging threshold. Because Pub. L.

108

– 173 does not address how we are to pay for such drugs and biologicals (any drug or biological that falls into one or the other category and that has a per day cost greater than $50), we proposed to set payment based on
median costs derived from the CY 2003 claims data. Because these products are generally older or low-cost items, or both, we believe that the payments will allow us to provide adequate payment to hospitals for furnishing these items. In the proposed rule, we listed in Table 28 the drugs and biologicals to which the proposed payment policy would apply.

We received numerous public comments on our proposal.

Comment: A commenter expressed concern about the proposed payment rate for HCPCS code J7342 (Dermal tissue, of human origin, with or without other bio-engineered or processed elements, with metabolically active elements, per square centimeter) when billed by Maryland-based hospitals and comprehensive outpatient rehabilitation facilities (CORFs).

Response: We understand the

commenter ’ s concern; however, Maryland-based hospitals and CORFs are excluded from payment under the OPPS and the OPPS payment rates do not apply to them. This final rule with comment period addresses only the providers that are paid under the OPPS. Therefore, this comment is outside the scope of this rule.

Comment: An association for manufacturers of contrast agents supported CMS ’ proposal to pay separately for certain MRI contrast agents (for example, HCPCS codes A4643 and A4647). However, the
commenter was concerned that the payment rates for these products were based on CY 2003 hospital claims data and that the overall accuracy of the hospital median cost data is questionable; therefore, the commenter
recommended that CMS review the proposed payment rates for MRI contrast agents and requested that such
review include a confirmation that the
median cost data used as the basis for calculating the payment rates are
correct. The commenter also indicated that the proposed rule did not have unit descriptors for the HCPCS codes A4643 and A4647 and requested that CMS add the unit descriptor, ‘‘ up to 20 ml ’’ to HCPCS codes A4643 and A4647 in order to provide further clarity and facilitate more accurate coding and billing by hospitals.

Response: We understand the

commenter ’ s concern about setting appropriate payment rates for these products. These products do not meet
the definition of ‘‘ specified covered outpatient drugs ’’ as defined in the MMA; however, we do have a significant number of CY 2003 hospital claims data for these products. It is our general policy under the OPPS to use the most recent available hospital claims data in setting the OPPS payment rates. For CY 2005, both of these products will be separately payable items. The payment rate for A4643 will be based on approximately 14,200 claims for approximately 27,000 services, and payment for A4647 will be based on approximately 87,600 claims for approximately 155,000 services.

We believe that the CY 2003 claims data contain a sufficiently robust set of claims for both products on which to base the payment rates for these items using the methodology that will be usedfor other separately payable non-passthrough drugs and biologicals. With respect to adding unit descriptors to A4643 and A4647, we suggest that the commenter pursue these changes through the process set up by the
National HCPCS Panel.

Comment: A commenter expressed concern that CMS may have inappropriately packaged low osmolar contrast material (LOCM) drugs into
APCs based on a determination that the drugs do not meet CMS ’ s packaging rule because they are below the $50 threshold required for separate payment. The commenter questioned the accuracy of the median cost data
used as the basis for CMS ’ s decision as

CMS ’ paid claims files for LOCM do not include unit descriptors for the HCPCS codes A4644, A4645, and A4646. The
commenter is concerned that this makes it difficult to interpret the data in any meaningful way for purposes of determining what the payment rates for these drugs should be and whether they should be paid separately, in particular, because the dose administered per procedure can range from 10 ml to 200
ml. The commenter also believed that CMS should pay for LOCM drugs separately in the hospital outpatient setting because they are paid as such in the physician office setting. Therefore,
the commenter recommended that CMS exercise its discretion to apply an exception to the packaging rule to
LOCM as it did with the anti-emetics and allow separate payment for LOCM drugs in CY 2005. The commenter also suggested that CMS assign the unit descriptor ‘‘ per 10 ml ’’ to HCPCS codes A4644, A4645, and A4646.

Response: We recognize that the
commenter is concerned about the packaging of the three LOCM products. Based on the methodology used to calculate median cost per day for drugs and biologicals, as explained in section V.B.2. of the preamble, we determined that the per day costs of these products were below $50. Therefore, these items were packaged. We note that the LOCM products are a unique class of drugs that have always been packaged from the beginning of the OPPS in August 1, 2000, and this is the first year that we looked into the cost data for these drugs to determine whether they should be paid separately. We realize that for CY 2005 these drugs will be packaged under the OPPS, but will receive separate payment in the physician office setting. However, based upon the statutory packaging threshold for drugs and biologicals as per administration cost less than $50, we believe that it is appropriate for us to package the LOCM drugs under the OPPS. With respect to adding unit descriptors to HCPCS code A4644, A4645, and A4646, we suggest that the commenter pursue these changes through the process set up by
the National HCPCS Panel.

Comment: We received comments concerning the new Part D prescription drug benefit mandated by the MMA and the intersection between drugs covered by Part D and Part B.

Response: Because such issues are not within the scope of this CY 2005 OPPS


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final rule with comment period, we will not respond to those comments in this
document.

Comment: We received many comments from makers of drug and biological products, national trade associations, and an association for cancer centers suggesting that CMS should expand the future rate-setting methodology for ‘‘ specified covered outpatient drugs ’’ to include all drugs and biologicals that either are or were previously paid separately under the OPPS, regardless of whether the drugs meet or exceed the $50 threshold. The
commenters also recommended that
CMS also work with GAO and MedPAC to ensure that their respective studies of the acquisition costs and pharmacy
service and overhead costs include all of these drugs and biologicals and that the studies are thorough and will contain all the information CMS needs to set proper payment rates in the future. Many of
these commenters were concerned about

CMS ’ use of claims, other data, and the methodologies used to establish the OPPS payments for drugs and biologicals that do not meet the
definition of ‘‘ specified covered outpatient drugs ’’ and therefore, are not statutorily required to be included in
these studies. The commenters suggested that CMS should not implement different methodologies for

‘‘ specified covered outpatient drugs ’’ and other separately paid drugs in CY 2006; instead, CMS should ensure appropriate payment for all Medicare covered drugs by applying the acquisition cost-based payment methodology to all separately paid drugs. One commenter believed that Congress fully intended for all separately paid drugs and biologicals to be paid based on hospital acquisition costs, as informed by these studies.
Another commenter recommended that CMS continue to accept external cost data that may be submitted by knowledgeable stakeholders, such as manufacturers, providers, or patients to provide verification of hospital acquisition costs for specific drugs and biologicals. One commenter indicated
that it would like to work with CMS as it prepares the hospital acquisition cost survey for the CY 2006 rates.

Response: We appreciate the interest expressed by many of the commenters regarding the MMA-mandated surveys that will be conducted by the GAO and MedPAC of hospital acquisition cost for drugs and biologicals and their overhead and related costs, respectively. However, we note that these provisions of the MMA affect payment for drugs and biologicals in CY 2006, and thus, these comments fall outside the scope of this rule. Therefore, we will not be responding to these comments at this

time.

Comment: A commenter requested that CMS examine every HCPCS J-code for drugs to ensure that the dosage

definitions for the HCPCS codes are set

at the lowest available manufacturers ’ dosage and match the customary dispensing packaging.

Response: Changes to the HCPCS Jcodes are made by the National HCPCS Panel; therefore, this comment is outside the scope of this OPPS final rule. We suggest that the commenter pursue these changes through the process established by the National

HCPCS Panel.

**BILLING CODE 4120**

**– 01** 

**– P** 


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**BILLING CODE 4120**

**– 01** 

**– C** 


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e. CY 2005 Change in Payment Status for HCPCS Code J7308

Since implementation of the OPPS on August 1, 2000, HCPCS code J7308 (Aminolevulinic acid HCI for topical administration, 20 percent single unit dosage form) has been treated as a packaged item and denoted as such using status indicator ‘‘ N ’’ . Thus, historically we have not allowed separate payment for this drug under
the OPPS and it does not meet the statutory definition of a specified covered outpatient drug. For CY 2005, we proposed to allow separate payment for this drug at 106 percent of ASP, which is equivalent to the payment rate
that it would receive under the Medicare Physician Fee Schedule. We proposed a CY 2005 ASP and payment under the OPPS for HCPCS code J7308 of $88.86. We solicited comments on our proposed payment methodology for HCPCS code J7308 for CY 2005.

We did not receive any comments on our proposed policy. However, we did receive a comment on this policy in response to the January 6, 2004 interim final rule with comment period, which
we discuss below.

Comment: One commenter requested that HCPCS code J7308 be paid separately under the OPPS because its cost is in excess of the $50 median cost per day threshold, and the drug is also paid separately under the Medicare Physician Fee Schedule in CY 2004.

Response: We agree with the commenter and will finalize our policy to pay separately for J7308 at the payment rate that it would receive under the Medicare Physician Fee Schedule. The payment rate listed in Addenda A and B of the August 16, 2005 proposed rule was based on the second quarter ASP submission for CY
2004. As stated in section V.A. 3. of this final rule with comment period, we plan to make any appropriate adjustments to
the amount shown in Addenda A and B if later quarter ASP submissions indicate that adjustments to the payment rate for this drug is necessary.

4. Public Comments Received on the January 6, 2004 Interim Final Rule With Comment Period and Departmental Responses

As discussed in section V.B.3. of this final rule with comment period, on January 6, 2004, we published in the Federal Register an interim final rule with comment period (69 FR 822) that implemented section 621(a)(1) of Pub. L.

108

– 173. Section 621(a)(1) specified payment limits on three categories of specific covered outpatient drugs and defined these three categories of drugs. We received many pieces of correspondence that contained public comments associated with the January 6, 2004 interim final rule with comment period. Many of the comments expressed concerns about the following issues: treating radiopharmaceuticals as

‘‘ drugs; ’’ establishing mechanisms to pay for drugs without HCPCS codes at 95 percent of AWP; correcting the classification of specific items to sole

source ‘‘ specified covered outpatient drugs; ’’ eliminating the use of

‘‘ equitable adjustments ’’ to the OPPS payment for drugs and biologicals or applying any functional equivalence standards; paying separately for drugs that are either packaged or whose payment is based on median cost as

‘‘ specified covered outpatient drugs ’’ ; expanding the list of items that will be
studied in the MMA-mandated GAO and MedPAC surveys of certain OPD services; using the cost-to-charge methodology and the hospital outpatient claims data to set payment rates for certain drugs and biologicals; identifying and establishing appropriate payment rates for innovator and noninnovator multiple source drugs; and changing HCPCS code descriptors for radiopharmaceuticals to reflect the products as administered to patients.

We will not address these comments separately in this section because these
issues are discussed in detail throughout this entire section (section V.) of this final rule with comment period. However, for those public comments that are not specifically addressed in section V., a summary of them and our responses to those
comments follow:

Comment: A commenter suggested that CMS create separate HCPCS codes for Neoral, Sandimmune, and the other cyclosporine products. The commenter indicated that currently all of these products are being billed using HCPCS code J7502 (Cyclosporine, oral, 100 mg). The commenter stated that the payment rates for the brand name products should not be linked to the payment rates for the non-innovator products
because this situation creates access issues to the branded products, and CMS should not limit patient access to the specific formulation deemed medically appropriate for the individual needs of the specific patients.

Response: We note that for both CYs 2004 and 2005, hospitals can use
HCPCS code C9438 to bill for the brand name forms of oral cyclosporine. As
stated V.A.3.a. of this final rule with comment period, the MMA set forth different payment ceilings for the brand and generic versions of a drug where the CY 2005 payment rate for innovator multiple source (brand name) drugs may not exceed 68 percent of the reference AWP and the payment for generic versions may not exceed 46 percent of the reference AWP. We explained previously that we apply those ceilings only where the payment for an item based on the median hospital cost for the drug exceeds one of these ceilings. In some cases, the payment based on the median hospital cost falls below the 46 percent ceiling for generic drugs. In such cases, the payment rate would be the same for brand and generic versions. We believe that basing payment for these items on relative hospital costs, with the application as appropriate of the previously mentioned ceilings not only meets the intent but also the requirements of the MMA.

Comment: A commenter
recommended that CMS consider pricing information from several authoritative sources when determining the reference AWP, including Red Book and First Data Bank, on a case-by-case basis since such pricing information can be used to resolve outstanding payment issues and ensure greater accuracy in calculating the OPPS payment rates.

Response: We appreciate this
comment and will consider this
recommendation when we reassess the OPPS payment rates.

Comment: Several commenters noted that CMS changed the classification for many of the biologicals products to sole

source ‘‘ specified covered outpatient drugs ’’ in the February 27, 2004 CMS Transmittal 113 without discussing why the changes were made. One of the
commenters indicated that the
definition for sole source ‘‘ specified covered outpatient drugs ’’ in the MMA
is different from the Medicaid rebate
definition. The commenter stated that the MMA defined sole source drugs as: (1) A biological product (as defined under section 1861(t)(1) of the Act); or (2) a single source drug (as defined in section 1927(k)(7)(A)(iv) of the Act). The commenters requested that CMS clarify that it intends to treat all biological products as sole source drugs in the future as the law requires.

Response: We agree with the commenters that biologicals products
are defined as sole source ‘‘ specified covered drugs ’’ in the MMA, and we will determine payment rates for these products accordingly.

Comment: We received several
comments on the mechanism for establishing payment rates for innovator and noninnovator multiple source drugs. One commenter urged CMS to set the payment rates closer to the actual


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costs for all products and services and provide differential reimbursement for innovator multiple source products only if their actual acquisition costs were markedly higher than that for the noninnovator multiple source products.
Another commenter indicated that innovator and noninnovator multiple source drugs were discounted very similarly, and therefore, differential payments were not necessary. A commenter also requested that CMS obtain legislative approval to price these innovator and noninnovator multiple source drugs using a blended payment rate set halfway between 46 percent and 68 percent of their reference AWPs.

Response: We appreciate these suggestions and note that the methodology that will be used to determine payment rates for innovator and noninnovator multiple source drugs
in CY 2005 is described in detail in
section V.A.3.a. of this final rule with comment period.

C. Coding and Billing for Specified Outpatient Drugs

As discussed in the January 6, 2004 interim final rule with comment period (69 FR 826), hospitals were instructed to bill for sole source drugs using the existing HCPCS code, which were priced in accordance with the provisions of newly added section 1833(t)(14)(A)(i) of the Act, as added by
Pub. L. 108

– 173. However, at that time, the existing HCPCS codes did not allow us to differentiate payment amounts for innovator multiple source and noninnovator multiple source forms of the drug. Therefore, effective April 1, 2004, we implemented new HCPCS codes via Program Transmittal 112 (Change Request 3144, February 27, 2004) and Program Transmittal 132 (Change Request 3154, March 30, 2004) that providers were instructed to use to bill for innovator multiple source drugs in order to receive appropriate payment
in accordance with section 1833(t)(14)(A)(i)(II) of the Act. Providers
were also instructed to continue to use
the current HCPCS codes to bill for noninnovator multiple source drugs to receive payment in accordance with section 1833(t)(14)(A)(i)(III). In this manner, drugs, biologicals, and radiopharmaceuticals will be appropriately coded to reflect their classification and be paid accordingly. In the August 16, 2004 proposed rule, we proposed to continue this coding practice in CY 2005 with payment made
in accordance with section 1833(t)(14)(A)(ii) of the Act.

We received a few public comments on our proposal. Comment: Several commenters urged that CMS delete certain newly created C codes (C9400,Thallous Chloride, brand;

C9401 Strontium

– 89 chloride, brand; C9402 Th I131 so iodide cap, brand; C9403 Dx I131 so iodide cap, brand; C9404 Dx So iodide sol, brand; C9405 Th I131 so iodide, sol. brand) because radiopharmaceuticals are better
characterized as either sole source or innovator multiple source drugs. The
commenters indicated that the creation of the new codes implied that some radiopharmaceuticals are generic products and others are brand, but there was no identification of which product falls within which code. Further, there was no payment difference between some of the radiopharmaceutical brand products versus generics. The commenters believed these products did
not fit the conventional brand versus generic distinctions, and should all be recognized as brand drugs until the GAO report provides additional data. Also, the commenters recommended
that the current A-codes be retained at the payment levels CMS proposes for

‘‘ brand ’’ drugs and believed that
deletion of these codes should result in payment for the corresponding radiopharmaceuticals based on their
status as a sole source or innovator multi-source drug and would significantly lessen hospital
administrative burden and confusion.
Another commenter indicated that hospitals needed further clarification on
which manufacturers ’ products can be
billed under the HCPCS codes created for the brand and generic forms of a product.

Response: As stated in section
V.A.3.a. of this final rule with comment period, section 621(a) of Pub. L. 108

– 173 sets forth different payment ceilings for the brand and generic versions of a drug where the CY 2005 payment rate for innovator multiple source (brand name) drugs may not exceed 68 percent of the reference AWP and the payment for generic versions may not exceed 46 percent of the reference AWP. We explained previously that we apply those ceilings only where the payment
for an item based on the median hospital cost for the drug exceeds one of these ceilings. In some cases, the payment based on the median hospital cost falls below the 46 percent ceiling for generic drugs. In such cases, as the commenters indicate, the payment rate
would be the same for brand and generic versions.

We will not be providing a list of brand name and generic products for hospitals to use in determining whether their product is a brand name or generic product. We believe that hospitals are in the best position to correctly determine which type of products they are using.
We refer the commenter to the
definitions of innovator and noninnovator multiple source drugs stated in the January 6, 2004 interim final rule with comment period (69 FR 822). Hospitals can also use the FDA ’ s Orange Book in determining whether an item they use is a brand name product.

D. Payment for New Drugs, Biologicals and Radiopharmaceuticals Before HCPCS Codes Are Assigned

1. Background

Historically, hospitals have used a
code for an unlisted or unclassified drug, biological, or radiopharmaceutical or used an appropriate revenue code to bill for drugs, biologicals, and radiopharmaceuticals furnished in the outpatient department that do not have an assigned HCPCS code. The codes for not otherwise classified drugs, biologicals, and radiopharmaceuticals are assigned packaged status under the OPPS. That is, separate payment is not made for the code, but charges for the code would be eligible for an outlier payment and, in future updates, the charges for the code are packaged with the separately payable service with which the code is reported for the same
date of service.

Drugs and biologicals that are newly approved by the FDA and for which an HCPCS code has not yet been assigned by the National HCPCS Alpha-NumericWorkgroup could qualify for passthrough payment under the OPPS. An application must be submitted to CMS in order for a drug or biological to be assigned pass-through status, along with a temporary C-code for billing purposes,and an APC payment amount. Passthrough applications are reviewed on a flow basis, and payment for drugs and biologicals approved for pass-through status is implemented throughout the year as part of the quarterly updates of
the OPPS.

In the November 7, 2003 final rule with comment period (68 FR 63440), we explained how CMS generally pays under the OPPS for new drugs and biologicals that are assigned HCPCS codes, but that are not approved for pass-through payment, and for which CMS had no data upon which to base a payment rate. These codes do not receive separate payment, but are assigned packaged status. Hospitals were urged to report charges for the new codes even though separate payment is not provided. Charges reported for the
new codes are used to determine hospital costs and payment rates in future updates. For CY 2004, we again


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noted that drugs that were assigned an HCPCS code effective January 1, 2004, and that were assigned packaged status, remain packaged unless pass-throughstatus is approved for the drug. If passthrough status is approved for these drugs, pass-through payments are implemented prospectively in the next available quarterly release.

2. Provisions of Pub. L. 108

– 173

Section 621(a)(1) of Pub. L. 108

– 173 amended section 1833(t) of the Act by adding paragraph (15) to provide for payment for new drugs and biologicals until HCPCS codes are assigned under the OPPS. Under this provision, we are required to make payment for an outpatient drug or biological that is furnished as part of covered OPD
services for which a HCPCS code has not been assigned in an amount equal to 95 percent of AWP. This provision applies only to payments under the OPPS, effective January 1, 2004. However, we did not implement this provision in the January 6, 2004 interim final rule with comment period because
we had not determined at that time how hospitals would be able to bill Medicare and receive payment for a drug or biological that did not have an identifying HCPCS code.

As stated earlier, at its February 2004 meeting, the APC Panel heard presentations suggesting how to make payment for a drug or biological that did
not have a code. The APC Panel recommended that we work swiftly to implement a methodology to enable hospitals to file claims and receive payment for drugs that are newly approved by the FDA. The APC Panel
further recommended that we consider using temporary or placeholder codes that could be quickly assigned following FDA approval of a drug or biological to facilitate timely payment for new drugs and biologicals.

We explored a number of options to make operational the provisions of section 1833(t)(15) of the Act, as added by section 621(a)(1) of Pub. L. 108

– 173, as soon as possible. One of the approaches that we considered was to establish a set of placeholder codes in the Outpatient Code Editor (OCE) and the PPS pricing software for the hospital OPPS (PRICER) that we would instruct hospitals to use when a new drug was approved. Hospitals would be able to submit claims using the new code but would receive no payment until the next quarterly update. By that time, we would have installed an actual payment amount and descriptor for the code into the PRICER, and would mass-adjust
claims submitted between the date of FDA approval and the date of installation of the quarterly release. A second option that we considered was to implement an APC, a C-code, and a payment amount as part of the first quarterly update following notice of FDA approval of a drug or biological. Hospitals would hold claims for the new drug or biological until the quarterly release was implemented and then submit all claims for the drug orbiological for payment using the new Ccode to receive payment on a retroactive basis. We also considered instructing hospitals to bill for a new drug or biological using a ‘‘ not otherwise
classified ’’ code for which they would receive an interim payment based on charges converted to cost. Final payment would then be reconciled at cost report settlement. While each of these approaches might enable hospitals to begin billing for a newly approved drug or biological as soon as it received FDA approval, each approach had significant operational disadvantages, such as increased burden on hospitals or payment delays, or the risk of significant overpayments or underpayments that could not be resolved until cost report settlement.

We adopted an interim approach that
we believe balances the need for hospitals to receive timely and accurate payment as soon as a drug or biological is approved by the FDA with minimal disruption of the OPPS claims processing modules that support the payment of claims. On May 28, 2004 (Transmittal 188, Change Request 3287), we instructed hospitals to bill for a drug or biological that is newly approved by the FDA by reporting the National Drug Code (NDC) for the product along with a new HCPCS code C9399, Unclassified drug or biological. When C9399 appears on a claim, the OCE suspends the claim for manual pricing by the fiscal intermediary. The fiscal intermediary prices the claim at 95 percent of its AWP using Red Book or an equivalent recognized compendium, and processes the claim for payment. This approach enables hospitals to bill and receive payment for a new drug or biological concurrent with its approval by the FDA. The hospital does not have to wait for the next quarterly release or for approval of a product-specific HCPCS to receive payment for a newly approved drug or biological or to resubmit claims for adjustment. Hospitals would discontinue billing C9399 and the NDC upon implementation of an HCPCS code, status indicator, and appropriate payment amount with the next quarterly update.

In the August 16, 2004 proposed rule, we proposed to formalize this methodology for CY 2005 and to expand it to include payment for new radiopharmaceuticals to which a HCPCS code is not assigned (see section V.G. of this preamble). We solicited comments on the methodology and expressed particular interest in the reaction of hospitals to using this approach to bill and receive timely payment under the OPPS for drugs, biologicals, and radiopharmaceuticals that are newly approved by the FDA, prior to assignment of a product-specific HCPCS
code.

We received a number of public comments on our proposal.

Comment: One commenter, a state hospital association, is concerned about the ability of hospitals to correctly code for newly approved drugs and biologicals without HCPCS codes using
the NDC codes. The commenter indicates that typically only pharmacy systems within hospitals can properly handle the assignment and reporting of a drug ’ s NDC, not the hospital billing systems. Additionally, the use of the Remarks field to report the NDC creates payment delays as it requires manual review and pricing by the fiscal intermediaries. Several commenters, including a national hospital association and several state hospital associations, recommended that CMS adopt a new revenue code subcategory for hospitalsto use when reporting these newly FDAapproved drugs and biologicals on UB

– 92 paper claims. The hospital could use the new revenue code along with the reported NDC in the revenue-code description field. Establishing a new revenue code field, to be used with the description field, allows clearinghouses to scan the paper UB

– 92 and then convert the data into the appropriate HIPAA standard for auto adjudication. The FI would then no longer have to suspend these paper claims for manual pricing, because it would build logic into the system to auto-adjudicate these claims. The hospital would then continue to report C9399 (HCPCS code indicating Unclassified drug or biological) in the HCPCS field, the units in the Unit field, the date the drug was administered in the date field, and finally, the price of these drugs in the Total Charges field. These commenters believed that this alternative policy would greatly improve the current process for both hospitals and fiscal
intermediaries.

Response: We read the hospital

associations ’ recommendation for an alternative approach to report NDCs on

UB

– 92 paper claims with interest and will explore its feasibility with the different components within CMS that are responsible for claims processing, information technology and systems,


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and HIPAA standards. It appears that time-consuming systems changes could be required were we to adopt such an approach, which could delay implementation, but we will consider the proposal carefully.

Comment: A maker of pharmaceuticals commends CMS for implementing the mechanism where hospitals can bill and be paid for new drugs without HCPCS codes. However,
the commenter is concerned that the use of a miscellaneous code may result in significant payment delays and potentially prevent patient access to new therapies. The commenter suggests that CMS monitor claims submission, timely processing, and payments more closely so that patient access to new therapies is not impeded. Another commenter suggested that CMS should modify this mechanism if necessary toensure patients have access to cuttingedge drugs. One commenter suggested that CMS explore with its contractors the feasibility of automating processing of these claims by including the NDC number as a claims processing field when the miscellaneous C code appears on a claim since such a process would
eliminate the additional costs of manual claim review and expedite provider payment.

Response: We share the commenters ’ concerns that claims processing systems not impede beneficiary access to new drug therapies. However, we believe the approach that we implemented in CY 2004 and that we proposed to adopt permanently beginning in CY 2005, which requires the use of HCPCS code C9399 to be reported with an appropriate NDC, will result in hospitals receiving payment for new drugs more quickly compared to the process that we followed previously, even though some manual handling of claims is required. We agree with the commenter who suggested that CMS closely monitor claims submission, timely processing, and payments for new drugs, and we intend to do so.

Comment: One commenter encouraged CMS to reconsider the payment policy that requires the reporting of the NDC for new drugs as

‘‘ mandatory ’’ and consider making the

NDC ‘‘ optional. ’’ For providers unable to automate the reporting of the NDC number due to software limitations, it suggested that CMS consider allowing providers the option of listing the NDC number in the detailed drug name as reported on the itemized statement of charges that can be requested along with the UB reporting the C9399 code.

Response: As we have indicated in previous responses to commenters ’ suggestions regarding ways to implement the payment requirement for new drugs and biologicals that have not been assigned a HCPCS code, we will
also consider this commenter ’ s recommendation to determine its feasibility.

Comment: Several commenters urged CMS to reconsider the policy of preloading several new codes into CMS ’ computer system and assigning them to new drugs and biologicals as the Food and Drug Administration approved them, rather than requiring manual processing of claims using a single
miscellaneous code. If CMS determines that the current policy is imposing too great an administrative burden on hospitals and delays in processing claims that harm hospitals ’ ability to provide new drugs and biologicals to Medicare beneficiaries, the commenters urged CMS to reconsider its proposal and to explore preloading placeholder
codes instead.

Response: Preloading placeholder codes was one of the options that we considered before we implemented C9399, but we found that this approach had its disadvantages, most of which stemmed from concerns about delays
related to the dissemination of new codes to providers and installing prices into the claims processing modules in a timely manner. We propose to monitor throughout CY 2005 the use of HCPCS
code C9399 and NDC codes to evaluate whether this approach is an improvement over how hospitals were previously paid for new drugs to which a HCPCS code had not been assigned and to determine if changes in the process would be beneficial.

Comment: One commenter indicated that requiring hospitals to submit the National Drug Code on claims imposes
an enormous administrative burden on hospitals because there is no field for NDCs on the claims form and, therefore,
NDCs cannot be entered on the claim automatically. Rather, claims must be flagged and adjusted manually. The commenter suggested that the best solution is to close the lag time between FDA approval and HCPCS assignment of a new drug. By creating a seamless execution of approval and code assignment, CMS can ensure that the
MMA mandate is fulfilled in the least burdensome manner and that providers are adequately paid for providing these new drugs.

Response: While the use of NDCs may impose a degree of reporting burden on hospitals, we believe that, in spite of the inconvenience of manual reporting and claims processing, this approach is the most efficient way to expedite payment to hospitals for newly approved drugs to which a HCPCS code has not been assigned.

Comment: One commenter, an association for cancer centers, supported CMS ’ proposal for reporting new drugs without HCPCS codes using C9399 and any other necessary data. However, the commenter requested
clarification from CMS on whether C9399 can only be used for injectible drugs or whether this code can also be used to report all newly approved FDA drugs (including oral drugs). The
commenter believed that C9399 can be used for all Medicare-covered drugs, including oral anti-emetics and oral chemotherapeutics with IV equivalents, but requested that CMS clarify this issue
to ensure that fiscal intermediaries correctly process this new code.

Response: Our instructions regarding how hospitals may report a new drug using C9399 and NDCs only indicate the method by which hospitals can bill Medicare for payment if the new drug is covered by the Medicare program. These instructions do not represent a
determination that the Medicare program covers a new drug for which a hospital submits a bill using C9399. In addition to determining payment, fiscal
intermediaries must determine whether a drug billed with C9399 meets all program requirements for coverage. For example, they must assess whether the drug is reasonable and necessary to treat the beneficiary ’ s condition and whether the drug is excluded from payment because it is usually self-administered. The same rules, regulations, and policies that apply to coverage of drugs, biologicals, and radiopharmaceutical agents that already have a HCPCS code also apply to newly approved items for which a HCPCS code has not yet been assigned.

Comment: Two commenters urged CMS to publish the approved drugs and radiopharmaceuticals that may be submitted under HCPCS code C9399, as well as the appropriate units of measure applicable for each drug or biological and the payment amount for the drug based on 95 percent of the AWP. One commenter indicated that hospitals are concerned that they will not identify all of the drugs that are eligible for this payment and are also concerned that they may inappropriately assign the HCPCS code to drugs that are not eligible for this payment. Additionally, there is an administrative burden placed both on providers and the fiscal
intermediaries when CMS does not publish the payment rates for these drugs.

Response: We understand that use of C9399 and NDCs is a departure from how hospitals have become accustomed


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to preparing Medicare claims for the OPPS services. However, the MMA mandates that hospitals be paid 95 percent of AWP for new drugs until a HCPCS code is assigned to that drug. We believe this MMA provision is intended to ensure that hospitals can receive timely payment for new drugs, biologicals, and radiopharmaceuticals without having to wait for a HCPCS
code to be created and disseminated or for an OPPS payment amount to be implemented in a quarterly OPPS update. Generally, CMS learns of FDA approval of a new product at approximately the same time the public learns of the approval. Hospitals may wish to look to their advocacy associations for assistance in monitoring the FDA Web site to identify new products as they are approved, as a supplemental information source. We also intend to explore ways hospitals could systematically receive timely reports of newly approved drugs by means other than checking the FDA Web site. However, how to report a product rests with the hospital, as it does for any drug, biological, radiopharmaceutical agent, procedure, or service, with or without a HCPCS code. Therefore, we are not accepting
the commenters ’ suggestion that we publish the approved drugs and radiopharmaceuticals that may be submitted under HCPCS code C9399, as well as the appropriate units of measure applicable for each drug or biological and the payment amount for the drug based on 95 percent of the AWP. Rather, we prefer to focus our resources on updating the OPPS on a quarterly basis with codes, APC assignments, and payment amounts for drugs, biologicals, and radiopharmaceuticals newly approved by the FDA during the prior quarter.

We have carefully considered

commenters ’ recommendations and concerns, and we believe that our proposed methodology for using C9399 and NDC codes to bill for drugs, biologicals, and radiopharmaceutical agents newly approved by FDA to which a HCPCS code is not assigned is the most efficient and practicable approach at this time to ensure timely, appropriate Medicare payment for these new products. Therefore, we are making final for CY 2005 our proposed methodology, without modification.

E. Payment for Vaccines

Outpatient hospital departments administer large numbers of immunizations for influenza (flu) and pneumococcal pneumonia (PPV), typically by participating in immunization programs. In recent years, the availability and cost of some vaccines (particularly the flu vaccine) have fluctuated considerably. As discussed in the November 1, 2002 final rule (67 FR 66718), we were advised by providers that the OPPS payment was
insufficient to cover the costs of the flu
vaccine and that access of Medicare beneficiaries to flu vaccines might be limited. They cited the timing of updates to the OPPS rates as a major concern. They indicated that our update methodology, which uses 2-year-old claims data to recalibrate payment rates,
would never be able to take into account yearly fluctuations in the cost of the flu vaccine. We agreed with this concern and decided to pay hospitals for influenza and pneumococcal pneumonia vaccines based on a reasonable cost methodology. As a result of this change, hospitals, home health agencies (HHAs), and hospices, which were paid for these vaccines under the OPPS in CY 2002, have been receiving payment at reasonable cost for
these vaccines since CY 2003. We are
aware that access concerns continue to exist for these vaccines. However, we continue to believe that payment other
than on a reasonable cost basis would exacerbate existing access problems. Therefore, in the August 16, 2004 proposed rule, we proposed to continue paying for influenza and pneumococcal pneumonia vaccines under the reasonable cost methodology in CY

2005.

Comment: Several commenters applauded CMS ’ proposal to continue to pay for vaccines under the reasonable cost methodology. The commenters indicated that payment on a reasonable cost basis helps ensure that the OPPS rates are adequate to cover hospitals ’ costs of providing vaccines to Medicare beneficiaries, protecting their health, and reducing Medicare ’ s costs of treating influenza and other preventable
illnesses.

Response: We appreciate the

commenters ’ continued support of our policy to pay for influenza and pneumococcal pneumonia vaccines at
reasonable cost and finalize our proposal in this final rule with comment period. We note that for CY 2005 a new
CPT code for an influenza vaccine was
created. The new CPT code 90656 (Influenza virus vaccine, split virus, preservative free, for use in individuals 3 years and above, for intramuscular use) will be paid at reasonable cost in CY 2005. We have assigned status
indicator ‘‘ L ’’ (Not Paid under OPPS. Paid at reasonable cost) to this new CPT
code. F. Changes in Payment for Single Indication Orphan Drugs

Section 1833(t)(1)(B)(i) of the Act gives the Secretary the authority to designate the hospital outpatient services to be covered. The Secretary has specified coverage for certain drugs as orphan drugs (section 1833(t)(14)(B)(ii)(III) of the Act as added by section 621(a)(1) of Pub. L. 108

– 173). Section 1833(t)(14)(C) of the Act as added by section 621(a)(1) of Pub. L.

108

– 173, gives the Secretary the authority in CYs 2004 and 2005 to specify the amount of payment for an orphan drug that has been designated as such by the Secretary.

We recognize that orphan drugs that are used solely for an orphan condition or conditions are generally expensive and, by definition, are rarely used. We believe that if the cost of these drugs were packaged into the payment for an associated procedure or visit, the payment for the procedure might be insufficient to compensate a hospital for the typically high cost of this special type of drug. Therefore, in the August 16, 2004 proposed rule, we proposed to continue making separate payments for orphan drugs based on their currently assigned APCs.

In the November 1, 2002 final rule (67 FR 66772), we identified 11 single indication orphan drugs that are used solely for orphan conditions by applying the following criteria:

• The drug is designated as an orphan drug by the FDA and approved by the FDA for treatment of only one or more orphan conditions(s).

• The current United States Pharmacopoeia Drug Information (USPDI) shows that the drug has neither an approved use nor an off-label use for other than the orphan condition(s).

Eleven single indication orphan drugs were identified as having met these criteria and payments for these drugs
were made outside of the OPPS on a
reasonable basis.

In the November 7, 2003 final rule with comment period (68 FR 63452), we discontinued payment for orphan drugs
on a reasonable cost basis and made separate payments for each single indication orphan drug under its own APC. Payments for the orphan drugs were made at 88 percent of the AWP listed for these drugs in the April 1, 2003 single drug pricer, unless we were presented with verifiable information that showed that our payment rate did not reflect the price that is widely available to the hospital market. For CY 2004, Ceredase (alglucerase) and Cerezyme (imiglucerase) were paid at 94 percent of AWP because external data


### 65808 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

submitted by commenters on the August 12, 2003 proposed rule caused us to believe that payment at 88 percent of
AWP would be insufficient to ensure
beneficiaries ’ access to these drugs.

In the December 31, 2003 correction of the November 7, 2003 final rule with comment period (68 FR 75442), we added HCPCS code J9017, arsenic trioxide (per unit) to our list of single indication orphan drugs. As of the time of our August 16, 2004 proposed rule, the following were the 12 orphan drugs that we have identified as meeting our criteria: J0205 Injection, alglucerase, per 10 units; J0256 Injection, alpha 1- proteinase inhibitor, 10 mg; J9300 Gemtuzumab ozogamicin, 5 mg; J1785 Injection, imiglucerase, per unit; J2355 Injection, oprelvekin, 5 mg; J3240 Injection, thyrotropin alpha, 0.9 mg; J7513 Daclizumab parenteral, 25 mg; J9015 Aldesleukin, per vial; J9017 Arsenic trioxide, per unit; J9160 Denileukin diftitox, 300 mcg; J9216 Interferon, gamma 1-b, 3 million units and Q2019 Injection, basiliximab, 20 mg. In the August 16, 2004 proposed rule, we did not propose any changes to this list of orphan drugs for CY 2005.

In the proposed rule, we noted that had we not classified these drugs as single indication orphan drugs for payment under the OPPS, they would have met the definition as a single source specified covered outpatient drug and been paid lower payments which could impede beneficiary access to these unique drugs dedicated to the treatment of rare diseases. Instead, for CY 2005, under our authority at section 1833(t)(14)(C) of the Act, we proposed to pay for all 12 single indication orphan drugs, including Ceredase and Cerezyme, at the rate of 88 percent of AWP or 106 percent of the ASP, whichever is higher. However, for drugs where 106 percent of the ASP would exceed 95 percent of AWP, payment would be capped at 95 percent of AWP, which is the upper limit allowed for sole source specific covered outpatient drugs. For example, Ceredase and Cerezyme would each be paid at 95 percent of the AWP because payment at ASP plus 6 percent for these two drugs not only exceeds 88 percent of the AWP but also exceeds 95 percent of the AWP. We proposed to pay the higher of 88 percent of AWP or 106 percent of ASP capped at 95 percent of AWP to ensure
that beneficiaries will continue to have access to such important drugs.

We received the following comments to our August 16, 2004 proposed rule on single indication orphan drugs.

Comment: A few commenters recommended that CMS adopt the

FDA ’ s definition of an orphan drug as under the Orphan Drug Act. The
commenters indicated that CMS shouldexpand the current list of 12 singleindication orphan drugs that receive special treatment to include several other FDA-designated orphan drugs. One commenter requested that CMS adopt a utilization threshold to identify orphan drugs that would receive the special treatment rather than using its

current criteria.

Response: Using the statutory authority in section 1833(t)(1)(B)(i) of the Act, which gives the Secretary broad authority to designate covered OPD services under the OPPS, we have established criteria which distinguish single-indication orphan drugs from other drugs designated as orphan drugs by the FDA under the Orphan Drug Act. Our determination to provide special payment for these drugs neither affects
nor deviates from FDA ’ s classification of any drugs as orphan drugs. The specialtreatment given to this subset of FDAdesignated orphan drugs is intended to
ensure that beneficiaries have continued access to these life-saving therapies given that these drugs have a relatively low volume of patient use, lack any other non-orphan indication and are typically very costly. Although we are not expanding our criteria to identify orphan drugs that will receive special payment for CY 2005, we will consider
the commenters ’ recommendation of a utilization threshold in future changes to the OPPS orphan drug list.

Comment: We received comments from different drug manufacturers separately requesting that Campath (J9010, Alemtuzumab), Elitek (J2783, Rasburicase), Vidaza (C9218, Azacitidine for injectable suspension), and Botox (J0585, Botulinum toxin typeA) be included in the list of singleindication orphan drugs that will receive special payment for CY 2005.

Response: After careful review of the requests for these four drugs to be included in the list of single-indication orphan drugs, we have determined that Campath (J9010) and Vidaza (C9218) do
meet our criteria for inclusion in the list. Thus, effective for January 1, 2005, J9010 and C9218 will be paid in accordance with the payment policy for single indication orphan drugs for CY 2005. However, we have determined that Elitek (J2783) and Botox (J0585) do
not meet the criteria for inclusion in thelist because these drugs have an offlabel use as indicated by the 2004 United States Pharmacopoeia Drug Information (USPDI).

Comment: Several commenters, including manufacturers of alpha-1 proteinase inhibitor (J0256) sold under the brand names Prolastin, Aralast and Zemaira, submitted comments expressing concern over the decrease in the payment rate for HCPCS J0256 from
the CY 2004 level to the CY 2005 proposed rate. The majority of commenters requested that the payment rate for J0256 be frozen at the CY 2004 levels, rather than based on the AWP of Prolastin, the least expensive drug among the three name brands. As some commenters explained, Prolastin has experienced supply shortages in the past and if the payment rate for the alpha-1 therapy did not take into account the higher AWPs of Aralast or Zemaira, it would be inadequate to cover the actual acquisition costs of the drugs to hospitals.

The manufacturer of Aralast requested that CMS exclude pricing information associated with Prolastin when setting the payment rate for J0256. The commenter stated that although Prolastin is currently available and used in greater quantities than either Aralast or Zemaira , it has experienced supply shortages in the past. Therefore, according to the commenter, the payment rate for J0256 needs to be such that patients will have continued access to all three brand names. Alternatively,
the commenter recommended that new
HCPCS codes could be created so each brand name could be paid appropriately or CMS could freeze the payment rate for J0256 at the CY 2004 levels, as the majority of commenters recommended.

The manufacturer of Zemaira expressed concern that the proposed payment rate does not meet the actual hospital acquisition cost for this brand name, which is the newest of the three
brand names to come on the market to be used in alpha-1 therapy.

We received a comment from an organization representing voluntary health organizations and individual patients that stated that the proposed payments for CY 2005 were adequate to avoid problems with access to the orphan drugs that patients with rare diseases need. In addition, the commenter requested that CMS take actions to monitor any changes in
beneficiaries ’ access to orphan drugs as a result of payment changes, to review the claims database for changes in utilization patterns, to seek input from beneficiaries about access problems, and to inform beneficiaries about payment changes and the potential impact of such changes on their access.

We also received recommendations from a patient advocacy organization requesting that CMS work with the manufacturers of the alpha-1 therapy to obtain the data necessary to raise the proposed OPPS rate of $2.46 (per 10 mg) or to establish the ASP rate which may


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enhance patient access to care. The
commenter also recommended that CMS base the payment rate for J0256 on all
available brands.

Response: After careful evaluation of the issues and concerns raised by commenters in response to our proposed rule, we recognize that our proposed payment rate for HCPCS code J0256 may create an unanticipated access problem during periods of short supply. Therefore, in order to ensure
continued beneficiaries ’ access to this important drug, we will base the payment rate for HCPCS code J0256 on all three brands of the alpha-1 proteinase inhibitor currently available on the market. The adjusted AWP of HCPCS code J0256 will be based on the volume-weighted average of the three drugs. The adjusted AWP will be updated each quarter, as necessary, to reflect any changes in the individual AWP or relative weight of each drug in
the calculation of the AWP for HCPCS code J0256. We would expect that as the
volume and/or individual AWP increases or decreases for a brand, these changes will be captured in its relative weight and will be reflected in the adjusted AWP for HCPCS code J0256.

We share the commenters ’ concern for protecting beneficiaries ’ access to these therapies used for rare disease conditions. As part of our process of developing special payment rates for single indication orphan drugs in CY 2005, our analysis of CY 2003 claims
data does not indicate a decrease in utilization of any orphan drugs that may signify barriers to beneficiaries ’ access to these drugs.

Comment: Several commenters
recommended that CMS eliminate the95 percent AWP cap on singleindication orphan drugs whose ASP plus 6 percent would exceed their 88 percent AWP. According to the commenters, these drugs would not be subject to the 95 percent AWP cap when administered in the physician ’ s office. They argued that CMS should pay for these drugs at the same rate, irrespective
of the site of service.

We received a request from the drug
manufacturer of Ontak to increase the payment rate for the drug from 88 percent of the May 2004 AWP to 92 percent of the current AWP. Alternatively, the commenter requested that CMS remove the 95 percent AWP cap for J9160 (Ontak).

Response: We believe that access to these life-saving therapies is extremely important and after careful consideration, we will not implement the cap of 95 percent of AWP for any of the single-indication orphan drug for those drugs whose 106 percent ASP exceeds 88 percent of AWP. Effective forCY 2005, payment for all singleindication orphan drugs will be set at the higher of 106 percent of the most current ASP or 88 percent of the most

current AWP.

Comment: A few commenters recommended that CMS update the payment rates quarterly, based on the
latest ASP and AWP data available. They argue that to lock in the rates for a year based on outdated information could impede patient access to these drugs.

Response: We agree with the commenters and will base payments for single-indication orphan drugs on a quarterly comparison of ASP and AWP data. Appropriate adjustments to the payment amounts shown in Addendum
A and B will be made if ASP
submissions and AWP data in a later quarter indicate that adjustments to the payment rates are necessary. These changes to the Addenda will be announced in our program instructions released on a quarterly basis and posted
on our Web site at http:// www.cms.hhs.gov.

Comment: We also received a
comment from the manufacturer of Fabrazyme requesting that CMS consider making payment for Fabrazyme (C9208, agalsidase beta) as a single-indication orphan drug. The commenter believes that by statute, CMS is required to pay for the drug at 106 percent of ASP; however, the
commenter stated that if CMS were to somehow reach a different conclusion, it would request to be treated as a single-indication orphan drug.

Response: We agree with the commenter that the statute requires that payment for Fabrazyme (C9208), a drug that currently has pass-through status, be made at 106 percent of ASP for CY

2005.

In summary, we have set payment rates for single-indication orphan drugs according to the following policy, effective January 1, 2005:

• We are using the same criteria that we implemented in CY 2003 to identify single indication orphan drugs used solely for an orphan condition for special payment under the OPPS; and,

• We are setting payment under the CY 2005 OPPS for single indication orphan drugs at the higher of 88 percent of the AWP or the ASP plus 6 percent, updated quarterly to reflect the most
current AWP and ASP data.

While we are not implementing the 95 percent AWP cap on single-indication orphan drugs in CY 2005, we will monitor this decision and may apply the cap in future OPPS updates. G. Change in Payment Policy for Radiopharmaceuticals

In the November 1, 2002 OPPS final rule (67 FR 66757), we determined that we would classify any product containing a therapeutic radioisotope to be in the category of benefits described under section 1861(s)(4) of the Act. We also determined that the appropriate benefit category for diagnostic radiopharmaceuticals is section 1861(s)(3) of the Act. We stated in the November 1, 2002 final rule that we will consider neither diagnostic nor therapeutic radiopharmaceuticals to be drugs as defined in 1861(t) of the Act (67 FR 66757). Therefore, beginning with the CY 2003 OPPS update, and continuing with the CY 2004 OPPS update, we have not qualified diagnostic or therapeutic radiopharmaceuticals as drugs or biologicals.

As we stated in the August 16, 2004 proposed rule, when we analyzed the many changes mandated by Pub. L.

108

– 173 that affect how we would pay for drugs, biologicals, and radiopharmaceuticals under the OPPS in CY 2005, we revisited the decision that we implemented in CY 2003 not to classify diagnostic and therapeutic radiopharmaceuticals as drugs or biologicals. In our analysis, we noted that although we did not consider radiopharmaceuticals for pass-through payment in CYs 2003 and 2004, we did apply to radiopharmaceuticals the same packaging threshold policy that we applied to other drugs and biologicals, and which we proposed to continue in CY 2005. In addition, for the CY 2004 OPPS update, we applied the same adjustments to median costs for radiopharmaceuticals that we applied to separately payable drugs and biologicals that did not have pass-through status (68 FR 63441).

In our review of this policy, we noted that section 1833(t)(14)(B)(i) of the Act, as amended by section 621(a) of Pub. L.

108

– 173, does include

‘‘ radiopharmaceutical ’’ within the meaning of the term ‘‘ specified covered outpatient drugs, ’’ although neither section 621(a)(2) nor section 621(a)(3) of
Pub. L. 108

– 173 includes a reference to radiopharmaceuticals.

In an effort to provide a consistent reading and application of the statute, we proposed to apply to radiopharmaceuticals certain provisions
in section 621 of Pub. L. 108

– 173 which affect payment for drugs and biologicals billed by hospitals for payment under
the OPPS. We believed it was
reasonable to include radiopharmaceuticals in the general category of drugs in light of their


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inclusion as specified covered outpatient drugs in section 1833(t)(14)(B) of the Act, as added by section 621(a)(1) of Pub. L. 108

– 173.

Section 621(a)(1) of Pub. L. 108

– 173, which amends section 1833(t) of the Act by adding a new subparagraph (14) affecting payment for radiopharmaceuticals under the OPPS, is unambiguous. This provision clearly requires that separately paid radiopharmaceuticals be classified as

‘‘ specified covered outpatient drugs. ’’ Therefore, in CY 2005, we proposed to continue to set payment for radiopharmaceuticals in accordance with these requirements, which are
discussed in detail in section V.B.3. of this preamble.

Section 1833(t)(16)(B) of the Act, as added by section 621(a)(2) of Pub. L.

108

– 173, requires us to reduce the
threshold for the establishment of separate APCs with respect to drugs and biologicals to $50 per administration for drugs and biologicals furnished in 2005 and 2006. We proposed to apply the $50 packaging threshold methodology
discussed in section V.B.2. of this final rule with comment period to radiopharmaceuticals as well as to drugs and biologicals.

Section 1833(t)(15) of the Act, added by section 621(a)(1) of Pub. L. 108

– 173, requires us to make payment equal to 95 percent of the AWP for an outpatient drug or biological that is covered and furnished as part of covered OPD
services for which a HCPCS code has not been assigned. We proposed, beginning in CY 2005, to extend to radiopharmaceuticals the same payment methodology discussed in section V.D. of this preamble for new drugs and biologicals before HCPCS codes are assigned. That is, we proposed to pay for newly approved radiopharmaceuticals, as well as newly approved drugs and biologicals, at 95 percent of AWP prior to assignment of
a HCPCS code.

Section 1833(t)(5)(E) of the Act, as added by section 621(a)(3) of Pub. L.

108

– 173, excludes separate drug and biological APCs from outlier payments. Beginning in CY 2005, we proposed to apply section 621(a)(3) of Pub. L. 108

– 173 to APCs for radiopharmaceuticals. That is, beginning in CY 2005, radiopharmaceuticals would be excluded from receiving outlier payments.

Consistent with our proposed policy to apply to radiopharmaceutical agents payment policies that apply to drugs and biologicals, we further proposed, beginning in CY 2005, to accept applications for pass-through status for certain radiopharmaceuticals. That is, we proposed on a prospective basis to consider for pass-through status those radiopharmaceuticals to which a HCPCS code is first assigned on or after January 1, 2005. As we explain in section V.A.3. of this final rule with comment period, section 1833(t)(6)(D)(i) of the Act sets the payment rate for pass-through eligible drugs and biologicals as the
amount determined under section 1842(o) of the Act. In the August 16, 2004 proposed rule, we proposed to payfor drugs and biologicals with passthrough status in CY 2005 consistent with the provisions of section 1842(o) of the Act as amended by Pub. L. 108

– 173, at a rate that is equivalent to the payment these drugs and biologicals would receive in the physician office setting and set in accordance with the methodology described in the Medicare Physician Fee Schedule Proposed Rule for CY 2005 (69 FR 47488, 47520 through 47524).

We issued an interim final rule with comment period entitled ‘‘ Medicare Program: Manufacturer Submission of
Manufacturer ’ s Average Sales Price (ASP) Data for Medicare Part B Drugs and Biologicals ’’ in the April 6, 2004 Federal Register , related to the
calculation and submission of
manufacturer ’ s ASP data (69 FR 17935).
We need these data in order to determine payment for drugs and biologicals furnished in a physician office setting in accordance with the methodology described in the Medicare Physician Fee Schedule Proposed Rule (69 FR 47488, 47520 through 47524). However, the April 6, 2004 interim final rule with comment period excludes radiopharmaceuticals from the data reporting requirements that apply to Medicare Part B covered drugs and biologicals paid under sections 1842(o)(1)(D), 1847A, or 1881(b)(13)(A)(ii) of the Act (69 FR 17935). As a consequence, we would not have the same type of data available to determine payment for a newradiopharmaceutical approved for passthrough status after January 1, 2005 that
would be available to determine payment for a new drug or biological with pass-through status in CY 2005.

Therefore, in order to set payment for a new radiopharmaceutical approved for pass-through status in accordance with 1842(o) of the Act and in a manner that is consistent with how we proposed to set payment for a pass-through drug or biological, we proposed a methodology that would apply solely to new radiopharmaceuticals for which payment would be made under the OPPS and for which an application for pass-through status is submitted after January 1, 2005. That is, in order to receive pass-through payment for a new radiopharmaceutical under the OPPS, a manufacturer would be required to
submit data and certification for the radiopharmaceutical in accordance with the requirements that apply to drugs and biologicals under section 303 of
Pub. L. 108

– 173 as set forth in the interim final rule with comment period issued in the April 6, 2004 Federal Register (66 FR 17935) and described on
the CMS Web site at http://cms.hhs.gov. We proposed that payment would be
determined in accordance with the methodology applicable to drugs and biologicals that is discussed in the CY 2005 Medicare Physician Fee Schedule proposed rule (69 FR 47488, 47520

– 47524). In the event the manufacturer seeking pass-through status for a radiopharmaceutical does not submit
data in accordance with the requirements specified for new drugs and biologicals, we proposed to set payment for the new radiopharmaceutical as a specified covered outpatient drug, under section 1833(t)(14)(A) as added by section 621(a)(1) of Pub. L. 108

– 173.

We received many public comments on our proposals.

Comment: Many commenters applauded CMS for proposing to treat radiopharmaceuticals as drugs and encouraged CMS to continue to pay for these products as ‘‘ specified covered outpatient drugs ’’ under the OPPS, consistent with section 621(a) of the MMA. They indicated that this policy ensures consistent treatment of drugs and radiopharmaceuticals, eliminates confusion related to the prior
differences in their treatment under the OPPS, and facilitates patient access to these important therapies in clinically appropriate settings. One of the commenters also supported the proposal to exclude radiopharmaceuticals from receiving outlier payments in CY 2005.

Response: We appreciate the

commenters ’ support of our policy to treat radiopharmaceuticals as drugs and will finalize this policy for CY 2005.

Comment: Several commenters opposed our proposal to require
manufacturers to submit ASP data forradiopharmaceutical agents with passthrough status. One manufacturer of radiopharmaceuticals stated that there are significant practical problems and legal barriers to reporting ASP for radiopharmaceuticals. The commenter
indicated that manufacturers often sell the components of a radiopharmaceutical to independent radiopharmacies. These radiopharmacies then sell unit doses to many hospitals; however, some hospitals also purchase the components


### 65811 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

of the radiopharmaceutical and preparethe radiopharmaceutical through inhouse radiopharmacies. This
commenter asserted that the end result is that there is very often no ASP for the finished radiopharmaceutical product. For example, there may only be manufacturer pricing for the components; however, the price set by the manufacturer for one component of a radiopharmaceutical does not directly translate into the acquisition cost of the

‘‘ complete ’’ radiopharmaceutical, which may result from the combination of several components. This commenter
recommended that CMS be consistent and not require ASP in the OPPS, as CMS does not require ASP for radiopharmaceuticals in the Medicare Physician Fee Schedule. The commenter thus urged CMS to determine payment for pass-through radiopharmaceuticals as specified covered outpatient drugs, based on AWP or acquisition costs. Another
commenter recommended that CMS set payment for all pass-through radiopharmaceuticals in CY 2005 using
the AWP-based ‘‘ specified covered outpatient drugs ’’ payment methodology, regardless of whether ASP data are available for the drug and stated that this methodology is more appropriate for these products, because it will be more likely to ensure adequate payment as use of the product is adopted, and thus will provide for robust cost data for future rate-setting

purposes.

Response: We appreciate these
comments and understand the concerns commenters stated regarding our proposal to require manufacturers ofradiopharmaceutical agents with passthrough status to submit ASP data. We recognize the complexities of determining ASP for radiopharmaceuticals because of their unique preparation processes; therefore, we agree with the commenters ’ concerns about finalizing the proposed policy. Because radiopharmaceuticals are not paid on ASP in the physician office setting, manufacturers of these agents will not be required to report ASPs for payment purposes under the OPPS. Therefore, payment for radiopharmaceuticals with pass-through
status will be made in accordance with
their status as sole source ‘‘ specified covered outpatient drugs. ’’ That is, in
the absence of both ASP data and hospital claims data, we will set payment for new radiopharmaceuticals approved for pass-through status beginning in CY 2005 at the floor for
sole source ‘‘ specified coveraged outpatient drugs, ’’ which is 83 percent
of the AWP.

Comment: A few commenters urged
CMS to revise the HCPCS code descriptors for radiopharmaceutical products that do not currently have ‘‘ per dose ’’ or ‘‘ per study ’’ descriptors and
indicated that ‘‘ per dose ’’ or ‘‘ per study ’’ code descriptors will facilitate the collection of more accurate charge and cost data which are necessary to establish equitable payment for radiopharmaceutical agents.

Response: We recognize the concerns expressed by these commenters. As we have stated in the November 7, 2003 OPPS final rule with comment period (68 FR 63451), we continue to believe that in changing descriptors to ‘‘ per dose ’’ or ‘‘ per study ’’ , we will lose specificity with respect to the data we will receive from hospitals. We are not convinced that there is a programmatic need to change the radiopharmaceutical code descriptors to ‘‘ per dose ’’ or that
claims data based on the current code descriptors are problematic for setting payment rates for these products. However, we will continue to work with industry representatives to ensure that the current HCPCS descriptors are appropriate and review this issue in the future, if needed. Furthermore, we stress the importance of proper coding by providers so that we can obtain accurate data for future rate setting.

Comment: A commenter strongly supported CMS requiring that hospitals report all HCPCS codes for drugs including those that are packaged and
indicated that this will enable CMS to track costs and help to ensure that only correctly coded claims (those with radiopharmaceuticals) are used in setting payment rates for nuclear medicine procedures. Therefore, the
commenter recommended that CMS require continued reporting of HCPCS codes for all radiopharmaceuticals (packaged and non-packaged products).

Response: We will continue to strongly encourage hospitals to report charges for all drugs using the correct HCPCS codes for the items used, including the drugs that have packaged status in CY 2005. We agree with the
commenter that it is most useful to us
when we have a robust set of claims for each item paid for under the OPPS. We would note, however, that with just a very few exceptions, hospitals do appear to be reporting charges for drugs, biologicals and radiopharmaceuticals using the existing HCPCS codes, even when such items have packaged status. At this time, we do not believe it is necessary to institute a requirement for drugs as we are doing for the device category codes. However, we will continue to monitor this through our annual analysis of claims data and will reconsider this in the future, if we determine that it is necessary.

H. Coding and Payment for Drug
Administration

Since implementation of the OPPS, Medicare OPPS payment for administration of cancer chemotherapy drugs and infusion of other drugs has been made using the following HCPCS
codes:

• Q0081, Infusion therapy other than chemotherapy, per visit

• Q0083, Administration of chemotherapy by any route other than infusion, per visit

• Q0084, Administration of chemotherapy by infusion only, per

visit

• Q0085, Administration of chemotherapy by both infusion and another route, per visit

In the CY 2004 proposed rule, we proposed to change coding and payment for these services to enable us to pay more accurately for the wide range of services and the drugs that we package into these per visit codes. (Background
discussion on these codes is included in the August 12, 2003 OPPS proposed rule (68 FR 47998). Commenters on the CY 2004 proposed rule recommended that we use the CPT codes for drug
administration. One commenter provided a crosswalk from the CPT codes for drug administration to the Q
codes that we could use in a transition. We did not implement this in the final
rule for CY 2004 OPPS but indicated
that we would consider it for CY 2005
and would discuss it with the APC Panel at its February 2004 meeting.

Commenters and the APC Panel
recommended that we discontinue use of code Q0085 for CY 2004 because codes Q0083 and Q0084 could be used together to report the services described by code Q0085. We did implement this change for CY 2004 and made code Q0085 nonpayable for CY 2004 OPPS.

At the February 2004 APC Panel meeting, we presented a proposal from an outside organization that matched CPT codes for chemotherapy and nonchemotherapy infusions to the Q codes currently used to pay for these
services under the OPPS. We asked the APC Panel for their perspective on the potential benefit of using the proposed coding approach as the basis for billing and determining the OPPS payment for administering these drugs. The APC
Panel recommended that CMS continue to review the organization ’ s proposed coding crosswalk with the goal of using it to transition from the use of Q-codes


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to that of CPT codes to bill for administration of these drugs.

In the August 16, 2004 proposed rule, for CY 2005, we proposed to use the CPT codes for drug administration but
to crosswalk the CPT codes into APCs
that reflect how the services would have been paid under the Q codes. Although hospitals would bill the CPT codes and include the charges for each CPT code on the claim, payment would be made on a per visit basis, using the cost data from the per visit Q codes (Q0081, Q0083 and Q0084) to set the payment
rate for CY 2005. See Table 29 of the proposed rule for the proposed
crosswalk of CPT codes into APCs based on the Q codes (69 FR 50521). The only change from the crosswalk that was submitted by the outside organization is that we proposed a Q code and APC crosswalk for CPT code 96549 (Unlisted chemotherapy procedure), rather than bundling that service. We believe that Q0083 is the code that would have previously been reported by hospitals to
describe the unlisted service. In addition, this would place the unlisted
service in our lowest resource utilization APC for chemotherapy, consistent with our policy for other
unlisted services.

We proposed to establish the Q code
and APC crosswalk for CPT code 96549 because there is no CPT specific charge or frequency data on which to set payments. The CY 2005 OPPS is based
on CY 2003 claims data which used the Q codes. Therefore, the only cost data
available to us for establishment of median costs is the data based on the Q codes for drug administration. Moreover, the only frequency data that are available for use in calculating the scalar for budget neutrality of payment weights are the frequency data for the Q codes. Therefore, the payments set for
the CPT codes must use the cost data for the Q codes and must result in the same payments that would have been made had the Q codes been continued.

Under this proposed methodology, hospitals would report the services they
furnish with the CPT codes and would show the charges that they assign to the
CPT codes on the claim. The Medicare OCE would assign the code to an APC whose payment is based on the per visit Q code that would have been used absent coding under CPT. In most cases, the OCE would collapse multiple codes or multiple units of the same CPT code into a single unit to be paid a single APC amount. This approach is needed because the data for the Q codes is reported on a per visit basis and more
than one unit of a CPT code can be provided in a visit. For example, CPT code 96410 (Chemotherapy administration infusion technique, up to 1 hour) is for infusion of chemotherapy drugs for the first hour,
and CPT code 96412 is for chemotherapy infusion up to 8 hours,
each additional hour. The claims data used to set the APC payment rate for these codes is for a per visit amount (taken from CY 2003 data for Q0084 a per visit code). The frequency data on the claim are also on a per visit basis. For CY 2005, we proposed that CPT code 96410 would be paid one unit of APC 0117 (to which CPT code 96410 would be crosswalked) and no separate payment would be made for CPT code 96412, regardless of whether one unit or
more than one unit is billed. CPT code 96412 would be a packaged code for CY 2005. Under the Q code data on which the payment weight for APC 0117 is based, the per visit amount would represent a payment that is appropriate for all drug administration services in a visit (that is, one unit of CPT code 96410 and as many units of CPT code
96412 as were furnished in the same visit).

Similarly, we proposed that when a hospital bills 3 units of CPT code 96400 (Chemotherapy administration, subcutaneous or intramuscular, with or without local anesthesia), the OCE would assign one unit of APC 0116 for that code. (APC 0116 is the APC to
which CPT code 96400 would be crosswalked.) The payment would be based on Q0083, a per visit code, because, absent the ability to be paid based on CPT codes, the hospital would have billed one unit of Q0083 (for the 3 injections) had we not discontinued the Q codes for CY 2005. The OCE
would assume that there was one and only one visit in which there were 3 injections and would pay accordingly (that is, one unit of APC 0116).

We noted that if we adopt the CPT codes for drug administration to ensure accurate payment in the future, it would be critical for hospitals to bill the charges for the packaged CPT codes for drug administration for CY 2005 (that is, the CPT codes with SI=N), even though there would be no separate payment for them in CY 2005. For CY 2007 OPPS,
CY 2005 claims data would be used as the basis for setting median costs for each CPT code, based on the reported charges reduced to cost, and would determine what APC configuration ensures most appropriate payment for the CPT drug administration codes. If hospitals do not bill charges in CY 2005 for the packaged drug administration CPT codes such as CPT codes 96412, 96423, 96545, or 90781, they would jeopardize our ability to make accurate payments for services billed and paid
under these codes in CY 2007 when we use the CY 2005 data to set the payment weights.

Comment: Most commenters supported our proposal to code drug administration using CPT codes instead of the HCPCS codes. They indicated that
it would be less burdensome for hospitals to code services using just one
method for Medicare and all other payers. Some commenters opposed the use of CPT codes unless CMS pays an amount for each use of the CPT code, as CMS does under the Medicare Physician
Fee Schedule.

Response: We cannot pay an amount
for each use of each CPT code because all of our drug administration cost data are on a per visit (not a per code) basis as charges for each of the following three HCPCPS codes, Q0081, Q0083, and Q0084, are reported for a visit and

not a service.

We agree that billing for drug administration using the CPT codes will be less burdensome to hospitals and will also facilitate development of more accurate payment rates for drug administration services in future years. For CY 2005 OPPS, we will collapse the CPT codes billed for drug administration into a single unit of the applicable APC for payment as we do not have the CPT code specific claims data for use in establishing a CPT code specific payment. However, we anticipate that we would have the necessary claims for CY 2007 OPPS to set an appropriate APC payment rate for the services described by the CPT codes.

Comment: Several commenters asked that we affirm that hospitals may report CPT codes 90780 (intravenous infusion for therapy/diagnosis administered by physician or under direct supervision of physician; up to one hour) and 90781 (each additional hour up to (8) hours), notwithstanding that the administration is not done by a physician or under the direct supervision of a physician. The
commenters stated that such services are typically administered in hospitals by nurses without direct physician supervision and that if hospitals report these codes only when the full definition of the code is met, they would not be able to report the infusion services they furnish.

Response: We do not view the language of these CPT codes ’ definitions as being an obstacle to or inconsistent with the use of the codes by hospitals for billing Medicare. We view our general requirements regarding physician supervision (with respect to payment for services that are incident to a physician ’ s service in the outpatient hospital setting) as meeting the


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physician supervision aspect of the codes and thus, do not believe that use of the codes in the hospital outpatient setting would be prevented by the inclusion of the language in the code
definition.

Comment: A commenter asked that we change the status indicator for CPT
code 90780 and 90781 to ‘‘ X ’’ from ‘‘ T ’’ thereby eliminating the multiple procedure reduction for these codes, which in CY 2005 will replace HCPCS code Q0081 in billing for the administration of infusion therapy. The
commenter stated that there is no
situation in which the time and
resources involved in infusion care
should be reduced in the case of an observation patient.

Response: We disagree. The costs of space, utilities and staff attendance are duplicated when the beneficiary is receiving another service at the same time as infusion therapy, in particular when the patient is in observation. Hence it is appropriate to apply a multiple procedure reduction to infusion therapy particularly when the patient is in observation status. We believe it is necessary to understand how the OCE multiple procedure discounting logic functions. Line-items
with a service indicator of ‘‘ T ’’ are subject to multiple procedure discounting unless modifiers 76, 77, 78, and/or 79 are present on the claim. The

‘‘ T ’’ line-item with the highest payment
amount will not be discounted but all
other ‘‘ T ’’ line items will be discounted as multiple procedures. All line-items
that do not have a service indicator of

‘‘ T ’’ will be ignored in determining the discount. Therefore, if the only other services reported with infusion therapy are an emergency department or other visit code, or diagnostic tests and services assigned status indicator ‘‘ S, ’’ the infusion therapy code would not be subject to the multiple procedure discounting.

Comment: Several commenters stated that multiple visits per day for antibiotic infusion are common and the drug administration policies should permit such visits to be paid separately. The commenters stated that multiple visits for chemotherapy are possible and that provisions should be made for billing and paying them when they occur.

Response: We agree with the commenters on this issue. The reporting and payment for these multiple visits
and services will not be an issue once payment for drug administration under
the OPPS is made based on CPT codespecific data. However, until such time, hospitals will need to use modifier 59 (distinct procedure) when billing charges for services furnished during multiple visits that follow the initial visit. For CPT codes 90780 and 90781, where there are multiple visits for infusion on the same day, the hospital should report CPT code 90780 with modifier 59 and CPT code 90781, if appropriate, with modifier 59 for each separate visit for infusion. With modifier 59 appended to CPT codes 90780 and 90781, the OCE will allow up to 4 units of APC 0120 (Infusion of nonchemotherapy drugs) to be paid. Similarly, for the chemotherapy administration codes, where there is no modifier 59 reported, the OCE will collapse all codes that map to a particular APC into one unit of that APC and will pay one unit of each applicable APC. The system will assume that all services were furnished in one single encounter. Where the chemotherapy services are provided in multiple encounters, the hospital will need to
show modifier 59 on the service
furnished in the second encounter. The OCE will map those services into an additional unit of each applicable APC and will pay for each visit. The OCE will not, for a single date of service, pay more than 4 units of APC 120, nor more
than 2 units of APCs 116 and 117 (chemotherapy by route other than infusion and infusion of chemotherapy drugs). We intend to reassess these limits based on provider feedback and
our review of later claims data.

Comment: One commenter asked that
CMS ensure that the costs for CPT code 90780 (Infusion therapy one hour) are included in payment for CPT codes 67221 (Ocular photodynamic therapy) and 67225 (Eye photodynamic therapy add-on) because CPT code 90780 is bundled into both of these procedure
codes.

Response: The procedure code definition for CPT code 67221 specifies that intravenous infusion is included,
and CPT code 67225 is to be listed separately in addition to CPT code 67221, if a second eye is treated. Therefore, the National Correct Coding Initiative (NCCI) edits preclude payment
for CPT code 90780 with CPT codes 67221 and 67225 because the charges for the procedure CPT codes 67221 and 67225 are presumed to include all costs of administering the drug. Correct coding would not include reporting CPT
code 90780 for the same visits when photodynamic therapy was provided. We expect that hospitals will include their charges for the necessary infusion in their charges for the procedure codes when they bill CPT codes 67221 or 67225, so that our claims data reflect the costs of all resources necessary to perform the services. Comment: Several commenters urged CMS to adopt the new and revised AMA definitions for drug administration,
which will be HCPCS G-codes in the CY 2005 Medicare Physician Fee Schedule, because the existing CPT codes do not adequately capture the costs of the range of drug administrations. They also urged CMS to educate providers on the correct
use of the new CPT codes. The
commenters indicated that implementing the new CPT codes for drug administration will be more difficult in hospitals than in physicians ’ offices because the services are typically provided in more places in hospitals than in physicians ’ offices.

Response: For CY 2005 OPPS, we are implementing the existing CPT codes for drug administration rather than the
new G-codes that will be used for the Medicare Physician Fee Schedule payments. We do not intend to use the new HCPCS G-codes for the OPPS drug
administration services until such time
as the new CPT codes for those services
are issued in CY 2006. We believe that it would be disruptive to hospitals if we required them to implement the HCPCS alphanumeric codes for drug
administration in CY 2005 and then
switch to the new CPT codes in CY 2006. While only a subset of thephysician community administers antineoplastic drugs in their offices, we believe that most hospitals do so on an outpatient basis and hence most hospitals would have to change to the new HCPCS codes for CY 2005, only to change again to new CPT codes for CY 2006. However, we are told that all hospitals use the current CPT codes to bill other payers and crosswalk from the current CPT codes to the Q codes to bill Medicare. Thus, using the current CPT codes should be easier for hospitals than their current method for billing
Medicare. This would not be the case if we were to require that they use the new HCPCS codes for drug administration.

Comment: One commenter indicated
that CMS should revise the OPPS to mirror the policy under the Medicare Physician Fee Schedule that pays separately for each drug administered to permit the payment of one unit of each APC for each and every drug
administered. The commenter stated that since CMS acknowledged that there
are additional resources used with each administration of a drug, it should apply the same policy to hospitals since all of these services are furnished by nurses, whether in a physician ’ s office setting or a hospital setting.

Response: We are moving to the use
of CPT codes for CY 2005 OPPS. However, we will not be paying an APC
amount for each unit of each CPT code.


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The APC rate is, by necessity, based on
historic data for a code that was billed and reported on a per visit basis. Therefore, to pay each unit of a CPT
code an APC amount would not accurately reflect the resources used and would result in an overpayment of the costs of the services provided.

Comment: A commenter asked CMS to permit hospitals to continue billing HCPCS codes Q0081, Q0083 and Q0084 for drug administration until April 1, 2005 so that hospitals that do not currently bill the CPT codes for drug administration may have a transition period to convert to CPT code billing.

Response: The three cited Q-codes
will be deactivated for the OPPS effective January 1, 2005 and therefore cannot be used up to April 1, 2005. As discussed in our proposed rule, we are eliminating the 90-day grace period for deleted codes effective January 1, 2005. We are adopting this policy because the Health Insurance Portability and Accountability Act (HIPAA) transaction and code set rules require usage of the
medical code that is valid at the time that the service is provided. Details regarding elimination of the 90-day grace period for billing deleted codes
were issued to our contractors on February 4, 2004, in Transmittal 89, Change Request 3093. Moreover, we are not aware that there are any hospitals that do not bill the CPT codes for drug administration, as hospitals have told us that all payers other than Medicare require that they use the CPT codes and will not accept the Q-codes.

Comment: A commenter asked that CMS use the first two quarters of the CY
2005 claims to set the median costs for drug administration in CY 2006 OPPS
so that the transition to the more accurate payments under the CPT codes could begin earlier than CY 2007.

Response: As the CY 2005 claims data
will be the basis for the CY 2007 payment weights, we regret that we are
unable to transition to the new payments earlier than CY 2007 because of the time required to access the CY 2005 claims data and to process and construct our database for ratesetting and impact analyses. The second quarter of CY 2005 data will not be available to us until at least August 15, 2005, which is far too late for us to have developed and published any CY 2006 proposed rule.

After carefully reviewing all comments received, we are adopting as final our proposal to use the CPT codes for drug administration, effective January 1, 2005. We will collapse the CPT codes billed into a single unit of the applicable APC for payment. In addition, we are establishing the Q-code
and APC crosswalk for CPT code 96549 and will be paying 1 unit of APC 0117 for CPT code 96410 (to which CPT code 96410 will be crosswalked). We will not make a separate payment for CPT code 96412 regardless of whether 1 unit or more units are billed. For CY 2005, CPT code 96412 will be a packaged and not paid separately. Further, when a hospital bills 3 units of CPT code 96400 (Chemotherapy administration, subcutaneous or intramuscular, with or without local anesthesia), the OCE will assign 1 unit of APC 0116 for that code and the payment will be based on HCPCS code Q0083, a per visit code. Modifier 59 may be used with codes in APCs 0116, 0117, and 0120 to signify
additional encounters on the same date
of service for which additional APC payments may be made.

Table 33 below contains the crosswalk of CPT codes for drug administration to drug administration
APCs for CY 2005. The last two columns
of this table indicate the maximum
number of units of the APC that the OCE will assign without or with modifier 59, respectively.

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I. Payment for Blood and Blood
Products

Since the OPPS was first implemented in August 2000, separate payments have been made for blood and blood products in APCs rather than packaging them into payment for the procedures with which they were

administered. Administrative costs for processing and storage specific to the transfused blood product are included in the blood product APC payment, which is based on hospitals ’ charges. Payment for the collection, processing, and storage of autologous blood, as described by CPT code 86890, is made


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through APC 0347 (Level III Transfusion Laboratory Procedures).

In CY 2000, payments for bloods were
established based on external data provided by commenters due to limited
Medicare claims data. From CY 2000 to CY 2002, blood and blood product payment rates were updated for inflation. For CY 2003, as described in the November 1, 2002 final rule (67 FR 66773), we applied a special dampening methodology to blood and blood products that had significant reductions in payment rates from CY 2002 to CY 2003, when median costs were first calculated from hospital claims. Using the dampening methodology, we limited the decrease in payment rates for blood and blood products to approximately 15 percent. For CY 2004, as recommended by the APC Panel, we froze payment rates for blood and blood products at CY
2003 levels. This allowed us to undertake further study of the issues raised by commenters and presenters at the August 2003 and February 2004 APC Panel meetings.

In the August 16, 2004 proposed rule for CY 2005 OPPS, we proposed to continue to pay separately for blood and blood products. We also proposed to
establish new APCs that would allow each blood product to be in its own separate APC, as several of the blood product APCs currently contained multiple blood products with noclinical homogeneity or whose productspecific median costs may not have been similar. Thus, we also proposed to reassign some of these HCPCS codes already contained in certain APCs to new APCs. ( See Table 30 of the proposed rule (69 FR 50523.)

Other than for autologous blood products, hospital reimbursement for the costs of collection, processing, and storage of blood and blood products are made through the OPPS payments for specific blood product APCs. Wastage
and other administrative costs for blood
are attributable to overhead and distributed across all hospital services
linked to cost centers in the Medicare cost report, through the standard process of converting charges to costs using hospitals ’ CCRs for each cost center on the cost report.

In the August 16, 2004 proposed rule, we noted that comments to previous
OPPS rules had stated that the CCRs that we used to adjust claim charges to costs for blood in past years were too low, resulting in underestimation of the true hospital costs for blood and blood products. In response, we conducted a thorough analysis of the OPPS claims to compare CCRs between hospitals with a blood-specific cost center and hospitals defaulting to the overall hospital CCR. Our past methodology for determining CCRs for blood products included a default to the overall CCR when any given provider had chosen not to report costs and charges in a blood-specific cost center on the cost report. After matching the two blood-specific cost
centers to the 38X and 39X revenue codes, we observed a significant
difference in CCRs utilized for conversion of blood product charges to costs for those hospitals with and without blood-specific cost centers. The median CCR for those hospitals with a blood-specific cost center was 0.66 for
revenue code 38X and 0.64 for revenue code 39X, and for those defaulting to the overall hospital CCR, the result was a
CCR of 0.34 for revenue code 38X and
0.33 for revenue code 39X. The median overall CCR for all hospitals in the CY 2005 analysis was 0.33.

In light of this information, we applied the methodology described in our August 16, 2004 proposed rule to
calculate simulated medians for each blood and blood product based on our
CY 2003 claims data. We assumed that those hospitals not reporting costs and charges in a blood-specific cost center on their annual cost report, in general, face similar costs and engage in comparable charging practices for blood as those reporting a blood-specific cost center. For those hospitals not reporting a blood-specific cost center, we simulated a blood-specific CCR, which we then applied to convert charges to costs for blood products. Overall, this methodology increased the estimated
median costs of blood and blood products by 25 percent for CY 2005
relative to the median costs used to set CY 2004 APC rates. For example, the
estimated median for HCPCS code P9016 (Red blood cells, leukocyte reduced), the most frequently billed blood product, increased by 32 percent
relative to the CY 2004 median.

As discussed in the proposed rule, in reviewing the simulated medians calculated using the methodology
described above relative to those medians used to set CY 2004 payment rates, we noticed that some low-volume blood products (< 1,000 units) demonstrated significant decreases in median costs utilizing our general methodology. Overall, the simulated
median costs for low-volume blood products declined by 14 percent for CY 2005. Because a small sample size can lead to great variability in point estimates, we sought to increase the
number of units of low-volume blood products by combining CY 2002 and CY
2003 claims data for the low-volume products. We used the simulated CCRs to calculate costs from charges from CY 2002 and CY 2003 claims data. To ensure that we combined comparable costs, we updated the simulated costs on the CY 2002 claims to the base year of CY 2003 using the Producer Price Index (PPI) for blood and derivatives for human use (Commodity Code #063711). This is the PPI used to update blood and blood product prices in the market basket (67 FR 50039, August 1, 2002).We recognize that not all of the lowvolume blood products had claims in

CY 2002.

After combining the 2 years of claims data, we were able to raise the volume
of blood units billed for several of these products above 1,000 units. Since the publication of the proposed rule,
additional claims data from the last quarter of CY 2003 have become
available to us. The data showed that a few of the blood products had
utilization in CY 2003 that exceeded the 1,000 unit low-volume threshold and will not be subject to the low-volume blood product payment adjustment described below, that we are adopting
for CY 2005. The low-volume blood products that we are adopting as final
are listed below in Table 31 of this final rule with comment period.

The DHHS Advisory Committee on Blood Safety and Availability has
recommended that CMS establish payment rates for blood and blood products based on current year acquisition costs and actual total costs of providing such blood products. At the February 2004 APC Panel meeting,
the APC Panel recommended that CMS
use external data to derive costs of blood and blood products in order to establish payment rates. At the September 2004 APC Panel meeting, the
APC Panel recommended that CMS freeze payment rates for low-volume blood products for CY 2005 at CY 2004
levels. The Panel also recommended that CMS consider using external data for setting payment rates for blood and blood products in the future.

We received the following comments on our August 16, 2004 proposed rule regarding payment for blood and blood products.

Comment: A few commenters expressed strong support for payment rates developed using hospital data rather than blood industry data. The commenters urged CMS to exercise caution in using blood industry data and to consider evaluating the data for their validity, reliability and consistency with geographic variations in costs, in addition to being publicly available and subject to audit.

Response: We agree with the commenters that the OPPS payment
rates should be based on the most


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recently available and accurate hospital claims data. However, in rare circumstances when accurate hospital claims data capturing the full costs of services may not be available, we evaluate all external data very carefully to make sure that they meet our external data criteria. As discussed above, in setting all blood and blood product payment rates for CY 2005, we have relied upon data from hospital claims
submitted to CMS.

Comment: Several commenters expressed concern about the proposed payment rates for blood and blood products. The commenters indicated that despite increases in the CY 2005 proposed payment rates for blood and blood products, the proposed payment
rates still do not meet the actual costs to hospitals of acquiring these products. Some commenters stated that, in addition to hospital coding and billing problems, only a small number of hospitals were actually reporting blood costs, and that lack of reporting explains why the payment rates are still significantly below hospital acquisition costs. The commenters expressed
concerns that this would create barriers to access to a safe blood supply for
Medicare beneficiaries.

The commenters also expressed concerns about reductions in payment rates for low-volume blood products. They recommended that CMS either freeze payment rates at the CY 2004
OPPS levels for low-volume blood products that experienced a decrease in their proposed rates or use external data in setting payment rates for these products.

Response: We appreciate the

commenters ’ concerns and share the same concern for protecting
beneficiaries ’ access to a safe blood supply. As with all of the OPPS services, we prefer to rely on our claims data whenever possible. Comments received for previous rules also suggested that current hospital blood costs are not captured because hospitals underreport blood on their claims because it is too costly to bill for blood. However, our thorough analysis of billing for blood from CY 2003 claims data indicated that 81 percent of all hospitals included in our ratesetting and modeling for CY 2005 billed at least one unit of blood or blood product in CY 2003. Of these hospitals however, only 47 percent reported separate costs and charges in the two cost centers specific
to blood on their most recent annual cost reports. It may be that those hospitals billing for blood but not reporting costs and charges on their costreports for either of the two bloodspecific cost centers reported their blood costs and charges under other cost centers, such as operating room. As discussed in the proposed rule, we simulated blood-specific hospital CCRs to account for these reporting
differences and used these simulated CCRs to develop proposed median costs for blood products for CY 2005. Our claims data clearly show that the vast majority of hospitals do bill the OPPS for blood and blood products. In addition, the distribution of costs for individual products provides no evidence of significant coding problems.

As explained in the preamble of this section, we estimate that by using our new methodology of simulating medians and implementing the proposed payment rates for blood and blood products, excluding low-volume blood products, there would be a 25 percent increase in payment for blood and blood products overall. This includes a 32 percent increase in payment from CY 2004 for leukocyte reduced red blood cells (HCPCS code P9016), the highest volume blood product in the hospital OPD, and a 25 percent increase in payment for each unit of red blood cells (HCPCS code P9021), the second highest volume blood product.

After carefully reviewing all of the public comments received timely regarding low-volume blood products,
we are convinced that due to the low utilization of these products, in addition to possible hospital coding and billing problems for these low-volume products, the claims data may not have captured the complete costs of these products to hospitals as fully as possible. We believe it is imperative that
Medicare beneficiaries have full access to all medically necessary blood and blood products, including products that are infrequently utilized. Therefore, for blood products that would have experienced a decrease in median cost
from CY 2004 to CY 2005 based on our proposed methodology, we are establishing CY 2005 payment rates that are adjusted to a 50/50 blend of CY 2004 product-specific OPPS median costs and our proposed CY 2005 simulated medians. This adjustment methodology will allow us to undertake further study of the issues raised by commenters and by presenters at the September 2004 APC Panel meeting, without putting beneficiary access to these low-volume blood products at risk.

Comment: One commenter suggested that CMS survey all hospitals across the country to investigate direct and
indirect costs for blood. The commenter expressed concern that our proposed
rates were insufficient to cover the costs of blood and its testing and storage. The commenter also expressed the need for continued increases in payments for blood products.

Response: We appreciate the

commenter ’ s recommendation and will take it into consideration as needed, when we reassess the payment rates for blood and blood products. While we believe our payment rates are appropriate and adequate for the provision of blood and blood product services, we are aware of the increasing number of tests required to ensure the safety of the nation ’ s blood supply, which could possibly add to the costs of processing blood and blood products. The APC payment rates for blood and blood products are intended to cover the costs of medically necessary testing by community blood banks or blood banks operated by hospitals. However, the APC payment rates are not meant to include costs of tests requiring a specific patient ’ s blood, such as cross-matching in preparation for transfusion, because these tests are separately payable under
the OPPS.

Comment: Several commenters, including a hospital association,
recommended that CMS issue more specific guidance to hospitals for billing
of blood-related services in order to improve hospital claims data. Specifically, commenters requested that
CMS address issues related to application of the Medicare blood deductible, differences between donor and nondonor states, hospital markups for blood costs, the appropriate use of HCPCS code P9011 (Split blood unit) in billing, blood processing and preparation costs and autologous blood collection. In addition, the same
commenter recommended that CMS share its draft guidance for review with the Outpatient Medicare Technical Advisory Group (MTAG) or the National Uniform Billing Committee (NUBC), or both, to ensure it is correct, comprehensive, and reflective of the billing provider ’ s perspective.

Response: We recognize the need for comprehensive billing guidelines for hospitals and other providers to address a variety of blood-related services under the OPPS. In the near future, we intend to provide further billing guidelines to clarify our original Program Transmittal

A

– 01

– 50 issued on April 12, 2001 (CR Request 1585) regarding correct billing for blood-related services. We agree
with the commenters and intend to gather information from all relevant and
available resources.

Comment: One commenter, a hospital association, indicated that the revenue code 390 (Blood Storage and Processing)
should not have been included in Table 18 (Proposed Packaged Services by


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Revenue Codes) of the August 16, 2004 proposed rule. The commenter expressed concern that by including revenue code 390 in this table, hospitals would not be paid for the services because of a line-item claim rejection.

Response: We are clarifying that a
HCPCS code billed with revenue codes listed in Table 18 of the proposed rule could be paid separately as long as the HCPCS code is not assigned a status
indicator of ‘‘ N. ’’ When a revenue code charge is billed without a HCPCS code, the charge is reduced to cost using the appropriate CCR for the revenue code.
This cost is then added to a line item charge (reduced to cost) for a separately payable HCPCS code. This allows costs
associated with uncoded revenue code charges to be captured so we can make a more accurate payment for the claim.
If we did not add the costs of the line item revenue code charges without HCPCS codes, the full cost data for all resources necessary to deliver a separately payable service might not be captured, possibly resulting in a lesser payment for the claim.

In summary, after carefully reviewing all public comments received timely, we are adopting as final for CY 2005 OPPS the following proposals:

• To continue to pay separately for blood and blood products, to establish new APCs that would place each blood product in its own separate APC, and to implement proposed APC reassignments for such blood and blood products.

• Effective for services furnished on or after January 1, 2005, in this final rule with comment period, we are providing that the payment rates for blood and blood products, excluding low-volume blood products whose CY 2005
simulated medians decreased from the CY 2004 medians, will be determined according to the methodology we described in the August 16, 2004 proposed rule.

• Effective for services furnished on or after January 1, 2005, in this final rule with comment period, we are providingthat the CY 2005 payment rates for lowvolume blood products that would have experienced a decrease in median costs
from CY 2004 to CY 2005 based on our proposed methodology are adjusted to a 50/50 blend of CY 2004 product-specific median costs and our proposed CY 2005
simulated medians.

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VI. Estimated Transitional PassThrough Spending in CY 2005 for Drugs, Biologicals, and Devices

A. Basis for Pro Rata Reduction

Section 1833(t)(6)(E) of the Act limits the total projected amount of transitional pass-through payments for a given year to an ‘‘ applicable percentage ’’ of projected total Medicare and beneficiary payments under the hospital OPPS. For a year before CY 2004, the applicable percentage is 2.5 percent; for CY 2004 and subsequent years, we specify the applicable percentage up to 2.0 percent.

If we estimate before the beginning of the calendar year that the total amount of pass-through payments in that year would exceed the applicable percentage, section 1833(t)(6)(E)(iii) of the Act requires a prospective uniform
reduction in the amount of each of the transitional pass-through payments made in that year to ensure that the
limit is not exceeded. We make an estimate of pass-through spending to determine not only whether payments exceed the applicable percentage but also to determine the appropriate
reduction to the conversion factor.

For devices, making an estimate of pass-through spending in CY 2005 entails estimating spending for two groups of items. The first group consists
of those items for which we have claims data for procedures that we believe useddevices that were eligible for passthrough status in CY 2003 and CY 2004 and that would continue to be eligible for pass-through payment in CY 2005. The second group consists of those
items for which we have no direct claims data, that is, items that became, or would become, eligible in CY 2004 and would retain pass-through status in CY 2005, as well as items that would be newly eligible for pass-through payment beginning in CY 2005.

B. Estimate of Pass-Through Spending for CY 2005
In the August 16, 2004 proposed rule, we proposed to set the applicable percentage cap at 2.0 percent of the total OPPS projected payments for CY 2005. In this final rule with comment period, we are setting the applicable percentage cap at the same 2.0 percent.

We are using the same methodology described in the proposed rule to estimate the pass-through spending forCY 2005. To estimate CY 2005 passthrough spending for device categories in the first group described above, we
used volume information from CY 2003 claims data for procedures associated with a pass-through device and
manufacturer ’ s price information from applications for pass-through status. This information was projected forward to CY 2005 levels, using inflation and utilization factors based on total growth in Medicare Part B as projected by the CMS Office of the Actuary (OACT).

To estimate CY 2005 pass-through spending for device categories included in the second group, that is, items for which we have no direct claims data, we used the following approach: For categories with no claims data in CY 2003 that would be active in CY 2005, we followed the methodology described in the November 2, 2001 final rule (66 FR 55857). That is, we used price
information from manufacturers and
volume estimates based on claims for procedures that would most likely use the devices in question. This information was projected forward to CY 2005 using the inflation and utilization factors supplied by the CMS OACT to estimate CY 2005 pass-through spending for this group of device categories. For categories that become eligible in CY 2005, we will use the same methodology. No new device categories for January 1, 2005, were announced after the publication of the proposed rule. Therefore, the estimate of pass-through spending does not incorporate any pass-through spending for categories made effective January 1,

2005.

With respect to CY 2005 pass-through spending for drugs and biologicals, as we explain in section V.A.3. of this finalrule with comment period, the passthrough payment amount for new drugs and biologicals that we determine have pass-through status equals zero.Therefore, our estimate of total passthrough spending for drugs and biologicals with pass-through status in CY 2005 equals zero.


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In accordance with the methodology described above, we estimate that total pass-through spending for devices in CY 2005 would equal approximately $23.4 million, which represents 0.10 percent of total OPPS projected payments for CY 2005. This figure includes estimates for the current device categories continuing into CY 2005, in addition to projections for categories that first become eligible during CY 2005. This estimate is significantly lower than previous year ’ s estimates because of the method we
discuss in section V.A.3. of this preamble for determining the amount of pass-through payment for drugs and biologicals with pass-through status in

CY 2005.

Therefore, we will institute no pro
rata reduction for CY 2005.

In section V.G. of this final rule with comment period, we indicate that we are accepting pass-through applications for new radiopharmaceuticals that are assigned a HCPCS code on or after January 1, 2005. The pass-through amount for new radiopharmaceuticals approved for pass-through status in CY
2005 would be the difference between the OPPS payment for the radiopharmaceutical, that is, the payment amount determined for the radiopharmaceutical as a sole source specified covered drug, and the payment amount for the radiopharmaceutical under section 1842(o) of the Act. However, we have no information identifying new radiopharmaceuticals to which a HCPCS code might be assigned after January 1, 2005 for which pass-through status would be sought. We also have no data regarding payment for new radiopharmaceuticals with pass-through status under the methodology that we specify in section V.G. However, we do not believe that pass-through spending for new radiopharmaceuticals in CY 2005 will be significant enough to materially affect our estimate of total pass-through spending in CY 2005. Therefore, we are not including radiopharmaceuticals in our estimate of pass-through spending in CY 2005.

Because we estimate pass-through spending in CY 2005 will amount to 0.10 percent of total projected OPPS CY 2005 spending, we are returning 1.90 percent of the pass-through pool to adjust the conversion factor, as we discuss in section VIII. of this preamble.

We received a few public comments on our estimate of CY 2005 pass-through spending for drugs, biologicals, and
devices.

Comment: One commenter, a hospital organization, commended CMS for returning a portion of the pass-throughpool that exceeds its estimate for passthrough payments for CY 2005, by increasing the conversion factor.

Response: We appreciate the

commenter ’ s support.

Comment: One commenter was concerned that CMS did not provide
information on the extent to whichamounts that are actually spent on passthrough payments and outlier payments compared to the amounts that are
carved out of the total amount allowed OPPS payments for these projected payments. The commenter was
concerned that the amounts carved out for these purposes may not actually be spent and thus would be lost to hospitals.

Response: We are required by law to estimate the amounts that we expect to spend on pass-through payments and outliers each year before the start of the calendar year. We share the

commenter ’ s interest in making those estimates as accurately as possible to ensure that hospitals receive the amount to which they are entitled. We make our final estimate for each calendar year to the best of our ability based on all of the most recently available data when we prepare our final rule, including comments we receive concerning those issues in response to the proposed rule. With respect to the availability of data,
we have established limited data sets that include the set of claims we use for, first, the proposed rule and, ultimately, the final rule estimates. For example,
the claims for CY 2003 used for the final
rule for CY 2005 will be available to the public in a limited data set format. We will continue to assess the means by which we provide such information to determine if there are alternate ways to
ensure that our stakeholders obtain the information that is important to them on a timely basis.

VII. Other Policy Decisions and Policy Changes

A. Statewide Average Default Cost-toCharge Ratios

CMS uses cost-to-charge ratios (CCRs) to determine outlier payments, payments for pass-through devices, and monthly interim transitional corridor payments under the OPPS. Some hospitals do not have a valid CCR. These hospitals include, but are not limited to, hospitals that are new and have not yet submitted a cost report, hospitals that have a CCR that falls outside predetermined floor and ceiling thresholds for a valid CCR, or hospitalsthat have recently given up their allinclusive rate status. When OPPS was first implemented in CY 2000, we used CY 1996 and CY 1997 cost reports to
calculate default urban and rural CCRs for each State to use in determining the reasonable cost-based payments for those hospitals without a valid CCR (Program Memorandum A

– 00

– 63, CR 1310, issued on September 8, 2000). In the August 16, 2004 OPPS proposed rule, we proposed to update the default
ratios for CY 2005.


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As we proposed, in this final rule, we
calculated the statewide default CCRs using the same CCRs that we use to adjust charges to costs on claims data.
Table 31 lists the final CY 2005 default urban and rural CCRs by State. These
CCRs are the ratio of total costs to total charges from each provider ’ s most recently submitted cost report, for those cost centers relevant to outpatient services. We also adjusted these ratios to reflect final settled status by applying
the differential between settled to submitted costs and charges from the most recent pair of settled to submitted cost reports.

The majority of submitted cost reports, 87 percent, were for CY 2002. We only used valid CCRs to calculate these default ratios. That is, we removed the CCRs for all-inclusive hospitals, CAHs, and hospitals in Guam and the U.S. Virgin Islands because these entities are not paid under the OPPS, or in the case of all-inclusive hospitals, because their CCRs are suspect. We further identified and removed any obvious error CCRs and trimmed any outliers. We limited the hospitals used
in the calculation of the default CCRs to those hospitals that billed for services under the OPPS during CY 2003.

Finally, we calculated an overall average CCR, weighted by a measure of volume, for each State except Maryland.
This measure of volume is the total lines
on claims and is the same one that we use in our impact tables. Calculating a rate for Maryland presented a unique challenge. There are only a few providers in Maryland that are eligible to receive payment under the OPPS. However, we had no usable in-house cost report data for these Maryland hospitals, which is why we remove Maryland providers from our claims data for modeling OPPS. Therefore, we

obtained data from the fiscal intermediary for Maryland, which we attempted to use in calculating the CCRs for Maryland, but which we ultimately

determined could not be used to calculate representative CCRs. The cost data for three Maryland hospitals with very low volumes of services and cost data were so irregular that we lacked

confidence that it would result in a valid statewide CCR. Thus, for Maryland, we used an overall weighted average CCR for all hospitals in the nation to calculate the weighted average CCRs appearing in Table 37. The overall

decrease in default statewide CCRs can be attributed to the general decline in the ratio between costs and charges widely observed in the cost report data.

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2 Section 1833(t)(7) of the Act defined the ‘‘ preBBA ’’ amount for a period as the amount equal to the product of (1) the payment-to-cost ratio for the hospital based on its cost reporting period ending
in 1996, and (2) the reasonable cost of the services for the period. (Emphasis added.) In this context, BBA refers to the Balanced Budget Act of 1997, Pub.

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Comment: Several commenters
recommended that CMS instruct fiscal
intermediaries to work with thosefacilities that have given up their allinclusive rate status to quickly determine an appropriate CCR that will provide an accurate estimate of costs for each facility.

Response: We have already instructed intermediaries to update CCRs in a timely manner. In Program
Memorandum A

– 03

– 004 dated January 17, 2003, we instructed fiscal
intermediaries to recalculate each provider ’ s CCR on an ongoing basis whenever a more recent full year cost report becomes available, which includes tentatively settled cost reports.
Fiscal intermediaries will calculate a hospital-specific CCR for all-inclusive rate hospitals, as with all hospitals relying on default CCRs, when their first tentatively settled cost report becomes available after no longer being
considered as all-inclusive rate hospitals.

Comment: A few commenters asserted
that the decrease in CCRs between 1996 and 2002 was caused by the fact that charges were increasing faster than costs and that the increase in charges has been much lower since 2003. They requested that CMS take this fact into account in developing default CCRs.

Response: We did not inflate charges when calculating the default CCRs, and therefore, we do not believe that there is a need to adjust for charge inflation

since CY 2002.

B. Transitional Corridor Payments: Technical Change

1. Provisions of the August 16, 2004 Proposed Rule

When the OPPS was implemented, every provider was eligible to receive an additional payment adjustment (or transitional corridor payment) if the payments it received under the OPPS were less than the payment it would
have received for the same services under the prior reasonable cost-based system (section 1833(t)(7) of the Act). Transitional corridor payments were intended to be temporary payments for most providers but permanent payments
for cancer and children ’ s hospitals to ease their transition from the prior reasonable cost-based payment system to the prospective payment system. Section 411 of Pub. L. 108

– 173 amended section 1833(t)(7)(D)(i) of the Act to extend such payments through December 31, 2005, for rural hospitals
with 100 or fewer beds and extended such payments for services furnished during the period that begins with the provider ’ s first cost reporting period beginning on or after January 1, 2004 and ends on December 31, 2005, for sole community hospitals located in rural areas. Accordingly, transitional corridor payments are only available to
children ’ s hospitals, cancer hospitals, rural hospitals having 100 or fewer beds, and sole community hospitals
located in rural areas.

At the time the OPPS was implemented, section 1833(t)(7)(F)(ii) of the Act defined the payment-to-cost ratio (PCR) used to calculate the ‘‘ preBBA amount ’’ 2 for purposes of calculating the transitional corridor


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payments to be determined using the payments and reasonable costs of services furnished during the provider ’ s cost reporting period ending in calendar year 1996. The BIPA, Pub. L. 106

– 554, enacted on December 21, 2000, revised that requirement. Section 403 of BIPA amended section 1833(t)(7)(F)(ii)(I) of
the Act to allow transitional corridor payments to hospitals subject to the
OPPS that did not have a 1996 cost report by authorizing use of the first available cost reporting period ending
after 1996 and before 2001 in calculating a provider ’ s PCR.

Although we discussed the BIPA
amendment in the CY 2002 OPPS proposed rule published on August 24, 2001 (66 FR 44674), and implemented the amendment through Program
Memorandum No. A

– 01

– 51, issued on April 13, 2001, we failed to revise the regulations at § 419.70(f)(2) to reflect the change. In the August 16, 2004 OPPS proposed rule, we proposed a technical

correction to § 419.70(f)(2) to conform it to the provision of section 1833(t)(7)(F)(ii)(I) of the Act.

We did not receive any comments on this proposed technical change. Accordingly, in this final rule with comment period, we are adopting as final without modification our proposal and correcting § 419.70(f)(2) to conform it to the provision of section 1833(t)(7)(F)(ii)(I) of the Act.

However, we did receive several comments on the proposed rule related to the transitional corridor payments.

Comment: A few commenters expressed appreciation for the extension of transitional corridor payments for
children ’ s hospitals, cancer hospitals, rural hospitals having 100 or fewer beds, and sole community hospitals located in rural areas, but requested that CMS consider extending payment protections to rural hospitals that are not eligible for transitional corridor payments. The commenters noted that rural hospitals that have converted to critical access hospitals are paid at cost and, therefore, have a competitive advantage over rural hospitals that are not eligible for transitional corridor payments and cannot convert to critical access hospital status. One commenter requested protection for rural hospitals that provide emergency services.

A few commenters noted that the transitional corridor payment provision for rural hospitals having 100 or fewer beds and sole community hospitals located in rural areas expires on December 31, 2005, and requested that CMS further extend this payment protection.

Response: We share the concerns of rural hospitals and do not intend to limit access to health care to beneficiaries in rural areas. However, we note that the statute is very specific and does not provide transitional corridor payments for entities other than those listed in the statute, nor extend transitional corridor payments past December 31, 2005, for rural or sole community hospitals.

2. Comments on the Provisions of the January 6, 2004 Interim Final Rule With
Comment Period

As discussed in the January 6, 2004 interim final rule with comment period (69 FR 828), section 411(a)(1)(B) of Pub.

L. 108

– 173 provided that hold harmless transitional corridor provisions shall apply to sole community hospitals located in rural areas. Section 411(a)(2)
states that the effective date for section 411(a)(1)(B) ‘‘ shall apply with respect to cost reporting periods beginning on or after January 1, 2004 ’’ for sole community hospitals located in rural areas. The Conference Agreement for
Pub. L. 108

– 173 states, ‘‘ The hold harmless provisions are extended to sole community hospitals located in a rural area starting for services furnished on or after January 1, 2004 * * * ’’

Comment: Commenters noted that there appears to be a discrepancy
between the effective date in section 411
of Pub. L. 108

– 173 and the Conference Agreement. The commenters noted that, in accordance with section 411, a sole community hospital with a cost reporting period beginning on a date other than January 1 will not receive transitional corridor payments and

‘‘ interim ’’ transitional corridor payments for services furnished after December 31, 2003, and before the beginning of the provider ’ s next cost reporting period.

Response: Section 411(a)(2) of Pub. L.

108

– 173 provides the effective date with respect to the transitional corridor payments applied to sole community hospitals. Specifically, a sole community hospital with a cost reporting period beginning on or after April 1, 2004, is subject to the hold harmless provisions. We note that if a hospital qualifies as both a rural hospital having 100 or fewer beds and as a sole community hospital located in a rural area, for purposes of receiving transitional corridor payments and interim transitional corridor payments, the hospital will be treated as a rural hospital having 100 or fewer beds. In this case, transitional corridor payments would begin on January 1, 2004, and there would be no gap in transitional corridor payments. C. Status Indicators and Comment Indicators Assigned in the Outpatient Code Editor (OCE)

1. Payment Status Indicators

The payment status indicators (SIs) that we assign to HCPCS codes and APCs under the OPPS play an important role in determining payment for services under the OPPS because they indicate whether a service represented by a HCPCS code is payable under the OPPS or another payment system and also whether particular OPPS policies apply to the code. As we proposed, for CY 2005, we are providing our status indicator assignments for APCs in Addendum A, for the HCPCS codes in Addendum B, and the definitions of the
status indicators in Addendum D1 to this final rule with comment period.

Payment under the OPPS is based on
HCPCS codes for medical and other
health services. These codes are used for a wide variety of payment systems under Medicare, including, but not limited to, the Medicare fee schedule for physician services, the Medicare fee schedule for durable medical equipment and prosthetic devices, and the Medicare clinical laboratory fee schedule. For purposes of making payment under the OPPS, we must be able to signal the claims processing system through the Outpatient Code Editor (OCE) software, as to HCPCS codes that are paid under the OPPS and those codes to which particular OPPS payment policies apply. We accomplish this identification in the OPPS through the establishment of a system of status indicators with specific meanings.
Addendum D1 contains the definitions of each status indicator for purposes of
the OPPS for CY 2005.

We assign one and only one status
indicator to each APC and to each
HCPCS code. Each HCPCS code that is assigned to an APC has the same status
indicator as the APC to which it is assigned.

In the August 16, 2004 OPPS proposed rule, for CY 2005, we proposed to use the following status indicators in the specified manner:

• ‘‘ A ’’ to indicate services that are paid under some payment method other than OPPS, such as under the durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) fee schedule or the Medicare Physician Fee Schedule. Some, but not all, of these other payment systems are identified in
Addendum D1 to this final rule with comment period.

• ‘‘ B ’’ to indicate the services that are not payable under the OPPS when submitted on an outpatient hospital Part B bill type, but that may be payable by


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fiscal intermediaries to other provider types when submitted on an appropriate bill type.

• ‘‘ C ’’ to indicate inpatient services that are not payable under the OPPS.

• ‘‘ D ’’ to indicate a code that is discontinued, effective January 1, 2005.

• ‘‘ E ’’ to indicate items or services that are not covered by Medicare or codes that are not recognized by
Medicare.

• ‘‘ F ’’ to indicate acquisition of corneal tissue, which is paid on a
reasonable cost basis and certain CRNA services that are paid on a reasonable
cost basis.

• ‘‘ G ’’ to indicate drugs, biologicals, and radiopharmaceutical agents that arepaid under the OPPS transitional passthrough rules.

• ‘‘ H ’’ to indicate devices that arepaid under the OPPS transitional passthrough rules and brachytherapy sources that are paid on a cost basis.

• ‘‘ K ’’ to indicate drugs, biologicals (including blood and blood products), and radiopharmaceutical agents that are paid in separate APCs under the OPPS, but that are not paid under the OPPS transitional pass-through rules.

• ‘‘ L ’’ to indicate flu and pneumococcal immunizations that are paid at reasonable cost but to which no coinsurance or copayment apply.

• ‘‘ N ’’ to indicate services that are paid under the OPPS, but for which payment is packaged into another service or APC group.

• ‘‘ P ’’ to indicate services that are paid under the OPPS, but only in partial hospitalization programs.

• ‘‘ S ’’ to indicate significant procedures that are paid under the OPPS, but to which the multiple procedure reduction does not apply.

• ‘‘ T ’’ to indicate significant services that are paid under the OPPS and to which the multiple procedure payment discount under the OPPS applies.

• ‘‘ V ’’ to indicate medical visits (including emergency department or clinic visits) that are paid under the

OPPS.

• ‘‘ X ’’ to indicate ancillary services that are paid under the OPPS.

• ‘‘ Y ’’ to indicate nonimplantable durable medical equipment that must be billed directly to the durable medical equipment regional carrier rather than to the fiscal intermediary.

We proposed the payment status
indicators identified above for each
HCPCS code and each APC in Addenda A and B and requested comments on the appropriateness of the indicators we have assigned.

We received several public comments on our proposal relating to status
indicators. Comment: Two commenters, representing radionuclide, radiopharmaceutical, and nuclear medicine interests, expressed concern about assignment of status indicator

‘‘ N ’’ in Transmittal 290, issued August 27, 2004, to the new revenue codes for diagnostic and therapeutic radiopharmaceuticals, revenue codes 0343 and 0344, that were effective October 1, 2004. The commenters recommended changing the status
indicators for both 0343 and 0344 to

‘‘ K ’’ for nonpass-through drugs, biologicals, and radiopharmaceutical agents, and asked that CMS clarify and notify hospitals to use these revenue codes when billing and reporting costs for radiopharmaceuticals that can be paid separately. The commenters also stated that clarifying that these are nonpass-through and not packaged will assist CMS in tracking and analyzing costs for the radiopharmaceuticals and contribute to more accurate payment determinations. They recommended that CMS require hospitals to use the new revenue codes to report charges for radiopharmaceuticals.

Response: The assignment of status
indicator ‘‘ N ’’ to revenue codes 0343
and 0344 in Transmittal 290 relates to
OCE treatment of lines on a claim that report a charge with a revenue code but with no HCPCS code. The assignment of
certain status indicators to revenue codes reported in the attachment to quarterly OPPS updates entitled

‘‘ Summary of Data Modifications ’’ is an OCE specification only, and should not
be confused with how we use the status
indicators listed in Addendum D1 that we assign to HCPCS codes and to APCs.

Additional information related to how
revenue codes are used can be found in
Pub. 100

– 04, Medicare Claims Processing, Chapter 4, Section 20, Subsection 5.1.1, entitled ‘‘ Packaged
Revenue Codes. ’’ As indicated in that section, certain revenue codes when reported on an OPPS bill without a HCPCS code, including revenue codes 0343 and 0344, are considered packaged
services that are to be factored into the transitional outpatient payment and
outlier calculations.

Although we strongly encourage hospitals to report charges and HCPCS codes for diagnostic and therapeutic radiopharmaceuticals using revenue codes 0343 and 0344, respectively, we generally try to not to impose requirements on the assignment of
HCPCS codes to revenue codes for OPPS services because the way hospitals assign costs varies so widely. Nevertheless, we agree with the commenters that, to the extent hospitals report charges for radiopharmaceuticals, both packaged and separately payable, using the new revenue codes 0343 and 0344, our cost data related to radiopharmaceuticals should be more precise.

We will review our manual instructions and previous issuances related to the reporting of revenue codes and make any revisions needed to clarify and update those instructions.

Comment: One commenter asked that CMS change the status indicator for
code 90780 and 90781 to ‘‘ X ’’ from ‘‘ T ’’ and thereby cease the application of the multiple procedure reduction to these services, which will be billed for administration of infusion therapy in place of Q0081 for CY 2005. The
commenter indicated that there is no
situation in which the time and
resources involved in infusion care
should be reduced in the case of an observation patient.

Response: We disagree. The costs of space, utilities and staff attendance are duplicated when the beneficiary is receiving another service at the same time as infusion therapy, in particular when the patient is in observation. Hence, a multiple procedure reduction to infusion therapy is appropriate, particularly when the patient is in observation status. However, we are noting how the multiple procedure discounting logic in the OCE functions.
Line items with a service indicator of

‘‘ T ’’ are subject to multiple procedure discounting unless modifiers 76, 77, 78, or 79, or all, are present. The ‘‘ T ’’ line item with the highest payment amount will not be multiple procedure discounted, and all other ‘‘ T ’’ line items will be multiple procedure discounted.
All line items that do not have a service
indicator of ‘‘ T ’’ will be ignored in determining the discount. Therefore, if the only other services reported with infusion therapy are an emergency department or other visit code, or diagnostic tests and services assigned
status indicator ‘‘ S, ’’ the infusion therapy code would not be subject to the multiple procedure discounting.

2. Comment Indicators

In the November 1, 2002 and the November 7, 2003 final rules with comment period, which implemented changes in the OPPS for CYs 2003 and 2004, respectively, we provided code
condition indicators in Addendum B.
The code condition indicators and their meaning are as follows:

• ‘‘ DG ’’— Deleted code with a grace period; Payment will be made under the deleted code during the 90-day grace period.


### 65828 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

• ‘‘ DNG ’’— Deleted code with no grace period; Payment will not be made
under the deleted code.

• ‘‘ NF ’’— New code final APC assignment; Comments were accepted on a proposed APC assignment in the Proposed Rule; APC assignment is no longer open to comment.

• ‘‘ NI ’’— New code interim APC assignment; Comments will be accepted on the interim APC assignment for the
new code.

Medicare had permitted a 90-day grace period after implementation of an updated medical code set, such as the HCPCS, to give providers time to incorporate new codes in their coding and billing systems and to remove the
discontinued codes. HCPCS codes are updated annually every January 1, so the grace period for billing discontinued HCPCS was implemented every January 1 through March 31.

The Health Insurance Portability and Accountability Act (HIPAA) transaction and code set rules require usage of the
medical code set that is valid at the time that the service is provided. Therefore, effective January 1, 2005, CMS is eliminating the 90-day grace period for billing discontinued HCPCS codes. Details about elimination of the 90-day grace period for billing discontinued
HCPCS codes were issued to our contractors on February 6, 2004, in Transmittal 89, Change Request 3093.

In order to be consistent with the
HIPPA rule that results in the elimination of the 90-day grace period for billing discontinued HCPCS codes, in the August 16, 2004 OPPS proposed rule, we proposed, effective January 1, 2005, to delete code condition
indicators ‘‘ DNG ’’ and ‘‘ DG ’’ . We proposed to designate codes that are discontinued effective January 1, 2005
with status indicator ‘‘ D, ’’ as described in section VII.C.1. of this preamble.

Further, we proposed to rename

‘‘ code condition ’’ indicators as

‘‘ comment indicators. ’’ In Addendum
D2 to this final rule with comment period, we list the following two
comment indicators that we had proposed to use to identify HCPCS codes assigned to APCs that are or are not subject to comment:

• ‘‘ NF ’’— New code, final APC assignment; Comments were accepted on a proposed APC assignment in the Proposed Rule; APC assignment is no longer open to comment.

• ‘‘ NI ’’— New code, interim APC assignment; Comments will be accepted on the interim APC assignment for the
new code.

We did not receive any public comments on our proposal relating to
comment indicators. We are implementing the comment indicators and discontinuing the use of code condition indicators as we proposed,
without modification.

D. Observation Services

Frequently, beneficiaries are placed in

‘‘ observation status ’’ in order to receive
treatment or to be monitored before making a decision concerning their next placement (that is, admit to the hospital or discharge). This status assignment occurs most frequently after surgery or a visit to the emergency department. For
a detailed discussion of the clinical and payment history of observation services, see the November 1, 2002 final rule with comment period (67 FR 66794).

Before the implementation of the OPPS in CY 2000, payment for
observation care was made on a reasonable cost basis, which gave hospitals a financial incentive to keep
beneficiaries in ‘‘ observation status ’’ even though clinically they were being treated as inpatients. With the initiation of the OPPS, observation services were no longer paid separately; that is, they were not assigned to a separate APC. Instead, costs for observation services were packaged into payments for the
services with which the observation
care was associated.

Beginning in early 2001, the APC Panel began discussing the topic of separate payment for observation services. In its deliberations, the APC
Panel asserted that observation services following clinical and emergency room visits should be paid separately, and that observation following surgery should be packaged into the payment for the surgical procedure. For CY 2002, we implemented separate payment for observation services (APC 0339) under
the OPPS for three medical conditions: chest pain, congestive heart failure, and asthma. A number of accompanying requirements were established, including the billing of an evaluation and management visit in conjunction with the presence of certain specified diagnosis codes on the claim, hourly billing of observation care for a minimum of 8 hours up to a maximum of 48 hours, timing of observation beginning with the clock time on the

nurse ’ s admission note and ending at the clock time on the physician ’ s discharge orders, a medical record documenting that the beneficiary was under the care of a physician who specifically assessed patient risk to determine that the beneficiary would benefit from observation care, and provision of specific diagnostic tests to beneficiaries based on their diagnoses. In developing this policy for separately payable observation services, we balanced issues of access, medical necessity, potential for abuse, and the need to ensure appropriate payment. We selected the three medical conditions, noted previously, and the accompanying diagnosis codes and diagnostic tests to avoid significant morbidity and mortality from inappropriate discharge while, at the same time, avoiding unnecessary inpatient admissions.

Over the past 2 years, we have
continued to review observation care
claims data for information on utilization and costs, along with additional information provided to us by physicians and hospitals concerning our current policies regarding separately payable observation services. Our primary goal is to ensure that Medicare beneficiaries have access to medically necessary observation care. We also want to ensure that separate payment is made only for beneficiaries actually receiving clinically appropriate
observation care.

In January 2003, the APC Panel
established an Observation Subcommittee. Over the last year, this
subcommittee has held discussions concerning observation care and
reviewed data extracted from claims that reported observation services. The subcommittee presented the results of
its deliberations to the full APC Panel at the February 2004 meeting. The APC Panel recommendations regarding observation care provided under the OPPS were broad in scope and included elimination of the diagnosis requirement for separate payment for observation services, elimination of the requirement for the concomitant diagnostic tests for patients receiving observation care, unpackaging of observation services beyond the typical expected recovery time from surgical and interventional procedures, and
modification of the method for measuring beneficiaries ’ time in observation to make it more compatible with routine hospital practices and their associated electronic systems.

In response to the APC Panel recommendations, we undertook a number of studies regarding observation services, while acknowledging data limitations from the brief 2-year experience the OPPS has had with separately payable observation services.

To assess the appropriateness of the
APC Panel ’ s recommendation not to pay separately for observation services following surgical or interventional procedures, we analyzed the claims for these procedures to determine the extent to which the claims reported packaged observation services codes. This analysis revealed that while


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observation services are being reported on some claims for surgical and interventional procedures, the great majority of claims for these procedures reported no observation services. The packaged status of these observation services codes may result in underreporting their frequency, but the proportion of surgical and interventional procedures reported with the packaged observation services codes was so small that any increase would not change our substantive conclusion. This confirmed our belief that, although an occasional surgical case may require a longer recovery period than expected for the procedure, as a rule, surgical outpatients do not require observation care. Given the rapidly changing nature of outpatient surgical and interventional services, it would be difficult to determine an expected typical recovery time for each procedure. We have
concerns about overutilization ofobservation services in the postprocedural setting as partial replacement for recovery room time. However, we noted that, to the extent observation care or extended recovery services are provided to surgical or interventional patients, the cost of that care is packaged into the payment for the procedural APC which may result in higher median costs for those procedures.

We also analyzed the possibility of expanding the list of medical conditions for separately payable visit-related observation services, altering the requirements for diagnostic tests while in observation, and modifying the rules for counting time in observation care.

We looked at CY 2003 OPPS claims data for all packaged visit-related
observation care for all medical
conditions in order to determine
whether or not there were other diagnoses that would be candidates for separately payable observation services. Our analysis confirmed that the three diagnoses that are currently eligible for separate payment for observation services are appropriate, as those diagnoses are frequently reported in our visit-related claims with packaged observation services. In fact, diagnoses related to chest pain were, by far, the diagnosis most frequently reported for observation care, either separately payable or packaged. Other diagnoses that appeared in the claims data with packaged observation services included syncope and collapse, transient cerebral ischemia, and hypovolemia.

The packaged status of those observation stays means that the data are often incomplete and the frequency of services may be underreported. Generally, information about packaged services is not as reliably reported as is that for separately paid services. However, we are not convinced that, for those other conditions (such as hypovolemia, syncope and collapse, among others), there is a well-defined set of hospital services that are distinct from the services provided during a clinic or emergency room visit. Separately payable observation care must include specific, clinically appropriate services, and we are still accumulating data and experience for
the three medical conditions for which we are currently making separate payment. Therefore, we believed it was premature to expand the conditions for which we would separately pay for
visit-related observation services.

Hospitals have indicated that, even in the cases where the diagnostic tests have been performed, to assure that billing requirements for separately payable observation services under APC 0339 are met, they must manually review the medical records to prepare the claims. If they do not conduct this manual review, they may not be coding appropriately for separately payable
observation services.

As noted in our August 16, 2004 proposed rule, we have also received comments from the community and the APC Panel asserting that the requirements for diagnostic testing are overly prescriptive and administratively burdensome, and that hospitals may perform tests to comply with the CMS requirements, rather than based on clinical need. For example, a patient admitted directly to observation care with a diagnosis of chest pain may have had an electrocardiogram in a physician ’ s office just prior to admission to observation and may only need one additional electrocardiogram while receiving observation care. Thus, two more electrocardiograms performed in the hospital as required under the current OPPS observation policy might not be medically necessary.

We continue to believe that the diagnostic testing criteria we established
for the three medical conditions are the minimally appropriate tests for patients receiving a well-defined set of hospital
observation services for those conditions. The previous example, notwithstanding, we also continue to believe that the majority of these tests would be performed in the hospital outpatient setting. We define
observation care as an active treatment to determine if a patient ’ s condition is going to require that he or she be admitted as an inpatient or if the condition resolves itself and the patient is discharged. The currently required diagnostic tests reflect that an active assessment of the patient was being undertaken, and we believe they are generally medically necessary to determine whether a beneficiary will benefit from being admitted to observation care and aid in determining the appropriate disposition of the patient following observation care.

After careful consideration, we agree that specifying which diagnostic tests must be performed as a prerequisite for payment of APC 0339 may be imposing an unreasonable reporting burden on hospitals and may, in some cases, result in unnecessary tests being performed. Therefore, in the August 16, 2004 proposed rule, we proposed, beginning in CY 2005, to remove the current requirements for specific diagnostic testing, and to rely on clinical judgment
in combination with internal and external quality review processes to ensure that appropriate diagnostic testing (which we expect would include some of the currently required diagnostic tests) is provided for patients receiving high quality, medically necessary observation care.

Accordingly, we proposed that, beginning in CY 2005, the following tests would no longer be required to receive payment for APC 0339 (Observation):

• For congestive heart failure, a chest x-ray (71010, 71020, 71030), and electrocardiogram (93005) and pulse oximetry (94760, 94761, 94762)

• For asthma, a breathing capacity test (94010) or pulse oximetry (94760, 94761, 94762)

• For chest pain, two sets of cardiac enzyme tests; either two CPK (82550, 82552, 82553) or two troponins (84484, 84512) and two sequential electrocardiograms (93005)

We believe that this proposed policy change would benefit hospitals because it would reduce administrative burden, allow more flexibility in management of beneficiaries in observation care, provide payment for clinically appropriate care, and remove a requirement that may have resulted in duplicative diagnostic testing.

We received numerous public comments supporting our proposed policy. We did not receive any comments that opposed the proposed policy. Therefore, we are adopting, without modification, our proposal to no longer require specified diagnostic tests to receive payment for APC 0339, beginning in CY 2005.

Hospitals and the APC Panel further suggested that we modify the method for accounting for the beneficiary ’ s time in observation care. Currently, hospitals report the time in observation beginning with the admission of the beneficiary to


### 65830 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

observation and ending with the physician ’ s order to discharge the patient from observation. There are two problems related to using the time of the physician discharge order to determine the ending time of observation care. First, providers assert that it is not possible to electronically capture the time of the physician ’ s orders for discharge. As a result, manual medical record review is required in order to bill accurately. Second, the hospital maycontinue to provide specific dischargerelated observation care for a short time after the discharge orders are written and, therefore, may not be allowed to account for the full length of the observation care episode. In an effort to reduce hospitals ’ administrative burden related to accurate billing, in the proposed rule, we proposed to modify our instructions for counting time in
observation care to end at the time the outpatient is actually discharged from the hospital or admitted as an inpatient. Our expectation was that specific, medically necessary observation services were being provided to the patient up until the time of discharge. However, we did not expect reported
observation time to include the time patients remain in the observation area
after treatment is finished for reasons that include waiting for transportation
home.

Although beneficiaries may be in observation care up to 48 hours or longer, we believed that, in general, 24 hours was adequate for the clinical staff
to determine what further care the patient needs. In CY 2005, we proposed to continue to make separate payment
for observation care based on claims meeting the requirement for payment of HCPCS code G0244 (Observation care provided by a facility to a patient with CHF, chest pain, or asthma, minimum 8 hours, maximum 48 hours). However, we proposed not to include claims reporting more than 48 hours of observation care in calculating the final payment rate for APC 0339.

We received several public comments on our proposal.

Comment: A number of commenters urged that CMS include claims for stays greater than 48 hours in the data used to calculate the payment rate for observation because any such claims in
our dataset would have withstood local fiscal intermediary scrutiny for reasonableness and medical necessity and should therefore be regarded as legitimate for pricing calculations. One commenter requested that CMS provide
clarification to fiscal intermediaries regarding billing for stays that exceed 48 hours because code G0244 (Observation care provided by a facility to a patient with CHF, chest pain or asthma, minimum 8 hours, maximum 48 hours) would seem to preclude billing G0244 for stays that exceed 48 hours but that
otherwise meet all the criteria for payment.

Response: In an effort to clarify the apparent confusion cited by commenters with regard to billing for stays that exceed 48 hours, beginning in CY 2005, we are changing the descriptor
for HCPCS code G0244 to read as
follows:

G0244, Observation care provided by a facility to a patient with CHF, chest pain or asthma, minimum 8 hours.

We expect that hospitals will report
one unit of G0244 for each hour of observation care provided to patients for congestive heart failure, chest pain, or asthma, with a minimum 8 units billed to be eligible for separate observation payment.

We carefully considered the comments that urged us to include reporting more than 48 hours to
calculate the median cost of G0244. The final payment rate for APC 0339 listed
in Addendum A is based on all CY 2003
claims for G0244 taken from the National Claims History file, without regard to units of service. Prior to implementation of the OPPS, when hospital outpatient services were paid on a reasonable cost basis, Medicare did allow payment for observation services
that exceeded 48 hours when medical
review determined that a more extended period of observation care was reasonable and necessary. Since implementation of the OPPS, Medicare has ceased paying separately for observation care, with the exception of services reported with G0244, because payment for observation services was packaged into payment for services with
which observation services were reported. We believe that, in the overwhelming majority of cases, decisions can be and are routinely made
in less than 48 hours whether to release a beneficiary from the hospital following resolution of the reason for the outpatient visit or whether to admit the beneficiary as an inpatient. Therefore, we intend to revisit this issue in future updates.

For the reasons stated above, we are not adopting as final for CY 2005, our proposal to exclude claims for G0244 that reported more than 48 hours of
observation from calculation of the
median cost for APC 0339.

We also proposed the following requirements to receive separate payment for HCPCS code G0244 in APC 0339 for medically necessary observation services involving specific goals and a plan of care that are distinct from the goals and plan of care for an emergency department, physician office,
or clinic visit:

• The beneficiary must have one of three medical conditions: congestive heart failure, chest pain, or asthma. The hospital bill must report as the admitting or principal diagnosis an appropriate ICD

– 9

– CM code to reflect the condition. The eligible ICD

– 9

– CM diagnosis codes for CY 2005 are shown
in Table 38 below.

• The hospital must provide and report on the bill an emergency department visit (APC 0610, 0611, or 0612), clinic visit (APC 0600, 0601, or 0602), or critical care (APC 0620) on the same day or the day before the separately payable observation care (G0244) is provided. For direct admissions to observation, in lieu of an emergency department visit, clinic visit, or critical care, G0263 (Adm with CHF, CP, asthma) must be billed on the same day as G0244.

• HCPCS code G0244 must be billed
for a minimum of 8 hours.

• No procedures with a ‘ T ’ status indicator, except the code for infusion therapy of other than a chemotherapy drug (CPT code 90780) can be reported on the same day or day before observation care is provided.

• Observation time must be
documented in the medical record and begins with the beneficiary ’ s admission
to an observation bed and ends when he or she is discharged from the hospital.

• The beneficiary must be in the care of a physician during the period of observation, as documented in the medical record by admission, discharge, and other appropriate progress notes that are timed, written, and signed by the physician.

• The medical record must include documentation that the physician explicitly assessed patient risk to determine that the beneficiary would
benefit from observation care.

We received numerous public comments on our proposal.

Comment: Most commenters applauded our proposal to eliminate the requirement that specified diagnostic tests be reported in order to receive payment for HCPCS code G0244. However, many commenters expressed disappointment that CMS did not propose to expand the conditions for which separate payment would be provided for observation care. One commenter, representing cancer centers, requested that CMS study febrile neutropenia, chemotherapy hypersensitivity reaction, hypovolemia, and electrolyte imbalance as conditions that would warrant separate payment
for observation. A few commenters


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supported the APC Panel
recommendation that we eliminate altogether the diagnosis coding requirement for APC 0339. One
commenter stated that medical care included in hourly observation charges
billed under revenue code 762 for syncope and collapse, transient cerebral ischemia, and hypovolemia is medically necessary and distinct from services rendered in the emergency department or a clinic, is similar to that furnished to patients with congestive heart failure, asthma, and chest pain, and should therefore be paid for separately.

Response: We appreciate the support expressed by numerous commenters for the changes in requirements that we proposed for CY 2005 in order for hospitals to receive separate payment
for observation services. As we indicate below, we are making final most of the changes that we proposed, with some
modifications based on comments that we received. Although we are not going to implement in the CY 2005 OPPS the recommendations made by commenters and the APC Panel to expand separate payment for observation to include conditions in addition to congestive heart failure, asthma, and chest pain, we will continue to analyze our data and study the impact of such a change for reconsideration in future updates of the

OPPS.

Comment: Several commenters supported our proposal to change how we define ending time or ‘‘ discharge ’’ from observation care. However, those commenters also requested further clarification of what we mean by

‘‘ discharge. ’’

Response: We carefully considered the thoughtful comments related to our proposal to modify the current policy regarding the time that should be recorded to designate when observation care ends. Based on suggestions from commenters, we are elaborating upon our proposal to define as the end of observation, the time the outpatient is either discharged from the hospital or admitted as an inpatient. Specifically, we consider the time when a patient is

‘‘ discharged ’’ from observation status to
be the clock time when all clinical or
medical interventions have been completed, including any necessary followup care furnished by hospital staff and physicians that may take place after a physician has ordered that the patient be released or admitted as an inpatient. However, observation care does not include time spent by the patient in the hospital subsequent to the conclusion of therapeutic, clinical, or medical interventions, such as time spent waiting for transportation to go home. Comment: A few commenters requested clarification of the starting
time for observation. One commenter
recommended that CMS make it clear that observation time begins with the patient ’ s placement in the bed and initiation of observation care, regardless of whether the bed is in a holding area
or is in an actual observation bed or unit, as long as appropriate observation care is being provided. Another
commenter asked if CMS will allow providers to document observation start time on any applicable document in the
medical record and not limit the start
time documentation to the nurse ’ s observation admission note.

Response: We have stated in past
issuances and rules that observation time begins at the clock time appearing
on the nurse ’ s observation admission note, which coincides with the
initiation of observation care or with the time of the patient ’ s arrival in the observation unit (66 FR 59879, November 30, 2001; Transmittal A

– 02

– 026 issued on March 28, 2002; and
Transmittal A

– 02

– 129 issued on January 3, 2003.) In the August 16, 2004 proposed rule, we stated that
observation time must be documented in the medical record and begins with the beneficiary ’ s admission to an observation bed (69 FR 50534). We agree
with the commenter on the need for clarification, and we will reiterate in provider education materials developed for the CY 2005 OPPS update that observation time begins at the clock time documented in the patient ’ s medical record, which coincides with the time the patient is placed in a bed for the purpose of initiating observation care in accordance with a physician ’ s order.

Comment: One commenter, a hospital trade association, recommended that CMS reconsider requiring hospitals to report one of the ICD

– 9

– CM diagnosis codes designated for payment of APC 0339 as the admitting or principal diagnosis on the hospital claim. The commenter was concerned that, if we restrict the position of the diagnosis code to the admitting or principal field, many claims that otherwise meet the criteria for separate payment of observation will not be payable because coding rules and the frequency by
which Medicare beneficiaries with asthma, congestive heart failure or chest pains have other presenting signs, symptoms, and clinical conditions will result in inappropriate placement of the requisite diagnosis code. Therefore, the
commenter recommended that CMS accept the required diagnosis code in any diagnosis code field. Response: Our proposal to require hospitals to report one of the specified

ICD

– 9

– CM codes in the admitting or principal diagnosis field is a modification of policy that we implemented in the November 30, 2001 final rule (66 FR 59880). We disagree
with the commenter that this requirement will result in many claims for APC 0339 not being paid. Rather, we believe that requiring hospitals to report the signs, symptoms, and conditions that are the reason for the patient ’ s visit will enhance coding accuracy and ensure that we are paying appropriately for APC 0339 by limiting separate payment to those observation services furnished to monitor asthma, chest pain, or congestive heart failure. If we continued to accept the required ICD

– 9

– CM diagnosis code as a secondary diagnosis, we would remain concerned that we may be making separate payment for observation for conditions other than asthma, congestive heart failure or chest pain because these conditions are reported in the secondary diagnosis field even though they are not the clinical reason that the patient is receiving observation services.

Because we want to give hospitals ample time to incorporate this requirement into their billing systems, we will not implement this requirement before April 1, 2005. However, we are making final in this final rule with comment period the requirement that, beginning April 1, 2005, hospitals must report a qualifying ICD

– 9 CM diagnosis code in Form Locator (FL) 76, Patient Reason for Visit, and/or FL 67, principal diagnosis, in order for the hospital to receive separate payment for APC 0339. If a qualifying ICD

– 9 diagnosis code(s) is reported in the secondary diagnosis field but is not reported in either the Patient Reason for Visit field (FL 76) or the principal diagnosis field (FL 67), separate payment for APC 0339 will not
be allowed.

Comment: One commenter requested that CMS modify the requirement that
there be documentation that the physician has explicitly assessed the beneficiary risk to determine that he
would benefit from observation care.

Response: We expect that, prior to issuing an order to place a patient in observation status, it is standard procedure for the physician to assess the patient ’ s condition to determine the clinically appropriate intervention that is most likely to result in maximum benefit for the patient given his or her condition at that time. To expect
documentation of that assessment in the medical record of a patient for whom an
order to receive observation care has been issued is not new, excessive, or


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unduly burdensome, but rather is an essential part of the patient ’ s medical record to support the medically reasonable and necessary nature of the
services ordered and furnished.

Comment: One commenter requested
that CMS allow observation care following surgery if recovery time is longer than expected.

Response: As stated in the proposed rule, this situation is precisely contrary to the purpose of the observation care benefit. We again note that recovery time has been factored into the payment for the surgery. Although there is variation among patients ’ recovery times, that variation is part of the averaging that is inherent in a prospective payment system. Those costs are not considered as part of the payment for observation care, which serves an entirely different purpose for beneficiaries in the outpatient setting.

Comment: One commenter recommended adding ICD

– 9

– CM diagnosis code 427.31 (Atrial fibrillation) to the list of specified diagnosis codes that could be included on claims for separately payable
observation services furnished to patients with congestive heart failure or chest pain, or both.

Response: While many patients may
have chronic atrial fibrillation that is asymptomatic, we agree that some patients may present chest pain as a significant symptom associated with atrial fibrillation. Atrial fibrillation may also complicate acute myocardial infarction. Patients who are being evaluated and managed with observation care for chest pain in a hospital may be found to have symptomatic atrial fibrillation as the likely etiology of their chest discomfort following comprehensive assessment. However, we would generally expect that patients with chest pain and atrial fibrillation receiving observation services in the hospital would be receiving these services specifically for their chest pain and that one of the chest pain diagnoses already on our list of diagnosis codes would be present on
the claim as the reason for the visit or the principal diagnosis. Similarly, with respect to atrial fibrillation and congestive heart failure, congestive heart failure is an independent predictor of atrial fibrillation. However, as with chest pain and atrial fibrillation, we would generally expect that patients with congestive heart failure and atrial fibrillation receiving observation services in the hospital to be receiving these services specifically for their congestive heart failure and that one of the congestive heart failure diagnoses already on our list of diagnosis codes would be present on the claim as the reason for the visit or the principal diagnosis.

Therefore, while we agree with the

commenter ’ s suggestion that code
427.31 could be viewed as a reasonable diagnosis code for chest pain for which separate payment for observation services might be made under the OPPS, we believe it is unnecessary and
redundant to add it to the list for chest pain because any of the existing ICD

– 9

– CM diagnosis codes listed in Table 32 for chest pain suffices for purposes of the OPPS observation payment policy. Likewise, we are not adding code 427.31 to the list of acceptable congestive heart failure diagnoses for which separate payment for observation services is made by the OPPS.

Comment: One commenter recommended that diagnostic heart catheterization procedures, CPT codes 93510 through 92529, performed within 24 hours of an observation stay not disqualify separate payment for the observation even though these codes are assigned status indicator ‘‘ T, ’’ because it is not uncommon for patients admitted through the emergency department to observation for chest pain to be followed up with a diagnostic heart
catheterization within 24 hours.

Response: This scenario was discussed during the February 2004 APC Panel meeting, although it was not
advanced as a formal recommendation. While we are not adopting the

commenter ’ s recommendation at this time, we are making final in this final rule with comment period several changes in the requirements for separate payment for observation care, for implementation in CY 2005. We believe further analysis of any impact of such a change, in addition to analysis of the other changes being implemented in CY 2005, is necessary. We note that by the APC Panel may wish to consider this in future meetings.

Comment: One commenter, representing a health system, suggested extensive billing and coding changes to further simplify claims submission for observation services. These suggestions
included revision of the definition of
HCPCS code G0263 and elimination of
HCPCS code G0264 for direct admissions; replacing use of HCPCS
code G0244 with a revenue code and CPT codes and letting the OCE determine if the criteria for payment of APC 0339 are met; clarification of billing for postanesthesia care unit (PACU) services; and use of revenue codes to distinguish between
observation in a clinic and observation in an emergency department.

Response: We welcome the

commenter ’ s suggestions and will endeavor during the next year to evaluate their feasibility and impact of any such changes. However, we recognize that extensive systems changes would be required to implement many of these suggestions, but will consider them for possible implementation in future updates of the

OPPS.

After carefully considering the public
comments received related to our proposed requirements to receive separate payment for observation services in CY 2005, we are adopting our proposal as final without
modification.

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E. Procedures That Will Be Paid Only as Inpatient Procedures

Before implementation of the OPPS, Medicare paid reasonable costs for services provided in the outpatient department. The claims submitted were subject to medical review by the fiscal
intermediaries to determine the appropriateness of providing certain services in the outpatient setting. We did not specify in regulations those services that were appropriate to provide only in the inpatient setting and that, therefore, should be payable only when provided in that setting.

Section 1833(t)(1)(B)(i) of the Act gives the Secretary broad authority to
determine the services to be covered and paid for under the OPPS. In the April 7, 2000 final rule with comment period, we identified procedures that are typically provided only in an inpatient setting and, therefore, would not be paid by Medicare under the OPPS (65 FR 18455). These procedures comprise what is referred to as the

‘‘ inpatient list. ’’ The inpatient list specifies those services that are only paid when provided in an inpatient setting. These are services that require inpatient care because of the nature of the procedure, the need for at least 24 hours of postoperative recovery time or monitoring before the patient can be safely discharged, or the underlying physical condition of the patient. As we discussed in the April 7, 2000 final rule with comment period (65 FR 18455) and the November 30, 2001 final rule (66 FR 59856), we use the following criteria when reviewing procedures to determine whether or not they should be moved from the inpatient list and assigned to an APC group for payment
under the OPPS:

• Most outpatient departments are equipped to provide the services to the Medicare population.

• The simplest procedure described by the code may be performed in most outpatient departments.

• The procedure is related to codes that we have already removed from the inpatient list.

In the November 1, 2002 final rule (67 FR 66792), we added the following criteria for use in reviewing procedures to determine whether they should be removed from the inpatient list and assigned to an APC group for payment
under the OPPS:

• We have determined that the procedure is being performed in multiple hospitals on an outpatient basis; or


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• We have determined that the procedure can be appropriately and safely performed in an ASC and is on the list of approved ASC procedures or proposed by us for addition to the ASC
list.

In the November 7, 2003 final rule with comment period, we did not implement any changes in our payment policies for the OPPS inpatient list. However, we addressed issues and concerns raised by commenters in response to the August 12, 2003 proposed rule and further clarified payment policies related to the OPPS inpatient list.

At the February 2004 meeting, the
APC Panel made the recommendation to remove the following four abscess drainage CPT codes from the inpatient list: 44901, 49021, 49041, and 49061. As discussed in the proposed rule, we agreed with the APC Panel ’ s recommendation and we proposed to
remove these four abscess codes from the inpatient list and to assign them to APC 0037 for OPPS payment in CY

2005.

The APC Panel also made a
recommendation to either eliminate the inpatient list from the OPPS or to evaluate the current list of procedures for any other appropriate changes. As recommended by the APC Panel, we sought to identify additional procedure codes to propose for removal from the inpatient list, consistent with the
criteria listed above. To assist us in identifying procedures that were being widely performed on an outpatient basis for clinical review, we looked for services on the inpatient list that were performed on Medicare beneficiaries in
all sites of service other than the hospital inpatient setting approximately 60 percent or more of the time. We
relied on CY2003 Medicare Part B Extract and Summary System (BESS)
data for this information. We chose 60 percent as a threshold because, in general, we believe that a procedure should be specifically considered for removal from the inpatient list if there is evidence that it is being performed
less than one half of the time in the hospital inpatient setting. For procedures where data demonstrate that they are being delivered to Medicare beneficiaries in a safe and appropriate manner on an outpatient basis in a variety of different hospitals, we believe
that it is reasonable to consider the removal of these procedures from the inpatient list. After further clinical
evaluation of codes that met our 60- percent threshold to ensure that these procedures met our other criteria for removal from the inpatient list and were truly appropriate for consideration, we proposed to place 20 procedures that are on the inpatient list for the CY 2004 OPPS into clinical APCs for payment
under the OPPS for CY 2005. We proposed to assign all of these codes the
status indicator ‘‘ T. ’’ Two additional services, CPT codes 00174 and 00928, were proposed to be removed and assigned a status indicator ‘‘ N ’’ because, under the OPPS, anesthesia codes are packaged into the procedures with which they are billed.

We proposed not to accept the APC
Panel ’ s recommendation to completely eliminate the inpatient list for CY 2005. We solicited comments, especially from professional societies and hospitals, on whether any procedures on the CY 2005 proposed inpatient list were appropriate for removal and whether any other such procedures should be separately paid
under the OPPS. We also asked
commenters who recommend that a procedure that is currently on the inpatient list be reclassified to an APC to include evidence (preferably from peer-reviewed medical literature) that the procedure is being performed on an outpatient basis in a safe and effective manner. We requested that commenters suggest an appropriate APC assignment for the procedure and furnish supporting data to assist us in determining, based on comments, if the procedure could be payable under the

OPPS in CY 2005.

We received a number of public comments on our proposal to retain the inpatient list and to delete 22 procedure codes from the inpatient list and our solicitation of additional procedures currently on the inpatient list that should be reclassified to an APC, with supporting evidence.

Comment: One commenter
recommended that CMS remove the following CPT codes for spinal procedures currently on the inpatient list: CPT codes 22554, 22585, 22840,

22842, 22845, 22846, 22855, 63043, 63044, 63075, and 63076. The commenter submitted several published articles related to the performance of these procedures in the hospital outpatient setting.

Response: After careful review of the list of procedures and the accompanying articles submitted by the commenter, we believe these procedures should remain on the inpatient list for CY 2005. All of the procedures recommended by the commenter for removal were performed more than 90 percent of the time in the hospital inpatient setting on Medicare beneficiaries according to our BESS
data. There was no evidence submitted to demonstrate that the procedures were being provided safely and effectively to patients demographically similar to Medicare beneficiaries in multiple hospitals in the outpatient hospital setting. We are concerned that none of the published studies, with the exception of one, included patients in the general Medicare-eligible age range of 65 years or older. We do not believe that experience in providing these majorspinal procedures to young and middleaged adults in the outpatient setting can necessarily be generalized as safe and appropriate for typical Medicare
beneficiaries.

Comment: One commenter requested that CPT code 58260 (Vaginal hysterectomy) be removed from the inpatient list. The commenter stated that surgeons at the hospital believed that performing this procedure in an outpatient setting has been a standard of practice for a long time.

Response: According to our BESS data, the procedure described by CPT 58260 was performed more than 90 percent of the time in the hospital inpatient setting on Medicare
beneficiaries. There was no evidence submitted by the commenter to demonstrate that this procedure was being provided safely and effectively to patients demographically similar to Medicare beneficiaries in multiple hospitals in the outpatient hospital setting. Thus, we believe this procedure should remain on the inpatient list.

Comment: Several commenters, including a hospital association,
recommended the elimination of the inpatient list, echoing the APC Panel ’ s recommendation from February 2004. The commenters stated that, while it is appropriate to leave the decision of site of service to the physicians, hospitals are unable to receive payment for services on this list that are performed in the hospital outpatient setting. One commenter argued that the current policy penalizes beneficiaries because they must be admitted as inpatients to receive these procedures, rather than receiving these services in an outpatient setting and being allowed to return
home.

Response: In the November 7, 2003 final rule (67 FR 66797), we specified the inpatient list to include services that are payable by Medicare only when provided in an inpatient setting. These are services that generally require inpatient care because of the nature of the procedure, the need for at least 24 hours of postoperative recovery time or monitoring before the patient can be safely discharged, or the underlying physical condition of the Medicare beneficiary. We also listed in the November 7, 2003 final rule (68 FR 63466) the criteria that we use to evaluate whether a procedure should be


### 65836 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

removed from the inpatient list. We do not believe that all services can be safely and effectively delivered to Medicare beneficiaries in the outpatient setting.
We are concerned that elimination of the inpatient list could result in unsafe
or uncomfortable care for Medicare beneficiaries. Among the potential results are long observation stays after some procedures and imposition of OPPS copayments, which could differ significantly from a patient ’ s inpatient cost-sharing responsibilities.

We believe that it is important for hospitals to educate physicians on Medicare services provided under the OPPS to avoid inadvertently providing services in an outpatient setting that are more appropriate to an inpatient setting.

Comment: A few commenters
recommended that CMS consider developing an appeals process to
address circumstances in which payment for a procedure provided on an outpatient basis is denied because it is on the inpatient list.

Response: We would like to emphasize that procedures on the inpatient list that are performed on a patient whose status is that of an outpatient are not payable under Medicare. CPT codes assigned a status
indicator of ‘‘ C, ’’ such as those listed in Addendum E, are not payable under the OPPS, except under conditions described in the November 1, 2002 final rule (67 FR 66799).

Comment: A few commenters requested that CMS clarify the criteria
and the sources of data used to determine whether a procedure is appropriate for removal from the list. Other commenters expressed concern with the 60-percent threshold criterion
used to evaluate codes for removal from the inpatient list. One commenter
recommended that CMS revise its criteria because major teaching hospital outpatient departments often are the first places to perform services that had previously been performed only in the inpatient setting. This commenter argued that there would most likely be a time gap between when these services could be performed safely in teaching hospital outpatient departments and their dissemination to most hospitals ’ outpatient departments. The commenter recommended that the determining factor regarding whether a procedure should be removed from the inpatient list should be whether the procedure can be performed safely in an outpatient department and not the number of outpatient departments in which the procedure is performed.

Response: We recognize that teaching hospitals may have more technologically advanced equipment, more experienced staff, and greater resources than nonteaching hospitals. These characteristics may lead teaching hospitals to be the first places to perform on an outpatient basis some procedures on the inpatient list. On the other hand, community, nonteaching hospitals have pioneered the movement of some procedures to the outpatient setting, in part because of their responsiveness to identified local needs or their development of specific pathways for care. We cannot expect that all hospitals will have the necessary staff experience, resources, equipment, and interest to move many procedures to the outpatient setting. For these reasons, we do not believe that procedures that have been demonstrated to be performed safely and effectively on an outpatient basis in any single hospital or small group of hospitals alone are routinely appropriate for removal from the inpatient list.

In addition, we want to clarify that the 60-percent threshold discussed in our proposed rule is not an established
criterion that we use to determine whether a procedure is appropriate for removal from the inpatient list. The 60- percent threshold was used as an operational tool to identify from the entire inpatient list those procedures that we believe are currently already being performed in the outpatient setting a majority of the time based on our CY 2003 BESS data, so that these services could then undergo clinical review against the criteria for removal from the inpatient list. The BESS database aggregates all physician billing throughout the year for each service provided to Medicare beneficiaries and billed under the Medicare Physician Fee Schedule. Summary data include information regarding the site of service (hospital inpatient, hospital outpatient, physician ’ s office, among others) and specialty of the physician performing the service. We emphasize that our review of the codes recommended by
the commenters for removal from the
list was not based on this threshold. Rather, our determination was based on
the set of criteria described in the November 7, 2003 final rule (68 FR 63466).

We encourage hospitals and physicians to submit recommendations regarding procedures they believe meet
our criteria for removal from the inpatient list at any time. We ask that
evidence be submitted to demonstrate that the procedure is being performed on an outpatient basis in a safe and appropriate manner in a variety of different types of hospitals.

Comment: Numerous commenters supported the proposed removal of the 22 CPT codes from the inpatient list. In addition, a few commenters expressed support for retaining the list of inpatient procedures. One commenter stated that eliminating the list could create an increase in inappropriate observation stays by assigning observation status to patients whose status should have been inpatient.

Response: We appreciate the

commenters ’ support.

In this final rule, we are finalizing our proposed retention of the inpatient list for the OPPS. We also are finalizing our proposal to remove 22 procedures from
the CY 2004 list. Table 39 below lists the procedure codes that are being removed from the inpatient list and their APC assignments, effective January

1, 2005.

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F. Hospital Coding for Evaluation and Management Services

1. Background

Currently, for claims processing purposes, we direct hospitals to use the CPT codes used by physicians to report clinic and emergency department visits on claims paid under the OPPS. However, as discussed in the proposed rule, we have received comments suggesting that the CPT codes are insufficient to describe the range and mix of services provided to patients in the clinic and emergency department setting because they are defined to reflect only the activities of physicians (for example, ongoing nursing care, and patient preparation for diagnostic tests). For both clinic and emergency department visits, there are currently five levels of care. To facilitate proper coding, we require each hospital to create an internal set of guidelines to determine what level of visit to report for each patient (April 7, 2000, final rule with comment period (65 FR 18434)).

We have continued our efforts to address the situation of proper coding of clinic and emergency department visits to ensure proper Medicare payments to hospitals. Commenters who responded to the August 24, 2001 OPPS proposed rule (66 FR 44672) recommended that we retain the existing evaluation and management coding system until facility-specific evaluation and management codes for emergency department and clinic visits, along with national coding guidelines, were
established. Commenters also recommended that we convene a panel of experts to develop codes and guidelines that are simple to understand and to implement, and that are compliant with the HIPAA requirements. We agreed with these commenters, and in our November 1, 2002 OPPS final rule (67 FR 66792), we
stated that we believed the most appropriate forum for development of new code definitions and guidelines would be an independent expert panel that could provide information and data to us. We believed that, in light of the expertise of organizations such as the AHA and the AHIMA, these organizations were particularly well equipped to do so and to provide ongoing education to providers.

The AHA and the AHIMA, on their own initiative, convened an independent expert panel comprised of members of the AHA and AHIMA, as well as representatives of the American College of Emergency Physicians, the Emergency Nurses Association, and the American Organization of Nurse Executives, to develop code descriptions and guidelines for hospital emergency department and clinic visits and to provide us with the information and data. In June 2003, we received the panel ’ s input concerning a set of national coding guidelines for emergency and clinic visits.


### 65838 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

As we noted in the proposed rule, we are still considering the panel ’ s set of coding guidelines. Although we did not propose the panel ’ s set of coding guidelines, we received several
comments on the Panel ’ s coding guidelines and are continuing to review these public comments. In the November 7, 2003 OPPS final rule with comment period (68 FR 63463), we also indicated that we would implement new evaluation and management codes only when we are also ready to implement guidelines for their use. As we have not yet proposed new evaluation and management codes, we again note that we will allow ample opportunity for public comment, systems changes, and provider education before implementing such new coding requirements.

2. Proposal for Evaluation and Management Guidelines

In the November 7, 2003 OPPS final rule with comment period (68 FR 63463), we discussed our primary concerns and direction for developing the proposed coding guidelines for emergency department and clinic visits and indicated our plans to make available for public comment the proposed coding guidelines that we are considering through the CMS OPPS Web site as soon as we have completed
them.

We received a number of comments on our proposal.

Comment: Many commenters supported the development of evaluation and management codes and guidelines in the hospital outpatient setting and urged CMS to move forward as quickly as possible with reviewing the guidelines presented by the AHA
and AHIMA Evaluation and Management Panel. Several commenters expressed concern that the current lack of uniformity impairs CMS ’ ability to gather consistent, meaningful data on services provided in the emergency department and hospital clinics.
Commenters reminded CMS of its
commitment to make the evaluation and management codes and guidelines available for public comment and to provide at least 6 to 12 months notice prior to implementation of the new evaluation and management codes and guidelines.

Response: As stated in the August 16, 2004 OPPS proposed rule, we intend to make available for public comment the proposed coding guidelines that we are considering through the CMS OPPS Web site as soon as we have completed them. As stated in the August 16, 2004 OPPS proposed rule, we will notify the public through our ‘‘ listserve ’’ when the proposed guidelines will become available. To subscribe to this listserve, individuals should access the following
Web site: http://www.cms.hhs.gov/ medlearn/listserv.asp and follow the
directions to the OPPS listserve. When we post the proposed guidelines on the Web site, we will provide ample opportunity for the public to comment.

In addition, we will provide ample
time to train clinicians and coders on the use of new codes and guidelines and for hospitals to modify their systems. We anticipate providing at least 6 to 12 months notice prior to implementation of the new evaluation and management codes and guidelines. We will continue working to develop and test the new codes even though we have not yet made plans for their implementation.

G. Brachytherapy Payment Issues
Related to Pub. L. 108

– 173

1. Payment for Brachytherapy Sources (Section 621(b) of Pub. L. 108

– 173)

Sections 621(b)(1) and (b)(2) of Pub. L.

108

– 173 amended the Act by adding section 1833(t)(16)(C) and section 1833(t)(2)(H), respectively, to establish separate payment for devices of brachytherapy consisting of a seed or seeds (or radioactive source) based on a hospital ’ s charges for the service, adjusted to cost. Charges for the brachytherapy devices may not be used in determining any outlier payments under the OPPS. In addition, consistent with our practice under the OPPS to exclude items paid at cost from budget neutrality consideration, these items must be excluded from budget neutrality as well. The period of payment under this provision is for brachytherapy sources furnished from January 1, 2004 through December 31,

2006.

In the OPPS interim final rule with comment period published on January 6, 2004 (69 FR 827), we implemented sections 621(b)(1) and 621(b)(2)(C) of
Pub. L. 108

– 173. We stated that we will pay for the brachytherapy sources listed
in Table 4 of the interim final rule with comment period (69 FR 828) on a cost basis, as required by the statute. The status indicator for brachytherapy sources was changed to ‘‘ H. ’’ The
definition of status indicator ‘‘ H ’’ was for pass-through payment only for devices, but the brachytherapy sources affected by new sections 1833(t)(16)(C) and 1833(t)(2)(H) of the Act are not pass-through device categories. Therefore, we also changed, for CY 2004, the definition of payment status
indicator ‘‘ H ’’ to include nonpassthrough brachytherapy sources paid on
a cost basis. This use of status indicator ‘‘ H ’’ was a pragmatic decision that allowed us to pay for brachytherapy
sources in accordance with new section 1833(t)(16)(C) of the Act, effective January 1, 2004, without having to modify our claims processing systems. We stated in the January 6, 2004 interim final rule with comment period that we
would revisit the use and definition of
status indicator ‘‘ H ’’ for this purpose in the OPPS update for CY 2005. Therefore, in the August 16, 2004 proposed rule, we solicited further comments on this policy.

We received several public comments on our August 16, 2004 proposal and on the January 6, 2004 interim final rule with comment period.

Comment: One commenter, a hospital association, recommended that CMS
establish a new status indicator for brachytherapy sources paid on a cost
basis other than the status indicator

‘‘ H ’’ , which is also used for devicecategories paid on a transitional passthrough basis. The commenter noted that, because brachytherapy sources are subject to coinsurance and devices paid on a pass-through basis are not, a separate status indicator is needed for consistency in the classification of
status indicators.

Response: The commenter is correct that beneficiaries are not subject to copayment for the cost of device categories with pass-through payment, while beneficiaries are subject to copayment for other separately paid brachytherapy sources. However, our systems ’ logic incorporates thisdifference in copayment for passthrough device categories versus nonpass-through brachytherapy sources, even though the status indicator for
each is ‘‘ H ’’ . Therefore, we are not establishing a separate status indicator at this time. However, we will consider making a change if the need arises.

Comment: A number of commenters on the January 6, 2004 interim final rule with comment period urged us tocontinue to use, for CY 2005, the Ccodes and descriptors that we published
in that interim final rule with comment period (69 FR 828) for both prostate and nonprostate brachytherapy that we implemented for CY 2004. Several commenters also suggested that we add the phrase ‘‘ per source ’’ to each of the brachytherapy source descriptors to reinforce that each source equals one unit of payment.

Response: We agree and are retainingthe current brachytherapy source Ccodes and descriptors with which hospitals are familiar. We have been using these codes and descriptors since we unpackaged brachytherapy sources when the pass-through payment for


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these sources ended on December 31, 2002, in addition to other C-codes that we established either for pass-through payment (for example, C2632) or nonpass-through payment (for example, C2633). We also note that, in the August 16, 2004 proposed rule, we proposed adding ‘‘ per source ’’ to each of the applicable brachytherapy descriptors,
similar to the APC Panel ’ s recommendation (and the commenter ’ ssuggestion) to do so for two new highactivity source categories, discussed below. We are adopting this clarification as final policy in this final rule with comment period and adding ‘‘ per

source ’’ to the brachytherapy source descriptors that are paid on a per unit
basis for each source.

2. HCPCS Codes and APC Assignments for Brachytherapy Sources

As we indicated in the January 6,
2004 interim final rule with comment period, we began payment for the brachytherapy source in HCPCS code C1717 (Brachytx source, HCR lr-192) based on the hospital ’ s charge adjusted to cost beginning January 1, 2004. Prior
to enactment of Pub. L. 108

– 173, these sources were paid as packaged services
in APC 0313. As a result of the requirement under Pub. L. 108

– 173 to pay for C1717 separately, we adjusted the payment rate for APC 0313, Brachytherapy, to reflect the unpackaging of the brachytherapy source. We received no public comments on this methodology, and we are finalizing the payment methodology in this final rule with comment period.

Section 1833(t)(2)(H) of the Act, as added by section 621(b)(2)(C) of Pub. L.

108

– 173, mandated the creation of separate groups of covered OPD services that classify brachytherapy devices separately from other services or groups of services. The additional groups must
be created in a manner that reflects the number, isotope, and radioactive intensity of the devices of brachytherapy furnished, including separate groups for Palladium-103 and
Iodine-125 devices.

We invited the public to submit
recommendations for new codes to describe brachytherapy sources in a manner that reflects the number, radioisotope, and radioactive intensity of the sources. We requested commenting parties to provide a detailed rationale to support
recommended new codes. We stated that we would propose appropriate changes in codes for brachytherapy sources in the CY 2005 OPPS update.

At its meetings of February 18 through 20, 2004, the APC Panel heard from parties that recommended the addition of two new brachytherapy codes and HCPCS codes for high activity Iodine-125 and high activity Paladium-103. The APC Panel, in turn,
recommended that CMS establish new HCPCS codes and new APCs, on a per source basis, for these two brachytherapy sources.

We considered this recommendation and agreed with the APC Panel. Therefore, in the August 16, 2004 proposed rule, we proposed to establish the following two new brachytherapy
source codes for CY 2005:

• Cxxx1 Brachytherapy source, high activity, Iodine-125, per source.

• Cxxx2 Brachytherapy source, high activity, Paladium-103, per source.

In addition, we believe the APC
Panel ’ s recommendation to establish
new HCPCS codes that would distinguish high activity Iodine-125 from high activity Paladium-103 on a per source basis should be implemented for other brachytherapy code descriptors, as well. Therefore, as stated previously, we proposed to include ‘‘ per

source ’’ in the HCPCS code descriptors for all those brachytherapy source descriptors for which units of payment are not already delineated.

Further, a new linear source
Paladium-103 came to our attention in CY 2003 by means of an application for a new device category for pass-through payment. While we declined to create a new category for pass-through payment,
we believe that this source falls under the provisions of Pub. L. 108

– 173 for separate cost-based payment as a brachytherapy source. Accordingly, we proposed to add, for separate payment, the following code of linear source Paladium-103: Cxxx3 Brachytherapy linear source, Paladium-103, per 1 mm.

We received a number of public comments on our August 16, 2004 proposed rule and on the January 6,
2004 interim final rule with comment period, which deal with these issues.

Comment: In response to the January 6, 2004 interim final rule with comment period, several commenters recommended adding two new brachytherapy source codes and descriptors, to reflect the ranges in
radioactive intensities that are frequently required in clinical practice
for Iodine-125 and Palladium-103. The recommendations are for high activity payment codes for these two isotopes.
The commenters recommended the following specific descriptors:

Cxxx1 Brachytherapy source, Low Dose Rate, High Activity Iodine-125, greater than 1.01 mCi (NIST), per

source. Cxxx2 Brachytherapy source, Low Dose Rate, High Activity Palladium-103, greater than 2.2 mCi (NIST), per source.

The commenters suggested that CMS include in the two proposed APCs and HCPCS codes an appropriate measurement of minimum radioactivity in mCi, based on calibrations establish by the National Institute of Standards and Technology (NIST).

In response to the August 16, 2004 OPPS proposed rule, one commenter agreed with our proposal to create two new brachytherapy codes for high activity Iodine-125 and Palladium-103 sources, but recommended that we change the proposed descriptors. The commenter again recommended that we add the mCi (NIST) descriptions for the high activity ranges to these new high activity Iodine-125 and Palladium-103 sources we proposed.

Response: During its meetings of February 18 through 20, 2004, the APC
Panel recommended that CMS establish
two new HCPCS codes and APCs for High Activity Iodine-125 and High Activity Palladium-103 on a per source basis, but did not recommend adoption of other specific language regarding mCi in the descriptions above. As previously mentioned, in the August 16, 2004 proposed rule, we noted the APC
Panel ’ s recommendation to establish
two new HCPCS codes and APCs for these high activity sources, as noted
above.

We agree that, with the establishment of these new codes, which are the first to specify high activity, we should provide an appropriate quantitative
measurement of minimum source activity to specifically differentiate the high activity sources from other sources with differences in radioactive intensity for the two isotopes.

Accordingly, we are accepting the

commenter ’ s suggestion to utilize the calibrations established by the NIST to specify the high activity ranges.

The final code descriptors are: C2634 Brachytherapy source, High Activity Iodine-125, greater than 1.01 mCi (NIST), per source.

C2635 Brachytherapy source, High Activity Palladium-103, greater than 2.2 mCi (NIST), per source.

Comment: One commenter objected to our proposal to create the two high activity brachytherapy codes based on radioactive intensity and claimed that there is uncertainty regarding availability of radioactive substance and that providers will need to distinguish between low and high activity without a definition of high activity.

Response: We have now defined high activity level in our code descriptors for C2634 and C2635, using calibrations


### 65840 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

established by the NIST. We will implement these codes with the
definitions described herein.

Comment: One commenter on the January 6, 2004 interim final rule with comment period suggested that we
include ‘‘ low dose rate ’’ into the descriptors for each of the existing APCS for which the low dose rate may be applicable, to clarify that those descriptors refer to ‘‘ low dose rate ’’ brachytherapy.

Response: We do not believe that changes in the descriptors of all APCs
and HCPCS codes are warranted
without evidence that there are alternative low and high dose rate sources requiring a high or low dose rate indicator in the C-code descriptor to distinguish among the sources. In this manner, if there are both low and high dose rate forms, they may be paid on a cost basis for brachytherapy sources described by the same C-code until a new code is indicated for a high dose
rate source. If we receive evidence that high dose rate sources are used in clinical practice, we will determine at
that time whether to establish new
codes and APCs and whether the existing codes need to be modified in

some way.

Comment: One commenter on the January 6, 2004 interim final rule with comment period recommended that we establish a new source category forBrachytherapy linear source, Palladium103, per 10 millimeter length. The
commenter claimed that this linear source is provided in 10-millimeter lengths from 10 to 60 millimeters, and

not on a ‘‘ per seed ’’ basis. Although the
commenter indicated there were dosimetry studies comparing the Palladium-103 linear source to the per seed form, the commenter recommended against using the same Palladium-103 code for both sources, claiming it would cause confusion in billing and cost reporting.

Response: We agree that a separate
code for Palladium-103 linear source should be established for payment under Pub. L. 108

– 173. In our proposed rule, we indicated that we were aware of a new linear source Palladium-103, which came to our attention by means of an application for a new device category for pass-through payment. We stated that, while we decided not to create a new category for pass-through payment, we believed that the new linear source falls under the provisions
of Pub. L. 108

– 173 for separate costbased payment as a brachytherapy source. Therefore, we proposed to add the following code for linear source Palladium-103: Cxxx3 Brachytherapy linear source, Palladium-103, per 1 mm.
We believe that the 1 millimeter increments of payment affords greater flexibility for describing other linear source Palladium-103 sources that may
enter the market and be sold in other
than 10 mm increments.

We received several public comments in support of our proposed addition and descriptor of Brachytherapy linear source, Palladium-103, per 1 mm. Therefore, in this final rule with comment period, we are establishing the new code and descriptor for this new brachytherapy source, to be paid at cost:

C2636 Brachytherapy linear source, Palladium-103, per 1 mm.

Comment: One commenter on the January 6, 2004 interim final rule with comment period stated that CMS should pay for codes C1715 (Brachytherapy needle) and C1728 (Catheter, brachytherapy seed administration) on a cost basis as well as brachytherapy sources, asserting that these are brachytherapy devices.

Response: Brachytherapy needles and
catheters for administration of sources are not brachytherapy devices under section 621(b) of Pub. L. 108

– 173. Section 1833(t)(16)(C) of the Act specifies that, to qualify for payment at charges reduced to cost, a device of brachytherapy must consist of ‘‘ a seed or seeds (or radioactive sources). ’’ The special payment provision does not
include needles or catheters in the definition of devices of brachytherapy. Therefore, in this final rule with comment period, we are not establishing new payment categories for these devices that were formerly paid as transitional pass-through devices.

Comment: One commenter, a developer of a brachytherapy radiation system, recommended that CMS create
a C-code and APC for miscellaneous brachytherapy sources for payment of new brachytherapy sources at cost in
accordance with Pub. L. 108

– 173. This
commenter contended that such a
miscellaneous source code would allow CMS to pay hospitals for new brachytherapy sources in the interval between FDA approval of the source and the development of specific coding
for new sources.

Response: Section 621(b) of Pub. L.

108

– 173 requires us to establish new codes and separate payment for specific
seed or seeds or other radioactive sources of brachytherapy. We do not believe that the statute contemplates a separate payment for an over-inclusive ( ‘‘ catch-all ’’ ) category such as a miscellaneous brachytherapy source code. Such a category would inappropriately include all new brachytherapy sources until separate payment is established. Moreover, we note that hospitals and brachytherapy source manufacturers might be able to use a miscellaneous category to bill Medicare for brachytherapy systems that do not meet our standard of a separately payable radioactive source of brachytherapy. In addition, new brachytherapy sources may be added more frequently than annually, when
we are able to add new codes and payment instructions to our electronic claims processing systems. Therefore, in this final rule with comment period, we are not creating a new code of miscellaneous brachytherapy sources.

Table 40 provides a complete listing of the HCPCS codes, long descriptors, APC assignments and status indicators that we will use for brachytherapy sources paid under the OPPS in CY

2005.



### T ABLE 

### 40.—S EPARATELY 

### P AYABLE 

### B RACHYTHERAPY 

### S OURCES

HCPCS Long descriptor APC APC title New status indicator

C1716 ........... Brachytherapy source, Gold 198, per source ............... 1716 Brachytx source, Gold 198 ........................ ..... H C1717 ........... Brachytherapy source, High Dose Rate Iridium 192,

per source. 1717 Brachytx source, HDR Ir-192 ......................... H

C1718 ........... Brachytherapy source, Iodine 125, per source ............. 1718 Brachytx source, Iodine 125 ...................... ..... H C1719 ........... Brachytherapy source, Non-High Dose Rate Iridium 192, per source. 1719 Brachytx source, Non-HDR Ir-192 ................. H

C1720 ........... Brachytherapy source, Palladium 103, per source ....... 1720 Brachytx source, Palladium 103 ..................... H C2616 ........... Brachytherapy source, Yttrium-90, per source ............. 2616 Brachytx source, Yttrium-90 ...................... ..... H C2632* ......... Brachytherapy solution, Iodine125, per mCi ................. 2632 Brachytx sol, I–125, per mCi .................... ...... H C2633 ........... Brachytherapy source, Cesium-131, per source .......... 2633 Brachytx source, Cesium-131 ........................ H


### 65841 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

T ABLE 

### 40.

— S EPARATELY 

### P AYABLE 

### B RACHYTHERAPY 

### S OURCES



### — Continued

HCPCS Long descriptor APC APC title New status indicator

C2634** ........ Brachytherapy source, High Activity, Iodine-125, greater than 1.01 mCi (NIST), per source. 2634 Brachytx source, HA, I

– 125 ........................... H

C2635** ........ Brachytherapy source, High Activity, Palladium-103, greater than 2.2 mCi (NIST), per source. 2635 Brachytx source, HA, P

– 103 .......................... H

C2636** ........ Brachytherapy linear source, Palladium-103, per 1MM 2636 Brachytx linear source, P

– 103 ....................... H

* Currently paid as a pass-through device category, scheduled to expire from pass-through payment as of January 1, 2005. ** Newly created brachytherapy payment codes beginning January 1, 2005.

Comment: A few commenters requested that CMS discuss in the OPPS final rule the process for adding other new brachytherapy devices forqualification under the separate costbased payment methodology under Pub.

L. 108

– 173. The commenters urged CMS to add new brachytherapy devices for separate cost-based payment on a quarterly basis, rather than annually.

Response: In the OPPS interim final rule published on January 6, 2004 that implemented the brachytherapy provisions of Pub. L. 108

– 173 for CY 2004, we invited the public to submit
recommendations for new codes to describe brachytherapy sources in a manner reflecting the number, radioisotope, and radioactivity intensity of the sources (69 FR 828). We requested that commenters provide a detailed rationale to support recommended new codes. The public may send such
recommendations to the Division of Outpatient Care, Mailstop C4

– 05

– 17, Centers for Medicare and Medicaid Services, 7500 Security Blvd., 21244.
We will endeavor to add new brachytherapy source codes and descriptors to our systems for payment on a quarterly rather than an annual
basis.

H. Payment for APC 0375, Ancillary Outpatient Services When Patient Expires

In CY 2003, we implemented a new
modifier

– CA, Procedure payable only in the inpatient setting when performed emergently on an outpatient who dies before admission. The purpose of this modifier is to allow payment, under certain conditions, for outpatient
services on a claim that have the same
date of service as a HCPCS code with
status indicator ‘‘ C ’’ that is billed with
modifier

– CA. When a procedure with
status indicator ‘‘ C ’’ (inpatient services not payable under the OPPS) was billed
with modifier

– CA, we made payment of a fixed amount, under New Technology APC 0977.

In the November 7, 2003 final rule with comment period, we implemented APC 0375 to pay for services furnished in CY 2004 on the same date billed for a procedure code with modifier

– CA (68 FR 63467). We were concerned that our policy of paying a fixed amount under a new technology APC for otherwise payable outpatient services furnished on
the same date of service that a procedure with status indicator ‘‘ C ’’ is performed emergently on an outpatient would not result in appropriate payment for these services. That is, continuing to make payment under a new technology APC would not allow us to establish a relative payment weight for the services, subject to recalibration based on actual hospital

costs.

We implemented a payment rate of $1,150 for APC 0375, which is the payment amount for the restructured New Technology

— Level XIII, APC 1513, that replaced APC 0977, in CY 2004. We also stated that for the CY 2005 update of the OPPS, we would calculate a median cost and relative payment weight for APC 0375 using charge data
from CY 2003 claims for line items with
a HCPC code and status indicator ‘‘ V, ’’

‘‘ S, ’’ ‘‘ T, ’’ ‘‘ X, ’’ ‘‘ N, ’’ ‘‘ K, ’’ ‘‘ G, ’’ and ‘‘ H, ’’ in addition to charges for revenue codes without a HCPCS code, that have the same date of service reported for a procedure billed with modifier

– CA. We
would then determine whether to set payment for APC 0375 based on our claims data or continue a fixed payment rate for these special services.

In accordance with this methodology,
for CY 2005 we reviewed the services on the 18 claims that reported modifier

– CA in CY 2003. We calculated a median cost for the aggregated payable services on the 18 claims reporting
modifier

– CA in the amount of $2,804.18. The mix of outpatient services that were reported appeared reasonable for a patient with an emergent condition requiring immediate medical intervention, and revealed a wide range of costs, which would also be expected. As we indicated in the August 16, 2004 proposed rule, we proposed to set the payment rate for
APC 0375 in accordance with the same methodology we have followed to set payment rates for the other procedural APCS in CY 2005, based on the relative payment weight calculated for APC

0375.

Comment: A few commenters were concerned whether the proposed rate of $2,757.68 for CY 2005 appropriately reflects the costs incurred by hospitals
in cases where the

– CA modifier is reported and requested that CMS review the rate and adjust it accordingly for CY

2006.

Response: We appreciate the

commenters ’ concerns. Services with a

– CA modifier appended are paid under APC 0375. As we explained in our August 16, 2004 proposed rule, the proposed rate of $2,757.68 for CY 2005 was calculated using actual claims billed in CY 2003. The final payment rate for CY 2005, using the updated data file, is calculated as $3,214.22. As we stated previously, review of the claims
data revealed a reasonable mix of outpatient services that a hospital could be expected to furnish during an encounter with a patient with an emergent condition requiring immediate medical intervention, as well as cases with a wide range of costs. We will continue to monitor the appropriateness of this payment rate as we develop
future rules.

VIII. Conversion Factor Update for CY

2005

Section 1833(t)(3)(C)(ii) of the Act requires us to update the conversion factor used to determine payment rates
under the OPPS on an annual basis. Section 1833(t)(3)(C)(iv) of the Act provides that, for CY 2005, the update is equal to the hospital inpatient market basket percentage increase applicable to hospital discharges under section 1886(b)(3)(B)(iii) of the Act.

The forecast of the hospital market basket increase for FY 2005 published in the IPPS final rule on August 11, 2004 is 3.3 percent (69 FR 49272), the same as the forecast published in the IPPS proposed rule on May 18, 2004 (69 FR 28374) and referenced in the CY 2005 OPPS August 16, 2004 proposed
rule. To set the OPPS conversion factor


### 65842 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

for CY 2005, we increased the CY 2004 conversion factor of $54.561, as specified in the November 7, 2003 final rule with comment period (68 FR 63459), by 3.3 percent.

In accordance with section 1833(t)(9)(B) of the Act, we further adjusted the conversion factor for CY
2004 to ensure that the revisions we are making to our updates by means of thewage index are made on a budgetneutral basis. For the OPPS proposed rule, we calculated a budget neutrality factor of 1.001 for wage index changes by comparing total payments from our simulation model using the FY 2005 IPPS wage index values to those payments using the FY 2004 IPPS wage
index values. For this final rule with comment period, we calculated a budget neutrality factor of 0.9986 for wage index changes by comparing total payments from our simulation model using the revised final FY 2005 IPPS wage index values to those payments using the current (FY 2004) IPPS wage index values. In addition, for CY 2005, allowed pass-through payments have decreased to 0.10 percent of total OPPS payments, down from 1.3 percent in CY
2004. The conversion factor is also adjusted by the difference in estimated pass-through payments of 1.20 percent.

The market basket increase update factor of 3.3 percent for CY 2005, the required wage index budget neutrality adjustment of approximately 0.9986, and the 1.20 percent adjustment to the pass-through estimate result in a
conversion factor for CY 2005 of
$56.983.

We did not receive any public comments on the proposed conversion factor update for CY 2005.

IX. Wage Index Changes for CY 2005

Section 1833(t)(2)(D) of the Act requires the Secretary to determine a wage adjustment factor to adjust, for geographic wage differences, the portion of the OPPS payment rate and the copayment standardized amount
attributable to labor and labor-related cost. This adjustment must be made in a budget neutral manner. As we have done in prior years, we proposed to adopt the IPPS wage indices and extend these wage indices to TEFRA hospitals that participate in the OPPS but not the

IPPS.

As discussed in the proposed rule and
finalized in section III.B. of this preamble, we standardize 60 percent of estimated costs (labor-related costs) for geographic area wage variation using the IPPS wage indices that are calculated prior to adjustments for reclassification
to remove the effects of differences in area wage levels in determining the OPPS payment rate and the copayment
standardized amount.

As published in the original OPPS April 7, 2000 final rule (65 FR 18545), OPPS has consistently adopted the final IPPS wage indices as the wage indices for adjusting the OPPS standard payment amounts for labor market differences. As initially explained in the September 8, 1998 OPPS proposed rule,
we believed and continue to believe that using the IPPS wage index as a source of an adjustment factor for OPPS is reasonable and logical, given the inseparable, subordinate status of the hospital outpatient within the hospital
overall. We also continue to believe that individual hospitals do not distinguish in hiring practices between their inpatient and outpatient departments and that hospitals face one labor market for both inpatient and outpatient services. Further, because hospital staff frequently provide services in both the inpatient and outpatient departments, labor costs associated with the hospital outpatient services are generally reflected in the hospital wage and salary data that are the basis of the IPPS wage
index. In accordance with section 1886(d)(3)(E) of the Act, the IPPS wage index is updated annually. In the August 16, 2004 proposed rule, we proposed to use the corrected proposed FY 2005 hospital IPPS wage index for urban areas published in the Federal Register on June 25, 2004 (69 FR 35919) and the proposed FY 2005 hospital IPPS wage index for rural areas published in
the Federal Register on May 18, 2004 (69 FR 28580) to determine the wage adjustments for the OPPS payment rate and the copayment standardized
amount for CY 2005.

We customarily publish the wage
index tables in the final rule for the OPPS update. We are not including the
tables in this final rule with comment period as CMS is in the process of reviewing the wage indices for IPPS. This review may impact the wage index values. We emphasize that our methodology for calculating the wage index for the OPPS has not changed. As noted above, our policy has consistently been to adopt the IPPS wage index for purposes of payment under the OPPS. We will publish finalized tables in a
later Federal Register document.

We note that the FY 2005 IPPS wage indices reflect a number of changes as
a result of the new OMB standards for defining geographic statistical areas, the implementation of an occupational mix adjustment as part of the wage index, and new wage adjustments provided for
under Pub. L. 108

– 173. The following is a brief summary of the changes in the FY 2005 IPPS wage indices and any adjustments that we are applying to the OPPS for CY 2005. (We refer the reader to the August 11, 2004 IPPS final rule (69 FR 49026

– 49070) and the October 7, 2004 IPPS correction notice (69 FR 60242) for a fuller discussion of the changes to the wage indices.)

A. The use of the new Core Based Statistical Areas (CBSAs) issued by the Office of Management and Budget (OMB) as revised standards for designating geographical statistical areas based on the 2000 Census data, to define labor market areas for hospitals for purposes of the IPPS wage index. The OMB revised standards were published
in the Federal Register on December 27, 2000 (65 FR 82235), and OMB announced the new CBSAs on June 6, 2003, through an OMB bulletin. In the FY 2005 hospital IPPS final rule, CMS adopted the new OMB definitions for wage index purposes. We treated, as urban, hospitals located in MSAs and treated, as rural, hospitals that are located in Micropolitan Areas or Outside CBSAs. To help alleviate the decreased payments for previously urban hospitals that became rural under the new MSA definitions, we allowed these hospitals to maintain their assignment to the MSA where they previously had been located for the 3- year period from FY 2005 through FY 2007. To be consistent, we are applying the same criterion to TEFRA hospitals paid under the OPPS but not under the
IPPS and to maintain that MSA designation for determining a wage index for the next 3 years. This policy will impact four TEFRA providers for purposes of OPPS payment. In addition
to this ‘‘ hold harmless ’’ provision, the IPPS final rule implemented a one-year transition for hospitals that experienced a decrease in their FY 2005 wage index compared to their FY 2004 wage index due solely to the changes in labor market definitions. These hospitals received 50 percent of their wage
indices based on the new MSA configurations and 50 percent based on
the FY 2004 labor market areas. For purposes of the OPPS, we also are applying this 50-percent transition blend to TEFRA hospitals.

B. The incorporation of a blend of an occupational mix adjusted wage index into the unadjusted wage index to reflect the effect of hospitals ’ employment choices of occupational categories to provide specific patient care. Specifically, OPPS will adopt the 10-percent blend of an average hourly wage, adjusted for occupational mix, and 90 percent of an average hourly wage, unadjusted for occupational mix,
as finalized in the IPPS final rule. As discussed in the IPPS final rule, this


### 65843 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

blend is appropriate because this was the first time that the occupational mix survey was administered and optimum
data could not be collected in the limited timeframe available. In addition,
CMS had no baseline data to use in developing a desk review program that could ensure the accuracy of the occupational mix survey data. Moving slowly to implement the occupational mix adjustment is also appropriate because of changing trends in the hiring nurses due changes in State law governing staffing levels and physician shortages. Finally, the blend minimizes the impact of the occupational mix adjustment on hospitals ’ wage index values without nullifying the value and intent of the adjustment.

C. The reclassifications of hospitals to geographic areas for purposes of the wage index. For purposes of the OPPS wage index, we are adopting all of the
IPPS reclassifications in effect for FY 2005, including reclassifications that the Medicare Geographic Classification Review Board (MGCRB) approved under the one-time appeal process for hospitals under section 508 of Pub. L.

108

– 173.

D. The implementation of an adjustment to the wage index to reflect
the ‘‘ out-migration ’’ of hospital employees who reside in one county but commute to work in a different county with a higher wage index, in accordance
with section 505 of Pub. L. 108

– 173 (August 11, 2004 IPPS final rule (69 FR 49061 through 49067), as revised and corrected on October 7, 2004 (69 FR 60242)). Hospitals paid under the IPPS located in the qualifying section 505

‘‘ out-migration ’’ counties received a wage index increase. We are applying the same criterion to TEFRA hospitals paid under the OPPS but not paid under the IPPS. Therefore, TEFRA hospitals located in a qualifying section 505 county will also receive an increase to their wage index under OPPS.

We will use final revised IPPS indices to adjust the payment rates and
coinsurance amounts that we are publishing in this OPPS final rule with comment period for CY 2005.

In general, geographic labor market
area reclassifications must be done in a budget neutral manner. Accordingly, in calculating the OPPS budget neutrality estimates for CY 2005, we have included the wage index changes that result from MGCRB reclassifications, implementation of section 505 of Pub. L.

108

– 173, and other refinements made in the IPPS final rule, such as the 50- percent transition blend for hospitals with FY 2005 wage indices that decreased solely as a result of the new MSA definitions. However, we did not take into account the reclassifications that resulted from implementation of the one-time appeal process under
section 508 of Pub. L. 108

– 173. Section 508 set aside $900 million to implement
the section 508 reclassifications. We
considered the increased Medicare payments that the section 508
reclassifications would create in both
the IPPS and OPPS when we determined the impact of the one-time appeal process. Because the increased OPPS payments already counted against the $900 million limit, we did not
consider these reclassifications when we calculated the OPPS budget neutrality adjustment.

We received a number of public comments on the application of the FY 2005 IPPS wage indices under the

OPPS.

Comment: In general, commenters approved of CMS ’ adoption of the FY 2005 final rule wage indices for IPPS. Several commenters requested clarification that CMS would adopt the temporary, 1-year relief for hospitals with wage areas changing due to the
revised labor market definitions provided in the FY 2005 IPPS final rule.

Response: We are adopting the IPPS temporary, 1-year relief provision of a 50/50 blend of old and new wage
indices in this OPPS final rule with comment period. Hospitals billing
Medicare under IPPS in FY 2005 will receive the same wage index for OPPS.

Comment: One commenter requested clarification that CMS would adopt the technical correction to the IPPS wage index to include counties incorrectly excluded from the out-migration adjustment under section 505 of Pub. L.

108

– 173.

Response: In this OPPS final rule with comment period, we are adopting all
technical corrections to the FY 2005 IPPS final rule wage indices, including
the referenced correction to the outmigration counties.

Comment: Several commenters requested clarification that CMS would adopt the wage index provisions for

‘‘ Special Circumstances of Hospitals in
All-Urban States. ’’

Response: We are adopting all of the changes to the IPPS wage indices
discussed in the FY 2005 IPPS final rule and any subsequent corrections to that final rule, including calculation of awage index floor for hospitals in allurban States.

Comment: One commenter noted that the wage index listed in the impact file
that we made available on the CMS Web site for the August 16, 2004 proposed rule listed a different wage index from the wage index adopted in the FY 2005 IPPS final rule and requested clarification that the hospital would receive the IPPS final rule wage index.

Response: We note that the proposed wage indices have to be assembled before the IPPS wage indices are finalized in order to model impact tables for the OPPS proposed rule. The final wage indices used for payment in CY 2005 for OPPS will reflect the wage
indices in the FY 2005 IPPS final rule and any subsequent corrections to that
final rule.

Comment: Several commenters, specifically individual hospitals adversely impacted by the final FY 2005 IPPS wage index, requested that CMS address several issues beyond the scope of the OPPS proposed rule, such as exempting hospitals from the new wage indices and employing former wage indices, calculating new wage indices or recalculating the current wage indices with additional provider or providers removed, calculating new ‘‘ inmigration ’’ adjustments, and, where permanent wage indices changes are not possible, providing a transition period beyond the 1-year 50/50 blend discussed above or extending ‘‘ hold
harmless ’’ provisions. One commenter also requested that adversely impacted hospitals be able to bill under the provider numbers of affiliated

institutions.

Response: As noted earlier in this section of the preamble, we believe, and other commenters concurred, that hospitals face the same labor costs for their inpatient and outpatient departments and that separate wage indices are not appropriate for different integrated components of the same
institution. It is for this reason that we have always adopted the same wage
index for both the IPPS and the OPPS payment systems. Moreover, our policy has consistently been to use the IPPS wage indices and, to the extent these wage indices are used, the IPPS process provides an opportunity for hospitals to comment specifically on the construction of the IPPS wage indices.

Comment: Several commentersrequested that CMS reduce the laborrelated share from the current 60 percent to some smaller percentage, frequently 52 percent or less, for outpatient payment purposes for hospitals in areas with a Medicare wage
index of 1.0 or lower to maintain consistency with the inpatient hospital policy.

Response: Section 403 of Pub. L. 108

– 173 mandated that the IPPS make a change to the labor-related share of the wage index, reducing the percentage from 71 to 62 for hospitals in areas with a wage index of 1.0 or lower. However, as discussed in the IPPS final rule (69


### 65844 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

FR 49069, August 11, 2004), prior to this mandate, we had determined that the labor-related share was increasing for inpatient services, not declining. Unlike IPPS, OPPS has no mandate to reduce the labor-related share, and we believe the current 60 percent labor-related share remains appropriate for OPPS payment purposes. We recognize that
the IPPS final rule discusses CMS ’ current analyses of the labor-related share, and we will carefully consider any research findings in light of their appropriateness for OPPS.

Comment: Several commenters expressed concern that CMS proposed to adopt the IPPS proposed wage index rather than the IPPS final wage index.

Response: As we have stated previously in this section of the preamble, we note that we are adopting the final IPPS wage indices and any subsequent corrections for the OPPS.

X. Determination of Payment Rates and Outlier Payments for CY 2005

A. Calculation of the National Unadjusted Medicare Payment

The basic methodology for determining prospective payment rates
for OPD services under the OPPS is set forth in existing regulations at §§ 419.31 and 419.32. The payment rate for services and procedures for which payment is made under the OPPS is the product of the conversion factor
calculated in accordance with section
VIII. of this final rule with comment period, and the relative weight
determined under section III. of this final rule with comment period. Therefore, the national unadjusted payment rate for APCs contained in
Addendum A to this final rule with comment period and for payable HCPCS
codes in Addendum B to this final rule with comment period (Addendum B is provided as a convenience for readers) was calculated by multiplying the CY 2005 scaled weight for the APC by the
CY 2005 conversion factor.

To determine the payment that will be made in a calendar year under the OPPS to a specific hospital for an APC for a service other than a drug, in a circumstance in which the multiple procedure discount does not apply, we take the following steps:

Step 1. Calculate 60 percent (the labor-related portion) of the national unadjusted payment rate. Since initial implementation of the OPPS, we have used 60 percent to represent our estimate of that portion of costs attributable, on average, to labor. (See the April 7, 2000 final rule with comment period (65 FR 18496 through 18497), for a detailed discussion of how we derived this percentage.)

Step 2. Determine the wage index area in which the hospital is located and identify the wage index level that applies to the specific hospital. The wage index values assigned to each area reflect the new geographic statistical
areas as a result of revised OMB standards (urban and rural) to which hospitals would be assigned for FY 2005 under the IPPS, reclassifications through the Medicare Classification Geographic Review Board, LUGAR, and
section 401 of Pub. L. 108

– 173, and the reclassifications of hospitals under the one-time appeals process under section
508 of Pub. L. 108

– 173. Assess whether the previous MSA-based wage index is higher than the CBSA-based wage index, and, if higher, apply a 50/50 blend. The wage index values include the occupational mix adjustment
described in section IX. of this final rule with comment period that was developed for the IPPS.

Step 3. Adjust the wage index of hospitals located in certain qualifying counties that have a relatively high percentage of hospital employees who reside in the county but who work in a different county with a higher wage index, in accordance with section 505 of
Pub. L. 108

– 173. This step is to be followed only if the hospital has chosen not to accept reclassification under step
2 above.

Step 4. Multiply the applicable wage index determined under Steps 2 and 3 by the amount determined under Step 1 that represents the labor-related portion of the national unadjusted payment rate.

Step 5. Calculate 40 percent (the nonlabor-related portion) of the national unadjusted payment rate and add that amount to the resulting product of Step 4. The result is the wage index adjusted payment rate for the relevant wage
index area.

B. Hospital Outpatient Outlier Payments

For OPPS services furnished between August 1, 2000, and April 1, 2002, we calculated outlier payments in the aggregate for all OPPS services that appear on a bill in accordance with section 1833(t)(5)(D) of the Act. In the November 30, 2001 final rule (66 FR 59856 through 59888), we specified that, beginning with CY 2002, we calculate outlier payments based on
each individual OPPS service. We revised the aggregate method that we had used to calculate outlier payments and began to determine outlier payments on a service-by-service basis.

As explained in the April 7, 2000 final rule with comment period (65 FR 18498), we set a projected target for outlier payments at 2.0 percent of total payments. For purposes of simulating payments to calculate outlier thresholds, we set the projected target for outlier payments at 2.0 percent for CYs 2001, 2002, 2003, and 2004. For reasons discussed in the November 7, 2003 final rule with comment period (68 FR 63469), for CY 2004, we established a separate outlier threshold for CMHCs. For CY 2004, the outlier threshold is met when costs of furnishing a service or procedure by a hospital exceed 2.6 times the APC payment amount or when the cost of furnishing services by a
CMHC exceeds 3.65 times the APC payment amount. The current outlier payment is calculated to equal 50 percent of the amount of costs in excess
of the threshold.

As we proposed, for CY 2005, we are continuing to set the projected target for outlier payments at 2.0 percent of total OPPS payments (a portion of that 2.0 percent, 0.6 percent, will be allocated to CMHCs for partial hospitalization program (PHP) services).

Outlier payments are intended to ensure beneficiary access to services by having the Medicare program share in the financial loss incurred by a provider associated with individual, extraordinarily expensive cases. They are not intended to pay hospitals additional amounts for specific services
on a routine basis. In its March 2004 Report, MedPAC found that 50 percent of OPPS outlier payments in CY 2004 were for 21 fairly common services that had relatively low APC payment rates, such as plain film x-rays and pathology services. We remain concerned by the MedPAC findings which indicate that a significant portion of outlier payments are being made for high volume, lower cost services rather than for unusually high cost services, contrary to the intent of an outlier policy. (A full discussion
of the 2004 MedPAC recommendations
related to the OPPS and the CMS response to those recommendations can
be found in section XII. of this preamble.)

In light of the MedPAC findings, in the August 16, 2004 proposed rule, we proposed to change the standard we have used to qualify a service for outlier payments since the OPPS was originally implemented. That is, in addition to the outlier threshold we have applied since the beginning of the OPPS, which requires that a hospital ’ s cost for a service exceed the APC payment rate for that service by a specified multiple of the APC payment rate, we proposed to
add a fixed dollar threshold that would
have to be met in order for a service to qualify for an outlier payment. Section 1833(t)(5)(A) of the Act gives the


### 65845 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

Secretary the authority to impose a fixed
dollar threshold in addition to an APC multiplier threshold. By imposing a dollar threshold, we expect to redirect outlier payments from lower cost, relatively simple procedures to more complex, expensive procedures for
which the costs associated with individual cases could be exceptionally high and for which hospitals would be at greater risk financially.

In the proposed rule, we proposed to require that, in order to qualify for an outlier payment, the cost of a service must exceed 1.5 times the APC payment
rate and the cost must also exceed the sum of the APC rate plus a $625 fixed dollar threshold. Based upon our review of the data, a proposed threshold of $625 best met our 2.0 percent projected target. When the cost of a hospital outpatient service exceeds these thresholds, we proposed to pay 50 percent of the amount by which the cost of furnishing the service exceeds 1.5 times the APC payment rate (the APC multiple) as an outlier payment.

However, in this final rule, we are increasing the proposed APC multiplier
of 1.5 to 1.75 and the fixed-dollar threshold from $625 to $1,175. This revision to the proposed rule estimates results from the inclusion of a charge inflation factor of 18.76 percent to account for charge inflation between the
CY 2003 claims data that we used to
model the outlier thresholds and their application in CY 2005. As we note below, many hospital associations expressed concern that the proposed $625 threshold for outlier payments was too high and suggested that OPPS
consider the decision in the IPPS final rule to lower the charge inflation assumption from 31.1 percent to 18.76 percent. These same commenters suggested that we provide the details of the assumptions used to set outlier
thresholds and asked that we ensure that the charges used to set outlier thresholds were not inappropriately
inflated.

Previously, OPPS has not used a charge inflation factor to adjust charges
on the claims used to model the payment system to reflect current dollars. We have historically set the projected target for outlier payments at 2 percent of the estimated spending under the proposed payment system, but have modeled that projected target without inflating charges on the claims, which usually lag behind the proposed system by 2 years. This year, we used
CY 2003 claims to model the CY 2005 payment system. When we modeled the thresholds discussed in the August 16, 2004 proposed rule, we did not include a charge inflation factor. By not adjusting for charge inflation between CY 2003 and CY 2005, the estimated
service costs will be lower than those
that will be billed under OPPS next year. Underestimated service costs also
led us to underestimate our outlier
thresholds. As reflected in the comments, we should have included a charge inflation factor similar to that
used in the IPPS outlier calculation when we developed the proposed outlier payments. In this final rule with comment period, we have done so as explained below, which results in anAPC multiplier of 1.75 and a fixeddollar threshold of $1,175.

To calculate the 1.75 multiple and $1,175 fixed-dollar thresholds, we first estimated the 2-percent projected target for outlier payments by estimating 2 percent of total spending in CY 2005 using the CY 2005 APC payment rates in this final rule with comment period
and services in the CY 2003 claims. We then inflated the charges on these claims by 18.76 percent, which is the estimated increase in charges between
CY 2003 and CY 2005 used in the outlier policy for the IPPS final rule. We
believe the use of this estimate is appropriate for OPPS because, with the exception of the routine service cost centers, hospitals use the same cost centers to capture costs and charges across inpatient and outpatient services. As also noted in the IPPS final rule, we
believe that this inflation factor is more appropriate than an adjustment to costs because charges increase at a faster rate
than costs. We then used the same CCRs that we used to adjust charges to costs in our ratesetting process to estimate a
cost for each service from the inflated charges on the CY 2003 claims. Although these CCRs are based largely on CY 2002 cost report data, we did not adjust them for probable increases in charges relative to costs between CY 2002 and CY 2005. Finally, we estimated a multiple threshold and
fixed-dollar threshold that would produce outlier payments that met our 2-percent projected target amount.

The large increase in the fixed-dollar threshold is largely a function of the additive impact of increasing all estimated outlier payments by 18.76 percent and restricting increased estimates of outlier payments to a fixed, projected target of 2 percent, as well as
the addition of a fixed-dollar threshold to determine outlier eligibility instead of using only a multiple threshold to determine outlier payment. As charges are inflated, each estimated outlier payment is higher by some proportional amount, but the total dollar increase varies with the magnitude of the
difference in the cost of the service and APC payment rate. The addition of the fixed-dollar threshold policy ensuresthat outlier payments are made for highcost services, thereby increasing the dollar amount of outlier payments and the total dollar impact of 18.76 percent
that must be contained within the projected outlier target. Further, the actual based on outlier payment for aservice is not affected by the fixeddollar threshold but, rather, is the difference between the hospital ’ s cost and the product of the multiple threshold and the APC payment rate. Changing the fixed-dollar threshold does not impact the amount of outlier payment. Adding the inflation adjustment to charges also increases the number of services eligible for an outlier payment under the proposed 1.5 multiple and $625 fixed-dollar thresholds. The combined impact of more services and higher payments greatly increases estimated outlier payments. Therefore, in order to reduce the number of services eligible for higher payments and the payments themselves to stay within our projected target of 2 percent of total OPPS payments, we had to raise both the fixed-dollar and multiple thresholds.

We are setting the dollar threshold at a level that will, for all intents and purposes, exclude outliers for a number of lower cost services. For example, under the CY 2004 methodology, a service mapped to an APC with a payment rate of $20 would only have to exceed $52 (2.6 × APC payment amount) in order to qualify for an outlier payment. Our final policy for CY 2005
with the additional fixed dollar threshold will require that the service in this example exceed $1,195 in order to qualify for an outlier payment. That is,
the cost of the service will have to
exceed both 1.75 times the APC payment rate, or $35, and $1,195 ($20 + $1,175).

The dollar threshold will also enable us to lower the APC multiplier portion
of the total outlier threshold from 2.6 to 1.75. We have chosen a multiple of 1.75 because this continues to recognize some variability relative to APC payment implicit in the current statute, but limits its impact in determining outlier payments. Under the changes to the outlier methodology, it will also be easier for the higher cost cases of a complex, expensive procedure or service to qualify for outlier payments because the $1,175 threshold is a small portion of the total payment rate for high cost services. For example, under the CY 2004 methodology, a service mapped to an APC with a payment rate of $20,000 would have to exceed $52,000 in order to qualify for an outlier


### 65846 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

payment but, as proposed for CY 2005, will have to exceed only $35,000. That is, the cost of the service will have to
exceed both 1.75 times the APC payment rate, or $35,000, and $21,175 ($20,000 + $1,175). Further, outlier payments for unusually expensive cases would be higher because the APC multiplier for outlier payment would
decrease from 2.6 to 1.75 times the APC payment rate.

Comment: Many commenters, including MedPAC, favored our proposed outlier policy that redirects outlier payments to expensive procedures for which hospitals ’ financial risk is potentially greater. (Under the proposed rule, outlier payments would be made when the cost of a separately payable service exceeds both 1.5 times the APC payment and a fixed dollar amount.) Several commenters agreed with this revision in policy, but requested that CMS monitor the impact of the new policy on hospitals with a relatively high volume of low cost cases and find some way to ensure that providers of less-intensive
services be afforded outlier

‘‘ protection. ’’

Response: As noted above, outlier payments are intended to ensure beneficiary access to services by having the Medicare program share in the financial loss incurred by a provider associated with individual, extraordinarily expensive cases. They are not intended to pay hospitals additional amounts for specific services on a routine basis, and we demonstrated in Table 39 of the proposed rule that this policy moderately redistributes outlier dollars to providers of high-cost, complex services, such as teaching hospitals. We will continue to model the distribution of outlier payments among hospitals. However, the purpose of the new policy is to limit financial risk attributable to patients whose costs are extraordinarily high. Therefore, our goal is to redirect outlier payments to those services that better meet our goal of providing outlier payments to those costly services with high financial risk. The intent is not to continue to provide a significant portion of outlier payments to high volume, low cost services.

Using the final rule data and updated charge inflation estimates, we have
modeled a fixed-dollar threshold of $1,175 for CY 2005.

Comment: Several commenters requested data that support the presumption that the revised outlier methodology will definitely result in payment of 2 percent of total OPPS payments. The commenters also urged
CMS to release data on actual outlier payments made in CY 2004 and in prior years, and to continue to report this data
in the future.

Response: The outlier thresholds and payment percentages are determined each year based on our best estimate of the thresholds and payment percentages needed to achieve the projected target of outlier payment. As discussed above, in order to estimate the outlier multiple and fixed-dollar thresholds, we first estimated 2 percent of the total spending using the APC payment rates in this final rule with comment period
and the services in the CY 2003 claims. Using this estimate, we inflated the charges on the CY 2003 claims to reflect CY 2005 dollars using the 1.1876 inflation adjustment used in the IPPS final rule. We then applied the overall CCR for each hospital based on their most recently submitted cost report, whether tentatively settled or final, and if tentatively settled, adjusted by a
submitted-to-settled ratio taken from the previous year ’ s cost report. These are
the same CCRs that we use in our ratesetting process. We then estimated outlier payments for variouscombinations of multiple and fixeddollar thresholds until we reached the targeted outlier expenditures.

Interested parties may calculate the amount of outlier spending from previous years. Such information is available in the claims data, not the limited data set, available from CMS for this final rule with comment period.

Comment: Several commenters wereconcerned that the proposed fixeddollar threshold of $625 was too high. Specifically, the commenters were
concerned that CMS had overstated its charge inflation estimates in calculating the fixed dollar threshold, as had been done in the FY 2005 IPPS proposed rule. The commenters requested that
CMS review its estimates and make comparable adjustments to these in the
FY 2005 IPPS final rule.

Response: As noted previously, the OPPS had not used a charge inflation
factor. In this final rule with comment period, we realized that we should have adopted a charge inflation estimate. We used the charge inflation estimate used in the IPPS final rule of 18.76 percent to update charges on the CY 2003 claims
that we used to model the fixed-dollar
threshold in order to reflect CY 2005 dollars. Comparable to IPPS, we did not update the CCRs that we employed to
estimate costs from these inflated charges. The CCRs are based on hospitals ’ most recently submitted cost report, frequently CY 2002, adjusted by
the most recent settled-to-submitted ratio, and were not updated for changes in relative costs and charges since the cost report year. Comment: One commenter supported the proposed change, but urged CMS to adopt MedPAC ’ s recommendation to fully eliminate outpatient outlier payments and to increase the base APC rates by a commensurate amount. The commenter asserted that the separate payment of services under OPPS
eliminates the need for an outlier policy.

Response: We believe that an outlier policy is necessary and appropriate under the OPPS. Outlier payments dampen the financial risk of and improve beneficiary access to expensive, complex outpatient services. The range of services provided in the outpatient setting continues to expand, continually including more services previously performed in the inpatient setting. Many of these procedures are high-cost, extensive, and as complex asinpatient procedures. The devicedependent APCs provide a good example. We agree that separate payment for many individual services
under OPPS reduces the need for an extensive outlier policy, but do not believe it eliminates the need entirely.
We believe that the lower outlier payment percentage under the OPPS of 50 percent relative to 80 percent under
the IPPS and the smaller OPPS projected outlier target of 2 percent relative to the IPPS projected target of between 5 and 6 percent reflect the more limited outlier liability associated with the outpatient payment system.

Comment: One commenter disagreed with our proposed policy and noted that it will substantially restrict outlier payments for a lot of outpatient services
and recommended that CMS remove the fixed-dollar threshold and apply outlier payments only when the cost of a
service exceeds 1.5 times the APC payment.

Response: We disagree with the commenter as removing the fixed-dollar threshold and relying only on a multiple
of 1.5 or 1.75 would result in outlier payments well in excess of the proposed 2-percent projected target. To meet the projected target, we would have to raise the multiple threshold to 2.95 if we
eliminated the fixed dollar threshold.

Comment: Several commenters requested that CMS release limited data set data files in a more timely manner.

Response: We have always attempted to, and will continue to, provide data necessary for evaluation of the OPPS in a timely manner. For example, this year, several data files were available through

CMS ’ Web site before the publication of the proposed rule.

Comment: Several commenters
recommended that CMS consider reinstating outlier payments at the claim


### 65847 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

level, rather than at the individual service level, resulting in easier administration of outliers and payments that are more equitable for high cost patients.

Response: We believe that calculating outliers on a service-by-service basis is the most appropriate way to calculate outliers for outpatient services. Outliers on a claim or bill basis requires both the aggregation of costs and the aggregation of OPPS payments thereby introducing some degree of offset among services; that is, the aggregation of low cost services and high cost services on a bill may result in the claim or bill not meeting the outlier criterion. While the implementation of service-based outliers is somewhat more complex because it involves allocating the costs of packaged services across multiple payable codes, we believe that under this approach, outlier payments are more appropriately directed to those specific services for which a hospital incurs significantly increased costs. We
also believe that the introduction of the fixed dollar threshold improves payment for expensive patients by targeting outlier payments to the more high-cost, complex services.

Comment: One commenter requested that CMS demonstrate the accuracy of its assumption that providers are receiving inappropriate outlier payments and suggest that the distribution of packaged costs on a claim could be affecting the outlier determination and payment. The commenter specifically requested that CMS exempt all drug administration
APCs from the new fixed-dollar threshold methodology.

Response: We agree that the allocation of packaged costs could modestly under or overestimate the cost of a single procedure for purposes of determining outlier payments. However, this observation cannot explain the huge concentration of services in low-cost, simple procedures receiving outlier payments observed by MedPAC in its March 2004 report referenced above. This concentration is clearly a function of the multiple threshold policy.

In accordance with section 1833(t)(5)of the Act, we have set a uniform fixeddollar outlier threshold that applies to all OPPS services in a given calendar year. We cannot exempt specific services from the outlier methodology because the statute does not provide for different thresholds for different types of OPPS services. Further, the magnitude of the multiple and fixed
dollar thresholds is determined prospectively before the beginning of each year based on all OPPS services qualifying for outlier payments in that

year.

Comment: One commenter was concerned that CMS does not provide
information to determine how theamounts that are actually spent on passthrough and outlier payments compare
to the amount that is carved out of the total amount allowed OPPS payment for these projected payments. The
commenter was concerned that the amounts carved out for these purposes may not actually be spent and thus, would be lost to hospitals.

Response: We are required by law to estimate the amounts that we expect to spend on pass-through and outlier payments each year before the start of the calendar year. We share the

commenter ’ s interest in assuring that those estimates are made as accurately as possible to ensure that hospitals receive the amount to which they are entitled by law. We make our final estimate for each calendar year to the best of our ability based on all of the
best data available at the time we prepare our final rule, including comments we receive in response to our proposed rule. With respect to the availability of data for modeling our outlier estimates, we have established
limited data sets which include the set of claims we used first for the proposed rule estimates and, ultimately, for those for our final rule with comment period. For example, the CY 2003 claims used in ratesetting and modeling for this final rule with comment period for CY 2005 OPPS will be available to the public in a limited data set format. However, estimates of total outlier payments made in previous years are not available in the limited data set, in no small part because outlier payments on these
claims would underestimate total outlier payments. Interested parties can estimate total outlier expenditures from a full year of OPPS claims data. We will continue to assess the means by which we provide data.

Comment: One commenter who did not support the proposed outlier policy suggested that the payment for outliers
in low-cost services could be an indication that the APC payment rate is
too low for these services. The
commenter also wondered if the concentration of outlier payments in low-cost services was the result of high packaged costs appearing with these separately payable services, and indicated that one example might include packaged observation services. Ultimately, this commenter suggested that a better understanding of why outlier payments are directed to common services is necessary before a change in policy can be supported. Response: As MedPAC discussed in its March 2004 report, the main reason to include outlier policies with prospective payment systems is to limit providers ’ financial risk attributable to patients whose costs are extraordinarily high relative to the median cost of providing the service. We believe that such risk is more substantial in high cost procedures. When the financial risk of providing a service becomes too high, providers may choose not to provide the service, an outcome that can harm beneficiary access.

The CY 2004 outlier policy does not distinguish between high cost services and low cost services. In fact, MedPAC found that 50 percent of OPPS outlier payments in CY 2004 were for services in low-paying APCs. These observations suggested the need to modify the outlier policy to provide better protection against financial risk. The fixed-dollar
threshold limits financial risk to providers who provide high-cost

services.

Although it is possible that extensive packaged costs have created the current
concentration of outliers in low cost services, it is unlikely in most circumstances. Separately payable services consistently billed with extensive packaged costs would ultimately increase payment rates as packaged costs were incorporated in the cost of the payable service. Although packaged observation services can be extensive, the review of OPPS claims data indicates that there are too many outlier payments to be associated with
the limited number of claims with packaged observation services. We believe the current policy creates an easy threshold for low-cost services to qualify for outlier payments and does little to protect hospitals against the financial risk associated with complex and high-cost services.

C. Payment for Partial Hospitalization

1. Background

Partial hospitalization is an intensive outpatient program of psychiatric services provided to patients as an alternative to inpatient psychiatric care
for beneficiaries who have an acute mental illness. A partial hospitalization program (PHP) may be provided by a hospital to its outpatients or by a
Medicare-certified CMHC. Section 1833(t)(1)(B)(i) of the Act provides the Secretary with the authority to designate the hospital outpatient services to be
covered under the OPPS. Section 419.21(c) of the Medicare regulations that implement this provision specifies that payments under the OPPS will be made for partial hospitalization services


### 65848 Federal Register / Vol. 69, No. 219 / Monday, November 15, 2004 / Rules and Regulations

furnished by CMHCs. Section 1883(t)(2)(C) of the Act requires that we establish relative payment weights based on median (or mean, at the election of the Secretary) hospital costs determined by 1996 claims data and
data from the most recent available cost reports. Payment to providers under the OPPS for PHPs represents the provider ’ s overhead costs associated with the program. Because a day of care is the
unit that defines the structure and scheduling of partial hospitalization services, we established a per diem payment methodology for the PHP APC,
effective for services furnished on or after August 1, 2000. For a detailed discussion, see the April 7, 2000 OPPS final rule (65 FR 18452).

2. PHP APC Update for CY 2005

As proposed, for calculation of the CY 2005 per diem payment in this final rule, we used the same methodology that was used to compute the CY 2004 per diem payment. For CY 2004, the per
diem amount was based on three quarters of hospital and CMHC PHP claims data (for services furnished from April 1, 2002, through December 31, 2002). We used data from all hospital bills reporting condition code 41, which identifies the claim as partial hospitalization, and all bills from
CMHCs because CMHCs are Medicare providers only for the purpose of providing partial hospitalization
services. We used CCRs from the most recently available hospital and CMHC cost reports to convert each provider ’ s line item charges as reported on bills, to estimate the provider ’ s cost for a day of
PHP services. Per diem costs are then computed by summing the line item costs on each bill and dividing by the number of days on the bill.

Unlike hospitals, CMHCs do not file cost reports electronically and the cost report information is not included in the Healthcare Cost Report Information System (HCRIS). The CMHC cost reports are held by the Medicare fiscal intermediaries. In a Program Memorandum issued on January 17, 2003 (Transmittal A

– 03

– 004), we
directed fiscal intermediaries to recalculate hospital and CMHC CCRs using the most recently settled cost reports by April 30, 2003. Following the initial update of CCRs, fiscal
intermediaries were further instructed to continue to update a provider ’ s CCR
and enter revised CCRs into the outpatient provider specific file. Therefore, for CMHCs, we use CCRs from the outpatient provider specific file. For CY 2005, we analyzed 12 months of data for hospital and CMHC
PHP claims for services furnished between January 1, 2003, and December 31, 2003. Updated CCRs reduced the median cost per day for CMHCs. The revised medians are $310 for CMHCs and $215 for hospitals. Combining these files results in a median per diem PHP cost of $289. As with all APCs in the OPPS, the median cost for each APC is
scaled to be relative to a mid-level office
visit and the conversion factor is applied. The resulting APC amount for PHP is $281.33 for CY 2005, of which $56.33 is the beneficiary ’ s coinsurance.

Comment: One commenter summed payments for three Group Therapy Sessions (APC 0325) and one Extended Individual Therapy Session (APC 0323) and requested that amount as the minimum for a day of PHP.

Response: We do not believe this is an appropriate comparison. It is important to note that the APC services cited by the commenter (APC 0325 and APC 0323) are not PHP services, but rather single outpatient therapeutic sessions. As stated earlier, we used data from PHP programs (both hospitals and CMHCs) to determine the median cost of a day of PHP. PHP is a program of services where savings can be realized by hospitals and CMHCs over delivering individual psychotherapy services. In addition, a minimal day of PHP treatment does encompass three

services.

Comment: One commenter requested that the same provisions given to rural hospital outpatient departments also be given to rural CMHCs.

Response: We believe the commenter may be referring to the statutory hold harmless provisions. Section 1833(t)(7)(D) of the Act authorizes such payments, on a permanent basis, for
children ’ s hospitals and cancer hospitals and, through CY 2005, for rural hospitals having 100 or fewer beds and sole community hospitals in rural areas. Section 1866(t)(7)(D) of the Act
does not authorize hold harmless payments to CMHC providers.

3. Separate Threshold for Outlier Payments to CMHCs

In the November 7, 2003 final rule with comment period (68 FR 63469), we indicated that, given the difference in PHP charges between hospitals and CMHCs, we did not believe it was appropriate to make outlier payments to CMHCs using the outlier percentage target amount and threshold established for hospitals. There was a significant
difference in the amount of outlier payments made to hospitals and CMHCs for PHP. Further analysis indicated the use of outlier payments was contrary to the intent of the outlier policy as discussed previously in section X.B. above. Therefore, for CY 2004, we established a separate outlier threshold for CMHCs. We designated a portion of the estimated 2.0 percent outlier target amount specifically for CMHCs, consistent with the percentage of projected payments to CMHCs under the OPPS in CY 2004, excluding outlier payments.

As stated in the November 7, 2003 final rule with comment period, CMHCs were projected to receive 0.5 percent of the estimated total OPPS payments in
CY 2004. The CY 2004 outlier threshold is met when the cost of furnishing services by a CMHC exceeds 3.65 times the APC payment amount. The current outlier payment percentage is 50 percent of the amount of costs in excess
of the threshold.

CMS and the Office of the Inspector General are continuing to monitor the excessive outlier payments to CMHCs. However, we do not yet have CY 2004
claims data that will show the effect of the separate outlier threshold for CMHCs that was effective January 1, 2004. Therefore, for CY 2005, as
discussed in section X.B. of this preamble, we are continuing to set the target for hospital outpatient outlier payments at 2.0 percent of total OPPS payments. We are also allocating a portion of that 2.0 percent, 0.6 percent,
to CMHCs for PHP services. We are adopting as final 0.6 percent for CMHCs because the percentage of CMHC ’ s payment to total OPPS payment rose slightly in the CY 2003 claims data. In the absence of CY 2004 claims data, we developed simulations for CY 2005. As
discussed in section X.B. of this final rule, we are establishing a dollar
threshold in addition to an APC multiplier threshold for hospital OPPS outlier payments. However, because PHP is the only APC for which CMHCs may receive payment under the OPPS, we would not expect to redirect outlier payments by imposing a dollar threshold. Therefore, we are not establishing a dollar threshold for CMHC outliers. In this final rule, we are setting the outlier threshold for CMHCs for CY 2005 at 3.5 percent times the APC payment amount and the CY 2005 outlier payment percentage applicable
to costs in excess of the threshold at 50 percent.

Comment: One commenter expressed concern about a separate outlier threshold for partial hospitalization services because many partial hospitalization programs are hospital
based. The commenter recommended
that CMS use the same threshold for all hospital services.

Response: We agree that the same outlier policy should apply to all


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hospital services. Under OPPS, we establish two sets of outlier thresholds, one for hospitals and one for CMHCs. The higher multiple threshold of 3.5 is reserved for services provided by CMHCs only. Hospitals billing for partial hospitalization will be subject to the outlier thresholds and payment percentages identified for all hospital

services.

XI. Beneficiary Copayments for CY

2005

A. Background

Section 1833(t)(3)(B) of the Act requires the Secretary to set rules for determining copayment amounts to be paid by beneficiaries for covered OPD services. Section 1833(t)(8)(C)(ii) of the Act specifies that the Secretary must reduce the national unadjusted copayment amount for a covered OPD service (or group of such services) furnished in a year in a manner so that the effective copayment rate (determined on a national unadjusted basis) for that service in the year does not exceed specified percentages. For all services paid under the OPPS in CY 2005, the specified percentage is 45 percent of the APC payment rate. The statute provides a further reduction in CY 2006 so that the national unadjusted

coinsurance for an APC cannot exceed 40 percent in CY 2006 and in calendar years thereafter. Section 1833(t)(3)(B)(ii) of the Act provides that, for a covered OPD service (or group of such services) furnished in a year, the national unadjusted coinsurance amount cannot be less than 20 percent of the OPD fee

schedule amount.

Comment: One commenter expressed

concern that the law does not further

reduce the maximum coinsurance rate

for CY 2007. The commenter believed that this may cause coinsurance rates to stagnate at 40 percent for a few years.

The commenter indicated that its organization will continue to advocate for a legislative change that would accelerate the copayment buy-down.

Response: We understand the concerns of this organization. In CY 2004, we determined that 63 percent of APCs had a national unadjusted coinsurance rate of 20 percent. Therefore, we will continue to apply our current methodology for calculating national unadjusted coinsurance rates, as explained in earlier Federal Register notices, which ensures that the copayments of the remaining 37 percent
of APCs will continue to decrease relative to increases in payment rates. B. Copayment for CY 2005

For CY 2005, we determined copayment amounts for new and revised APCs using the same methodology that we implemented for CY 2004 (see the November 7, 2003 OPPS final rule with comment period, 68 FR 63458). The unadjusted copayment amounts for services payable under the OPPS effective January 1, 2005 are shown in
Addendum A and Addendum B of this final rule with comment period.

XII. Addendum Files Available to the
Public Via Internet

The data referenced for Addendum C to this final rule with comment period are available on the following CMS Web site via Internet only: http:// www.cms.hhs.gov/providers/hopps/. We are not republishing the data represented in this Addendum to this final rule with comment period because of its volume. For additional assistance, contact Chris Smith Ritter at (410) 786

– 0378. Addendum C

— Healthcare Common Procedure Coding System (HCPCS) Codes by Ambulatory Payment Classification (APC).

This file contains the HCPCS codes sorted by the APCs into which they are assigned for payment under the OPPS.
The file also includes the APC status indicators, relative weights, and OPPS payment amounts.

XIII. Collection of Information Requirements

This document does not impose
information collection and recordkeeping requirements. Consequently, it need not be reviewed by the Office of Management and Budget under the authority of the Paperwork Reduction Act of 1995.

XIV. Regulatory Impact Analysis

A. OPPS: General

We have examined the impacts of this final rule with comment period as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L.

96

– 354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104

– 4), and
Executive Order 13132.

1. Executive Order 12866

Executive Order 12866 (as amended by Executive Order 13258, which merely reassigns responsibility of duties) directs agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis (RIA) must be prepared for major rules with economically significant effects ($100 million or more in any 1 year).

We estimate the effects of the provisions that will be implemented by this final rule with comment period will result in expenditures exceeding $100 million in any 1 year. We estimate the total increase (from changes in this final rule with comment period as well as enrollment, utilization, and case-mix changes) in expenditures under the OPPS for CY 2005 compared to CY 2004 to be approximately $1.5 billion. Therefore, this final rule with comment period is an economically significant rule under Executive Order 12866, and a major rule under 5 U.S.C. 804(2).

2. Regulatory Flexibility Act (RFA)

The RFA requires agencies to
determine whether a rule would have a significant economic impact on a
substantial number of small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and government agencies. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6 million to $29 million in any 1 year (65 FR 69432).

For purposes of the RFA, we have determined that approximately 37 percent of hospitals would be considered small entities according to
the Small Business Administration (SBA) size standards. We do not have
data available to calculate the percentages of entities in the pharmaceutical preparation manufacturing, biological products, or
medical instrument industries that
would be considered to be small entities according to the SBA size standards. For the pharmaceutical preparation manufacturing industry (NAICS 325412), the size standard is 750 or fewer employees and $67.6 billion in annual sales (1997 business census). For biological products (except diagnostic) (NAICS 325414), with $5.7 billion in annual sales, and medical instruments (NAICS 339112), with $18.5 billion in annual sales, the standard is 50 or fewer employees (see the standards Web site

at http://www.sba.gov/regulations/
siccodes/ ). Individuals and States are
not included in the definition of a small entity.

3. Small Rural Hospitals

In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a


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significant impact on the operations of
a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. With the exception of hospitals located in certain New England counties, for purposes of section 1102(b) of the Act, we previously defined a small rural hospital as a hospital with
fewer than 100 beds that is located outside of a Metropolitan Statistical Area (MSA) (or New England County Metropolitan Area (NECMA)). However,
under the new labor market definitions that we are adopting in this final rule with comment period (consistent with the FY 2005 IPPS final rule), we no longer employ NECMAs to define urban areas in New England. Therefore, we now define a small rural hospital as a hospital with fewer than 100 beds that
is located outside of an MSA. Section 601(g) of the Social Security Amendments of 1983 (Pub. L. 98

– 21) designated hospitals in certain New England counties as belonging to the adjacent NECMA. Thus, for purposes of the OPPS, we classify these hospitals as urban hospitals. We believe that the changes in this final rule with comment period will affect both a substantial number of rural hospitals as well as other classes of hospitals and that the effects on some may be significant. Therefore, we conclude that this final rule with comment period will have a significant impact on a substantial
number of small entities.

4. Unfunded Mandates

Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L.

104

– 4) also requires that agencies assess anticipated costs and benefits before issuing any rule that may result in an expenditure in any 1 year by State, local, or tribal governments, in the aggregate, or by the private sector, of $110 million. This final rule with comment period does not mandate any requirements for State, local, or tribal governments. This final rule with comment period also does not impose unfunded mandates on the private sector of more than $110 million
dollars.

5. Federalism

Executive Order 13132 establishes certain requirements that an agency must meet when it publishes any rule (proposed or final rule) that imposes
substantial direct costs on State and local governments, preempts State law,
or otherwise has Federalism implications.

We have examined this final rule with comment period in accordance with Executive Order 13132, Federalism, and have determined that it would not have an impact on the rights, roles, and responsibilities of State, local or tribal governments. The impact analysis (see Table 41) shows that payments to governmental hospitals (including State, local, and tribal governmental hospitals) will increase by 3.7 percent under this final rule with comment period.

Comment: One commenter expressed concern that CMS had removed the eye and ear specialty hospital category from our regulatory impact analysis andrequested that we reinstate this lineitem. They further requested information on why specific analyses
were retained for cancer and children ’ s hospitals.

Response: We removed the specific regulatory impact analysis of eye and ear hospitals because, unlike cancer and
children ’ s hospitals, they are not specifically protected by statute. Section 1833(t)(7)(D) of the Act holds harmless cancer hospitals, children ’ s hospitals, small rural hospitals with less than 100 beds, and sole community hospitals in rural areas. These hospitals cannot receive less payment in CY 2005 than they did in the CY 2004. However, because hold harmless provisions for
cancer and children ’ s hospitals are permanent, we will not specifically identify these hospital classes in future impact analyses.

Comment: One commenter expressed concern about the observed impact on teaching hospitals, specifically the observed increase of 2.9 percent under the proposed system, which is less than
the overall increase modeled for all hospitals of 4.6 percent in the proposed rule. This commenter requested that CMS conduct analyses assessing the need for an adjustment for specific classes of hospitals, which is within

CMS ’ regulatory authority. The commenter further suggested that these analyses assess whether teaching hospitals rely more on pass-through, outlier, transitional corridor, and device-dependent APC payments, and suggested that an adjustment is necessary if this is the outcome.

Response: We agree that it is important to monitor ongoing trends for specific classes of hospitals, and we are especially concerned when hospitals experience a negative increase. In this specific instance, major teaching hospitals are experiencing a positive increase in payments. We also agree that major teaching hospitals may be more dependent on costs estimated outside of the primary impact tables provided in the regulation. However, we are notconvinced that a reliance on passthrough, outlier, or transitional corridor payments is a reason to propose an adjustment. This is especially true in light of the outlier policy as proposed, which redirects money to complex and costly procedures that are more likely to be performed at academic medical

institutions.

B. Impact of Changes in This Final Rule
With Comment Period

We are adopting as final the proposed changes to the OPPS that are required by the statute. We are required under section 1833(t)(3)(C)(ii) of the Act to update annually the conversion factor used to determine the APC payment rates. We are also required under section 1833(t)(9)(A) of the Act to revise, not less often than annually, the wage index and other adjustments. In addition, we must review the clinical integrity of payment groups and weights at least annually. Accordingly, in this final rule with comment period, we are updating the conversion factor and the wage index adjustment for hospital outpatient services furnished beginning January 1, 2005, as we discuss in sections VIII. and IX., respectively, of this final rule with comment period. We
also have revised the relative APC payment weights using claims data from January 1, 2003, through December 31, 2003. Finally, we are removing 6 device categories and 13 drugs and biological agents from pass-through payment status. In particular, see section V.A.2with regard to the expiration of passthrough status for devices and see section IV.A.2 with regard to the expiration of pass-through status for drugs and biological agents.

Under this final rule with comment period, the update change to the conversion factor as provided by statute as well as the additional money for the OPPS payments in CY 2005 as authorized by Pub. L. 108

– 173, including money for drugs and increases in the wage indices, will increase total OPPS payments by 4.0 percent in CY 2005. The changes to the wage index and to the APC weights (which incorporate the cessation of pass-through payments for several drugs and devices) would not increase OPPS payments because the OPPS is budget neutral. However, the wage index and APC weight changes would change the distribution of payments within the budget neutral system as shown in
Table 41 and described in more detail
in this section.

C. Alternatives Considered

Alternatives to the changes we are making and the reasons that we have chosen the options we have are discussed throughout this final rule with comment period. Some of the


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major issues discussed in this final rule with comment period and the options
considered are discussed below.

1. Payment for Device-Dependent APCs

We package payment for an implantable device into the APC payment for the procedure performed to
insert the device. Because almost all devices lost pass-through status at the end of CY 2002, we discontinued use of separate codes to report devices in CY
2003. We have found that claims thatwe use to set payment rates for devicedependent APCs frequently have packaged costs that are much lower than the cost of the device. This is attributed, in part, to variations in hospital billing practices. In response, we reestablished device codes for reporting on a voluntary basis in CY 2004.

The APC Panel recommended that we use CY 2004 device-dependent APC rates updated for inflation as the CY 2005 payments. We considered this option but did not adopt it because it would not recognize changes in relative
cost for these APCs and would not advance us towards our goal of using unadjusted claims data as the basis for payment weights for all OPPS services.

In addition to consideration of the
APC Panel ’ s recommendation, we considered using CY 2002 claims to
calculate a ratio between the median calculated using all single bills and the median calculated using only claims with HCPCS codes for devices on them, and applying that ratio to the median calculated using CY 2003 claims data. We rejected this option because it assumes that the relationship between
the costs of the claims with and without codes for devices is a valid relationship not only for CY 2002 but CY 2003 as well. It also assumes no changes in billing behavior. We have no reason to believe either of these assumptions is true and, therefore, we did not choose this option. We also considered using external data provided by manufacturers
and other stakeholders as the estimated
device cost. We did not choose this alternative because we believe that, in a relative weight system, there should be a single stable and objective source of data for setting relative weights for all items and services for which payment is made in the system.

We do not believe that any of the above options would help us progress
toward reliance on our data. Rather than adopt any of those approaches, we developed an option to adjust thepayment for only those devicedependent APCs that have the most
dramatic decreases for CY 2005. We believe that the better payment approach for determining median costs for device-dependent APCs in CY 2005 is to base these medians on the greater of: (1) Median costs calculated using CY 2003 claims data; or (2) 95 percent of the APC payment median used in CY
2004 for these services. We believe that this adjustment methodology provides an appropriate transition to eventual use of all single bill claims data without adjustment.

We are also requiring hospitals to report C-codes for device categories used in conjunction with procedures billed and paid for under the OPPS. We have decided to implement edits, starting April 1, to enforce the reporting
of C-codes to bill for most of the devicedependent procedures for which we adjusted the medians for CY 2005, as well as for a few APCs that require devices that are coming off pass-through payment in CY 2005 (a continuation of current billing practice). We believe that adoption of our proposal will mitigate barriers to beneficiary access to care while encouraging hospitals to bill correctly for the services they furnish.
For a more detailed discussion of this issue, see section III.C. of this final rule with comment period.

2. Hospital Outpatient Outlier Payments

In its March 2004 Report, MedPAC made a recommendation to the Congress to eliminate the outlier provision under
the OPPS. MedPAC made its recommendation after studying outlier payments on claims for services furnished during CY 2002 and concluding that in 2002, 50 percent of outlier payments were paid for 21 fairly common services that had relatively low APC payment rates, while high cost services accounted for only a small share of outlier payments. However, outlier payments are required under the statute. Therefore, we cannot discontinue outlier payments absent a legislative change by the Congress.

In light of the MedPAC findings, we are adopting a fixed-dollar threshold in
addition to the threshold based on a multiple of the APC amount that we have applied since the beginning of the
OPPS. A fixed-dollar threshold will redirect OPPS outlier payments toward the complex and expensive services that can create high financial risk for a hospital. In its comments on the proposed rule, MedPAC recognized that elimination of the outlier policy for OPPS requires a legislative change and approved of the proposed policy to adopt a fixed-dollar threshold. For a more detailed discussion of this issue,
see section X. of this final rule with comment period. D. Limitations of Our Analysis

The distributional impacts presented here are the projected effects of the policy changes, as well as the statutory changes that would be effective for CY 2005, on various hospital groups. We estimate the effects of individual policy changes by estimating payments per service while holding all other payment policies constant. We use the best data available but do not attempt to predict behavioral responses to our policy changes. We also do not make adjustments for future changes in variables such as service volume, service mix, or number of encounters.

E. Estimated Impacts of This Final Rule With Comment Period on Hospitals

The estimated increase in the total payments made under OPPS is limited by the increase to the conversion factor set under the methodology in the statute. The distributional impacts presented do not include assumptionsabout changes in volume and servicemix. However, total payments actually made under the system also may be influenced by changes in volume and service-mix, which CMS cannot
forecast. The enactment of Pub. L. 108

– 173 on December 8, 2003, provided for the payment of additional dollars in 2004 and 2005 to providers of OPPS services outside of the budget neutrality requirements for both specified covered outpatient drugs (see section V.A.3.a. of this final rule with comment period) and the wage indexes for specific hospitals through reclassification reform
in section 508 of Pub. L. 108

– 173 (see
section IX. of this final rule with comment period). Table 41 shows the estimated redistribution of hospital payments among providers as a result of a new APC structure and wage indices, which are budget neutral; the estimated distribution of increased payments in CY 2005 resulting from the combined impact of APC recalibration and wage effects, and market basket update to the conversion factor; and estimated payments considering all payments for CY 2005 relative to all payments for CY 2004. In some cases, specific hospitals may receive more total payment in CY 2005 than in CY 2004, while, in other cases, they may receive less total payment than they received in CY 2004. However, our impact analysis suggests that no class of hospitals would receive less total payments in CY 2005 than in CY 2004. Because updates to the conversion factor, including the marketbasket and any reintroduction of passthrough dollars, are applied uniformly, observed redistributions of payments in the impact table largely depends on the


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mix of services furnished by a hospital (for example, how the APCs for the hospital ’ s most frequently furnished services would change) and the impact of the wage index changes on the hospital. However, the extent to which this final rule redistributes money during implementation will also depend on changes in volume, practice patterns,
and case-mix of services billed between
CY 2003 and CY 2005.

Overall, the final OPPS rates for CY 2005 will have a positive effect for all hospitals paid under OPPS. Adopted changes will result in a 4.0 percent increase in Medicare payments to all hospitals, exclusive of outlier and transitional pass-through payments. As described in the preamble, budget neutrality adjustments are made to the
conversion factor and the relative weights to ensure that the revisions in the wage indices, APC groups, and relative weights do not affect aggregate payments. The impact of the wage and APC recalibration changes are fairly
moderate across most classes of hospitals.

To illustrate the impact of the CY 2005 changes adopted in this final rule with comment period, our analysis begins with a baseline simulation model that uses the final CY 2004 weights, the FY 2004 final post-reclassification IPPS wage indices, as subsequently corrected, without changes in wage indices resulting from section 508 reclassifications, and the final CY 2004
conversion factor. Columns 2 and 3 in Table 41 reflect the independent effects of the changes in the APC
reclassification and recalibration changes and the wage indices, respectively. These effects are budget neutral, which is apparent in the overall zero impact in payment for all hospitals in the top row. Column 2 shows the independent effect of changes resulting
from the reclassification of HCPCS codes among APC groups and the recalibration of APC weights based on a complete year of CY 2003 hospital OPPS
claims data. We modeled the independent effect of APC recalibration by varying only the weights, the final CY 2004 weights versus the final CY 2005 weights, in our baseline model, and calculating the percent difference in payments. Column 3 shows the impact of updating the wage indices used to calculate payment by applying the final FY 2005 IPPS wage indices, as subsequently corrected. In addition to new wage data, the new IPPS wage indices use the CBSA system as the basis for geographic adjustment for wages, rather than the MSA designations used previously. The FY 2005 IPPS wage indices also include the new adjustment for occupational mix, the reclassifications of hospitals to geographic areas by the MGCRB, the increased payment authorized by
section 505 of Pub. L. 108

– 173 for outmigration, hold-harmless provisions for hospitals redesignated from urban to rural by the new labor market definitions, and the one-year transition, 50/50 blend for hospitals that experienced a decrease in their FY 2005 wage index compared to their FY 2004 wage index due solely to the changes in
labor market definitions. The OPPS wage indices used in Column 3 do not include wage increases due to reclassification of hospitals through
section 508 of Pub. L. 108

– 173. We modeled the independent effect of introducing the new wage indices by varying only the wage index between years, using CY 2004 weights, and a CY
2004 conversion factor that included a budget neutrality adjustment for changes in wage effects between 2004
and 2005.

Column 4 demonstrates the combined

‘‘ budget neutral ’’ impact of APC recalibration and wage index updates on various classes of hospitals, as well as the impact of updating the conversion
factor with the market basket. We modeled the independent effect of budget neutrality adjustments and the market basket update by using the weights and wage indices for each year, and using a CY 2004 conversion factor that included a budget neutrality adjustment for differences in wages and the market basket increase. Finally, column 5 depicts the full impact of final CY 2005 policy on each hospital group by including the effect of all the changes for CY 2005 and comparing them to the full effect of all payments in CY 2004, including those authorized by Pub. L.

108

– 173. Column 5 shows not only the combined budget neutral effects of APC and wage updates, and the market basket update, but it also shows the
effects of additional monies added to
the OPPS as a result of Pub. L. 108

– 173 and pass-through money returned to the
conversion factor from CY 2004. We modeled the independent effect of all changes using the final weights for CY
2004 and CY 2005 with additional money for drugs authorized by section
621 of Pub. L. 108

– 173, final wage indices including wage index increases for hospitals eligible for reclassification
under section 508 of Pub. L. 108

– 173, and the CY 2005 conversion factor of
$56.983.

Column 1: Total Number of Hospitals

Column 1 in Table 41 shows the total number of hospital providers (4,296) for
which we were able to use CY 2003 hospital outpatient claims to model CY 2004 and CY 2005 payments by classes of hospitals. We excluded all hospitals for which we could not accurately estimate CY 2004 or CY 2005 payment and entities that are not paid under the
OPPS. The latter include critical access hospitals, all-inclusive hospitals, and hospitals located in Guam, the U.S. Virgin Islands, and the State of Maryland. This process is discussed in greater detail in section III.B of this final rule with comment period. In prior years, we displayed non-TEFRA hospitals paid under PPS separately from TEFRA hospitals in our impact
and outlier tables. The distinction
between TEFRA and non-TEFRA holds little value for OPPS as all hospitals are treated equally under the OPPS payment system. For this reason, we did not include TEFRA hospitals as a distinct hospital category in Table 41. The impact on this specific class of hospitals is captured in the rows addressing disproportionate share (DSH) as we only calculate a DSH variable for hospitals participating in the IPPS. Finally, of the hospitals displayed in Table 41 and Table 42, it is important to note that section 1833(t)(7)(D) of the Act holds harmless cancer hospitals,
children ’ s hospitals, small rural hospitals with less than 100 beds, and sole community hospitals in rural areas. The hold harmless provisions for cancer
and children ’ s hospitals are permanent; these hospitals cannot receive less payment in CY 2005 than they did in the CY 2004. For this reason, we will not specifically identify these classes of hospitals in future impact analyses.

Column 2: APC Recalibration

The APC reclassification and recalibration changes tend to favor rural hospitals especially those characterized as small, although the overall redistribution impact is modest. Rural hospitals show a 0.6 percent increase,
which is somewhat less than that observed in the proposed rule of 0.9. Specifically, rural hospitals with 50 to 100 beds show a 0.8 percent increase and rural hospitals with 101 to 149 beds show a 0.7 percent increase attributable
to the APC recalibration. Mid-volume hospitals performing between 11,000 and 20,999 services experience an increase of 1.0 percent. Rural hospitals also show overall increases by region,
with the East North Central and East South Central regions benefiting by at least 0.9 percent and the South Atlantic and West North Central regions benefiting by 0.7 percent.

Urban hospitals show, on an average, a 0.2 percent decrease, which is comparable to that observed in the


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proposed rule. This decrease is spread among all urban hospitals. Large urban hospitals experience a decline of 0.1 percent and ‘‘ other ’’ urban hospitals experience a decline of 0.2 percent. Urban hospitals with greater than 200 beds show decreases, and the largest urban hospitals with bed size greater than 500 report a decrease of 0.9 percent. The smallest urban hospitals report a positive percent increases. Urban hospitals providing the lowest volume of services and those providing the highest also demonstrate negative impacts from APC recalibration. Decreases for urban hospitals are also concentrated in some regions, specifically, the South Atlantic, West South Central, Mountain, and Pacific experience decreases of at least 0.1 percent. West South Central loses the most, 0.9 percent.

The largest observed impacts among other hospital classes resulting from
APC recalibration include declines of 1 percent for major teaching hospitals and 2.3 percent for hospitals without a valid DSH variable, most of which are TEFRAhospitals. Hospitals treating more lowincome patients (high DSH percentage)
also demonstrate declines of 0.8 percent. However, hospitals treating fewer low-income patients experience positive impacts from APC recalibration. Government hospitals demonstrate a decline of 0.8 percent. The specialty hospitals, cancer and
children ’ s hospitals, also would experience declines of 2.4 and 1.5 percent due to APC recalibration, respectively, if they were not held harmless under section 1833(t)(7)(D) of
the Act.

In general, APC changes effect the distribution of hospital payments by increasing payments to small rural hospitals while decreasing payments made to large urban hospitals, including major teaching hospitals and those serving a high percentage of low-income patients.

Column 3: Wage Effect

Changes introduced by the new IPPS wage indices had a modest impact, but the distributions have changed since the proposed rule with the changes and additional provisions included in the final IPPS wage indices. Decreases in OPPS payment due to the new wage indices are generally located in rural hospitals, although specific classes of other hospitals also experience declines. Overall, urban hospitals experience no change in payments as a result of the new wage indices. However, large urban hospitals experience an increase of 0.1 percent. We estimate that rural hospitals will experience a decrease in payments of 0.2 percent. This pattern of urban gain and rural loss is evident in all ofthe urban and rural comparisons. Lowvolume urban hospitals with fewer than 5,000 services and urban hospitals in the West South Central region show the largest percentage increase of 0.5.

Rural hospitals show modest
decreases for most bed sizes but show the largest losses for hospitals with more than 200 beds. The new wage indices result in a 0.5 percent decrease for the largest rural hospitals. Similarly, high volume rural hospitals demonstrate an anticipated decline of 0.4 percent. Hospitals located in the New England and Middle Atlantic regions show a negative impact due to wage index changes regardless of urban or rural designation. However, rural hospitals in New England and the Middle Atlantic experience the largest decreases among regions of 0.7 and 0.6 percent, respectively. Rural hospitals in the South Atlantic, East North Central, East South Central, and Mountain regions also experience decreased payments. Rural sole community hospitals show the same impact as other rural hospitals; they experience a decline of 0.2 percent.

Looking across other categories of hospitals, major teaching hospitals are estimated to lose 0.3 percent. Almost all hospitals serving low-income patients lose 0.1 percent. Hospitals for which DSH is not available, mostly TEFRA hospitals, lose 0.3 percent.

Column 4: Budget Neutrality and Market Basket Update

In general, the market basket update alleviates any negative impacts on payments created by the budget neutrality adjustments made in columns 2 and 3. As column 4 demonstrates,
with the addition of the market basket update, we do not expect any class of hospital providers to experience an overall negative impact as a result of the proposed changes to OPPS for CY 2005. Further, the redistributions created by
APC recalibration tend to offset those created by the new wage indices. For example, rural hospitals gain 0.6 percent from the APC changes but lose 0.2 percent as a result of changes to the wage indices, leading to an overall adjustment of 3.7 percent with the
addition of the market basket. Urban hospitals show a decrease of 0.2 percent resulting from APC recalibration and no change as a result of the new wage index, leading to an update in column 4 of 3.2 percent.

For several classes of hospitals, positive or neutral wage effects do not offset the larger impacts of APC recalibration leading to lower update amounts. For example, low volume urban hospitals experience a negative APC recalibration effect of 1.1, but a positive wage effect of 0.5. The result is an overall update of 2.6, which is less than the market basket. A few hospital providers may experience much lower and much higher update amounts than
the market basket because the combined impact of the budget neutrality adjustments for the APC recalibration and the new wage index are reinforcing. Urban hospitals with more than 500 beds show a gain of 2.2 percent because the impact of APC recalibration was

¥ 0.9 percent and the new wage indices
added

¥ 0.1 percent. Major teaching hospitals experience a decline in payment due to APC recalibration of

¥ 1.0 and a decline due to wage indices
of

¥ 0.3 resulting in an overall, budget neutral update of 2.0. Hospitals for which we have no DSH variable, mostly TEFRA hospitals, will experience a decrease in payments due to both APC recalibration and the new wage indices, leading to a budget neutral increase of 0.7 percent. Hospitals serving a high number of low-income patients experience an overall update of 2.4 percent. Finally, cancer hospitals show an update of only 0.2 percent, and
children ’ s hospitals, of only 2.0 percent, but statutory provisions ensure that each of these hospitals is ‘‘ held
harmless ’’ relative to last year ’ s payments.

A few hospitals may also gain from the combined positive effect of the APC recalibration and the wage effect. Overall, mid-volume urban hospitals and urban hospitals with a small number of beds, rural hospitals in the East South and North Central, West North and South Central, and nonteaching hospitals experience positive impacts from both APC recalibration and the new wage indices.

Column 5: All Changes for CY 2005

Column 5 compares all changes for CY 2005 to a final simulated payment
for CY 2004 and includes all additional dollars resulting from provisions in Pub.

L. 108

– 173 in both years and the difference in pass-through estimates. Overall, we estimate that hospitals will gain 4.0 percent under this final rule with comment period relative to total spending with Pub. L. 108

– 173 dollars for drugs and wage indices in CY 2004. Hospitals do receive a 4.5-percent increase in dollars (3.3 percent for themarket basket and 1.2 percent for passthrough dollars returned to the conversion factor), which is reflected in the conversion factor. However, hospitals received more additional money from provisions in Pub. L. 108

– 173 for spending on drugs and wage


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indices in CY 2004 than in CY 2005. This is largely a result of the decline in the statutory minimum payment for sole source specified covered outpatient drugs from 88 percent to 83 percent of AWP. The observed 4.0 percent reflects this difference in spending.

Some hospitals experience large increases in addition to those already garnered under budget neutrality. In rural areas, hospitals providing between 11,000 and 20,999 services are projected to experience an increase of 5.1 percent. Rural hospitals in the East South Central, West North Central, and West South Central are all projected to experience an increase of at least 5 percent. Very small urban hospitals, less than 99 beds, will experience an increase of 4.9 percent. On the other hand, a handful of types of hospitals will experience much smaller updates. Large urban hospitals will receive an update of 3.9 percent. Urban hospitals
in the Middle Atlantic and Mountain regions will experience updates less than or equal to 3.5 percent. Rural hospitals in New England and the Middle Atlantic also have updates less than or equal to 3.5 percent.

Major teaching hospitals are projected to experience a smaller increase in payments, 2.6 percent, than the 4.0 percent aggregate for all hospitals due to negative impacts from both the APC recalibration, the new wage indices, and most probably the decline in spending for drugs under Pub. L. 108

– 73. Hospitals serving a disproportionate share of low-income patients also experience a lower increase, 3.4 percent. Hospitals for which there is no DSH information, mostly TEFRA hospitals, are estimated to receive an update of 0.3 percent. This low-observed increase appears to be largely due to APC
recalibration issues and declines in the payment for drugs. The impact of final payment on the specialty hospitals,
cancer and children ’ s hospitals, is not shown. If these hospitals were paid under OPPS, the cancer hospitals would experience a negative impact. However, these hospitals are held harmless and, therefore, will not experience any decline in payment. As noted above, we do not intend to specifically identify these hospitals in our future impact analyses.

F. Projected Distribution of Outlier Payments

As stated in section X.B. of this preamble, we have a projected target of 2 percent of the estimated CY 2005 expenditures to outlier payments. For CY 2005, we are adopting a fixed-dollar threshold. As discussed in section X.B. of the preamble, we are changing our current policy, which sets the outlier threshold using only a multiple of the APC payment rate, to a policy that includes both a multiple of the APC payment rate and a new fixed dollar threshold. This policy will better target outlier payments to higher cost, complex cases that create greater financial risk for hospitals.

For CY 2005, we are specifically proposing to require that, in order to qualify for an outlier payment, the cost
of a service must exceed 1.75 times the APC payment rate and the cost must
also exceed the sum of the APC rate plus a $1,175 fixed-dollar threshold. The outlier payment under this policy remains at 50 percent of the cost minus the multiple of the APC payment rate.

Table 42 below compares the percentage of outlier payments relative to total projected payments for the
simulated CY 2004 and CY 2005 outlier policies. As discussed in section X.B. of this preamble, we included a charge inflation factor in our modeling for this final rule with comment period that was not included in our modeling for the proposed rule. This resulted in
increased thresholds for both the
simulated CY 2004 and final CY 2005 outlier policies. To provide an accurate comparison for the new policy, we estimated the CY 2004, multiple-only policy, using the CY 2003 claims with inflated charges to pay total outlier payments that are 2 percent of total estimated spending. This resulted in a multiple threshold of 2.95.

Overall, Table 42 demonstrates that the outlier policy accomplishes the goal of redistributing outlier payments to hospitals performing more expensive procedures and incurring greater financial risk. Notwithstanding the inclusion of a charge inflation factor, the observed distributions for both policies differ very little from those provided in the proposed rule. First, based on the mix of services for the hospitals that would be paid under the OPPS in CY 2005, fewer hospitals would receive outlier payments. This is appropriate as more outlier money is targeted to specific services. We estimate that approximately 85 percent of all hospitals will receive outlier payments under the new policy, whereas 95 percent of all hospitals were estimated to get outlier payments under the CY 2004 policy.

We estimate that the redistribution of outlier payments is modest, rarely shifting total payments by more than 1 percent. In light of this, many hospitals receiving outlier payments under the previous policy will continue to receive outlier payments but for a different set of services. Nonetheless, this final outlier policy appears to accomplish thegoal of redirecting payments to highcost, expensive services. The adopted outlier policy tends to benefit large urban hospitals, teaching hospitals, proprietary hospitals, and hospitals serving a moderate share of low-income patients. The distribution observed here may offset the less than average increases in payment observed for these same classes of hospitals in the overall impact Table 41. Selected hospitals are predicted to lose outlier payments. Rural hospitals, specifically those that
show a small number of beds and provide a low volume of services, are eligible for fewer outlier payments when compared to other types of hospital categories, but, in general, these hospitals experience greater OPPS payment increases. Government hospitals experience a decrease in outlier payments of 0.3 percent, and TEFRA hospitals are projected to lose 1.2 percent in outlier payments.

G. Estimated Impacts of This Final Rule With Comment Period on Beneficiaries

For services for which the beneficiary pays a coinsurance of 20 percent of the payment rate, the beneficiary share of payment will increase for services for which OPPS payments will rise and will
decrease for services for which OPPS payments will fall. For example, for a mid-level office visit (APC 0601), the minimum unadjusted copayment in CY 2004 was $10.71. In this final rule with comment period, the minimum unadjusted copayment for APC 601 is $11.22 because the OPPS payment for
the service will increase under this final rule with comment period. In another example, for a Level III Pathology Procedure (APC 0344), the minimum unadjusted copayment in CY 2004 was $17.16. In this final rule with comment period, the minimum unadjusted copayment for APC 0344 is $15.66 because the minimum unadjusted copayment is limited to 45 percent of the APC payment rate for CY 2005, as
discussed in section XI. of this final rule with comment period.

However, in all cases, the statutelimits beneficiary liability for copayment for a service to the inpatient hospital deductible for the applicable year. This amount is $912 for CY 2005.

**BILLING CODE 4102**

**– 01** 

**– P** 


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**BILLING CODE 4120**

**– 01** 

**– C** 

Conclusion

The changes in this final rule with comment period affect all classes of hospitals. Some hospitals experience significant gains and others less significant gains, but all hospitals will experience positive updates in OPPS payments in CY 2005. Table 41
demonstrates the estimated distributional impact of the OPPS budget neutrality requirements and an additional 4.0 percent increase in payments for CY 2005, exclusive of outlier and transitional pass-through payments, across various classes of hospitals. Table 42 demonstrates the distributional impact of outlier payments under the new policy of a multiple and fixed-dollar threshold. These two tables and the accompanying discussion, in combination with the rest of this final rule with comment period, constitute a regulatory impact analysis.

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

XV. Regulation Text

List of Subjects in 42 CFR Part 419

Hospitals, Medicare, Reporting and recordkeeping requirements.

■ For the reasons set forth in the preamble, the Centers for Medicare &

Medicaid Services amends 42 CFR Chapter IV, Part 419, as set forth below:


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**PART 419**

**— PROSPECTIVE PAYMENT** 
**SYSTEM FOR HOSPITAL OUTPATIENT**
**DEPARTMENT SERVICES**

■ 1. The authority citation for Part 419
continues to read as follows:

Authority: Secs. 1102, 1833(t), and 1871 of the Social Security Act (42 U.S.C. 1302, 1395l(t), and 1395hh).

■ 2. Section 419.21 is amended by adding a new paragraph (e) to read as
follows:

**§ 419.21 Hospital outpatient services**  **subject to the outpatient prospective payment system.** 

* * * * *

(e) Effective January 1, 2005, an initial preventive physical examination, as
defined in § 410.16 of this chapter, if the examination is performed no later than
6 months after the individual ’ s initial Part B coverage date that begins on or after January 1, 2005.

■ 3. Section 419.22 is amended by adding a new paragraph (s) to read as
follows:

**§ 419.22 Hospital outpatient services**  **excluded from payment under the hospital outpatient prospective payment system.** 

* * * * * (s) Effective December 8, 2003, screening mammography services and effective January 1, 2005, diagnostic mammography services.

■ 4. Section 419.64 is amended by revising paragraph (d) to read as follows:

**§ 419.64 Transitional pass-through**  **payments: Drugs and biologicals.**

* * * * *

(d) Amount of pass-through payment. Subject to any reduction determined
under § 419.62(b), the pass-through payment for a drug or biological equals
the amount determined under section 1842(o) of the Social Security Act, minus the portion of the APC payment
amount that CMS determines is associated with the drug or biological.

■ 5. Section 419.70 is amended by revising the section heading and paragraphs (f)(2)(i) and (f)(2)(ii) to read as
follows:

**§ 419.70 Transitional adjustment to limit**  **decline in payments.**

* * * * *

(f) Pre-BBA amount defined. * * * (2) Base payment-to-cost ratio defined. * * *

(i) The provider ’ s payment under this part for covered outpatient services furnished during one of the following periods, including any payment for these services through cost-sharing described in paragraph (e) of this

section:

(A) The cost reporting period ending
in 1996; or

(B) If the provider does not have a cost reporting period ending in 1996, the first cost reporting period ending on or after January 1, 1997, and before January 1, 2001; and

(ii) The reasonable costs of these services for the same cost reporting period.

* * * * * (Catalog of Federal Domestic Assistance Program No. 93.773, Medicare

— Hospital Insurance; and Program No. 93.774,

Medicare

— Supplementary Medical Insurance Program)

Dated: October 28, 2004.

Mark B. McClellan,
Administrator, Centers for Medicare &

Medicaid Services.

Dated: October 28, 2004.
Tommy G. Thompson,

Secretary.


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[FR Doc. 04

– 24759 Filed 11

– 2

– 04; 4:45 am]

**BILLING CODE 4120**

**– 01** 

**– P**