Thursday,

February 3, 2005

Part II

Department of 

Health and Human 

Services

Centers for Medicare & Medicaid Services 

42 CFR Part 412

Medicare Program; Prospective Payment 

System for Long-Term Care Hospitals: 

Proposed Annual Payment Rate Updates, 

Policy Changes, and Clarification; 

Proposed Rule

5724 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Centers for Medicare & Medicaid 

Services 

42 CFR Part 412

[CMS–1483–P] 

RIN 0938–AN28

Medicare Program; Prospective 

Payment System for Long-Term Care 

Hospitals: Proposed Annual Payment 

Rate Updates, Policy Changes, and 

Clarification

AGENCY: Centers for Medicare & 

Medicaid Services (CMS), HHS.

ACTION: Proposed rule.

SUMMARY: This proposed rule would 

update the annual payment rates for the 

Medicare prospective payment system 

(PPS) for inpatient hospital services 

provided by long-term care hospitals 

(LTCHs). The payment amounts and 

factors used to determine the updated 

Federal rates that are described in this 

proposed rule have been determined 

based on the LTCH PPS rate year July 

1, 2005 through June 30, 2006. The 

annual update of the long-term care 

diagnosis-related group (LTC–DRG) 

classifications and relative weights 

remains linked to the annual 

adjustments of the acute care hospital 

inpatient diagnosis-related group 

system, and would continue to be 

effective each October 1. The proposed 

outlier threshold for July 1, 2005 

through June 30, 2006 is also derived 

from the LTCH PPS rate year 

calculations. We are proposing to adopt 

new labor market area definitions for 

the purpose of geographic classification 

and the wage index. We are also 

proposing policy changes and 

clarifications.

DATES: To be assured consideration, 

comments must be received at one of 

the addresses provided below, no later 

than 5 p.m. on March 29, 2005.

ADDRESSES: In commenting, please refer 

to file code CMS–1483–P. 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 on specific issues 

in this regulation 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–

1483–P, P.O. Box 8011, Baltimore, 

MD 21244–8011. 

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–

7197 in advance to schedule your 

arrival with one of our staff members.

Room 445–G, Hubert H. Humphrey 

Building, 200 Independence Avenue, 

SW., Washington, DC 20201; or 7500 

Security Boulevard, Baltimore, MD 

21244–1850. 

(Because access to the interior of the 

HHH Building is not readily available to 

persons without Federal Government 

identification, commenters are 

encouraged to leave their comments in 

the CMS drop slots located in the main 

lobby of the building. A stamp-in clock 

is available for persons wishing to retain 

a proof of filing by stamping in and 

retaining an extra copy of the comments 

being filed.) 

Comments mailed to the addresses 

indicated as appropriate for hand or 

courier delivery may be delayed and 

received after the comment period. 

Submission of comments on 

paperwork requirements. You may 

submit comments on this document’s 

paperwork requirements by mailing 

your comments to the addresses 

provided at the end of the ‘‘Collection 

of Information Requirements’’ section in 

this document. 

For information on viewing public 

comments, see the beginning of the 

SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Tzvi 

Hefter, (410) 786–4487 (General 

information); Judy Richter, (410) 786–

2590 (General information, transition 

payments, payment adjustments for 

special cases, and onsite discharges and 

readmissions, interrupted stays, colocated providers, and short-stay 

outliers); Michele Hudson, (410) 786–

5490 (Calculation of the payment rates, 

relative weights and case-mix index, 

market basket update, and payment 

adjustments); Mark Zezza, (410) 786–

7937 (Calculation of the payment rates 

wage index, wage index, and payment 

adjustments); Ann Fagan, (410) 786–

5662 (Patient classification system); 

Miechal Lefkowitz, (410) 786–5316 

(High-cost outliers and budget 

neutrality); Linda McKenna, (410) 786–

4537 (Payment adjustments, interrupted 

stay, and transition period).

SUPPLEMENTARY INFORMATION: 

Submitting Comments: We welcome 

comments from the public on all issues 

set forth in this rule to assist us in fully 

considering issues and developing 

policies. You can assist us by 

referencing the file code (CMS–1483–P) 

and the specific ‘‘issue identifier’’ that 

precedes the section on which you 

choose to comment. 

Inspection of Public Comments: All 

comments received before the close of 

the comment period are available for 

viewing by the public, including any 

personally identifiable or confidential 

business information that is included in 

a comment. After the close of the 

comment period, CMS posts all 

electronic comments received before the 

close of the comment period on its 

public Web site. Comments received 

timely will be available for public 

inspection as they are received, 

generally beginning approximately 3 

weeks after publication of a document, 

at the headquarters of the Centers for 

Medicare & Medicaid Services, 7500 

Security Boulevard, Baltimore, 

Maryland 21244, Monday through 

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

4 p.m. To schedule an appointment to 

view public comments, phone (410) 

786–7197. 

Copies: To order copies of the Federal 

Register containing this document, send 

your request to: New Orders, 

Superintendent of Documents, P.O. 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.

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5725

Table of Contents 

I. Background 

A. Legislative and Regulatory Authority 

B. Criteria for Classification as a LTCH 

1. Classification as a LTCH 

2. Hospitals Excluded from the LTCH PPS 

C. Transition Period for Implementation of 

the LTCH PPS 

D. Health Insurance Portability and 

Accountability Act Compliance 

II. Summary of Major Contents of This 

Proposed Rule 

III. Long-Term Care Diagnosis-Related Group 

(LTC–DRG) Classifications and Relative 

Weights 

A. Background 

B. Patient Classifications into DRGs 

C. Organization of DRGs 

D. Update of LTC–DRGs 

E. ICD–9–CM Coding System 

1. Uniform Hospital Discharge Data Set 

(UHDDS) Definitions 

2. Maintenance of the ICD–9–CM Coding 

System 

3. Coding Rules and Use of ICD–9–CM 

Codes in LTCHs 

F. Method for Updating the LTC–DRG 

Relative Weights 

IV. Proposed Changes to the LTCH PPS Rates 

and Proposed Changes in Policy for the 

2006 LTCH PPS Rate Year 

A. Overview of the Development of the 

Payment Rates 

B. Proposed Update to the Standard 

Federal Rate for the 2006 LTCH PPS Rate 

Year 

1. Proposed Standard Federal Rate Update 

a. Description of the Proposed Market 

Basket for the 2006 LTCH PPS Rate Year 

b. Proposed LTCH Market Basket 

Increase for the 2006 LTCH PPS Rate 

Year 

2. Proposed Standard Federal Rate for the 

2006 LTCH PPS Rate Year 

C. Calculation of Proposed LTCH 

Prospective Payments for the 2006 LTCH 

PPS Rate Year 

1. Proposed Adjustment for Area Wage 

Levels 

a. Background 

b. Proposed Labor-Related Share 

c. Proposed Revision of the LTCH PPS 

Geographic Classifications 

1. Current LTCH PPS Labor Market Areas 

Based on MSAs 

2. Core-Based Statistical Areas 

3. Proposed Revision of the Labor Market 

Areas 

a. New England MSAs 

b. Metropolitan Divisions 

c. Micropolitan Areas 

4. Implementation of the Proposed Revised 

Labor Market Areas Under the LTCH PPS

d. Proposed Wage Index Data 

2. Proposed Adjustment for Cost-of-Living 

in Alaska and Hawaii 

3. Proposed Adjustment for High-Cost 

Outliers 

a. Background 

b. Cost-to-charge ratios (CCRs) 

c. Establishment of the Proposed FixedLoss Amount 

d. Reconciliation of Outlier Payments 

Upon Cost Report Settlement 

e. Application of Outlier Policy to ShortStay Outlier Cases 

4. Proposed Adjustments for Special Cases 

a. General 

b. Adjustment for Short-Stay Outlier Cases 

5. Hospital-within-Hospitals and Satellites 

of LTCHs Notification Requirements 

6. Other Payment Adjustments 

7. Proposed Budget Neutrality Offset to 

Account for the Transition Methodology 

8. Extension of the Interrupted Stay Policy 

9. Onsite Discharges and Readmittances 

V. Computing the Proposed Adjusted Federal 

Prospective Payments for the 2005 LTCH 

PPS Rate Year 

VI. Transition Period 

VII. Payments to New LTCHs 

VIII. Method of Payment 

IX. MedPAC Recommendations/Monitoring 

X. Collection of Information Requirements 

XI. Regulatory Impact Analysis 

Acronyms 

Because of the many terms to which we 

refer by acronym in this proposed rule, we 

are listing the acronyms used and their 

corresponding terms in alphabetical order 

below:

BBA Balanced Budget Act of 1997, Pub. L. 

105–33

BBRA Medicare, Medicaid, and SCHIP 

(State Children’s Health Insurance 

Program) Balanced Budget Refinement 

Act of 1999, Pub. L. 106–113

BIPA Medicare, Medicaid, and SCHIP (State 

Children’s Health Insurance Program) 

Benefits Improvement and Protection 

Act of 2000, Pub. L. 106–554

CPSA Core-Based Statistical Area 

CMS Centers for Medicare & Medicaid 

Services 

COPS Medicare conditions of participation 

DRGs Diagnosis-related groups 

FY Federal fiscal year 

HCRIS Hospital Cost Report Information 

System 

HHA Home health agency 

HIPAA Health Insurance Portability and 

Accountability Act, Pub. L. 104–191

IPF Inpatient Psychiatric Facility 

IPPS Acute Care Hospital Inpatient 

Prospective Payment System 

IRF Inpatient rehabilitation facility 

LTC–DRG Long-term care diagnosis-related 

group 

LTCH Long-term care hospital 

MedPAC Medicare Payment Advisory 

Commission 

MedPAR Medicare provider analysis and 

review file 

OSCAR Online Survey Certification and 

Reporting (System) 

PPS Prospective Payment System 

QIO Quality Improvement Organization 

(formerly Peer Review organization 

(PRO)) 

RY Rate Year (July 1 through June 30) 

SNF Skilled nursing facility 

TEFRA Tax Equity and Fiscal 

Responsibility Act of 1982, Pub. L. 97–

248

I. Background 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘BACKGROUND’’ at the beginning of 

your comments.] 

A. Legislative and Regulatory Authority 

The Medicare, Medicaid, and SCHIP 

[State Children’s Health Insurance 

Program] Balanced Budget Refinement 

Act of 1999 (BBRA) (Pub. L. 106–113) 

and the Medicare, Medicaid, and SCHIP 

Benefits Improvement and Protection 

Act of 2000 (BIPA) (Pub. L. 106–554) 

provide for payment for both the 

operating and capital-related costs of 

hospital inpatient stays in long-term 

care hospitals (LTCHs) under Medicare 

Part A based on prospectively set rates. 

The Medicare prospective payment 

system (PPS) for LTCHs applies to 

hospitals described in section 

1886(d)(1)(B)(iv) of the Social Security 

Act (the Act), effective for cost reporting 

periods beginning on or after October 1, 

2002. 

Section 1886(d)(1)(B)(iv)(I) of the Act 

defines a LTCH as ‘‘a hospital which has 

an average inpatient length of stay (as 

determined by the Secretary) of greater 

than 25 days.’’ Section 

1886(d)(1)(B)(iv)(II) of the Act also 

provides an alternative definition of 

LTCHs: Specifically, a hospital that first 

received payment under section 1886(d) 

of the Act in 1986 and has an average 

inpatient length of stay (as determined 

by the Secretary) of greater than 20 days 

and has 80 percent or more of its annual 

Medicare inpatient discharges with a 

principal diagnosis that reflects a 

finding of neoplastic disease in the 12-

month cost reporting period ending in 

FY 1997. 

Section 123 of Pub. L. 106–113 

requires the PPS for LTCHs to be a per 

discharge system with a diagnosisrelated group (DRG) based patient 

classification system that reflects the 

differences in patient resources and 

costs in LTCHs while maintaining 

budget neutrality. 

Section 307(b)(1) of Pub. L. 106–554, 

among other things, mandates that the 

Secretary shall examine, and may 

provide for, adjustments to payments 

under the LTCH PPS, including 

adjustments to DRG weights, area wage 

adjustments, geographic reclassification, 

outliers, updates, and a disproportionate 

share adjustment. 

In a Federal Register document 

issued on August 30, 2002 (67 FR 

55954), we implemented the LTCH PPS 

authorized under Pub. L. 106–113 and 

Pub. L. 106–554. This system uses 

information from LTCH patient records 

to classify patients into distinct longterm care diagnosis-related groups 

(LTC–DRGs) based on clinical 

characteristics and expected resource 

needs. Payments are calculated for each 

LTC–DRG and provisions are made for 

appropriate payment adjustments. 

5726 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

Payment rates under the LTCH PPS are 

updated annually and published in the 

Federal Register. 

The LTCH PPS replaced the 

reasonable cost-based payment system 

under the Tax Equity and Fiscal 

Responsibility Act of 1982 (TEFRA), 

Pub. L. 97–248, for payments for 

inpatient services provided by a LTCH 

with a cost reporting period beginning 

on or after October 1, 2002. (The 

regulations implementing the TEFRA 

reasonable cost-based payment 

provisions are located at 42 CFR part 

413.) With the implementation of the 

prospective payment system for acute 

care hospitals authorized by the Social 

Security Amendments of 1983 (Pub. L. 

98–21), which added section 1886(d) to 

the Act, certain hospitals, including 

LTCHs, were excluded from the PPS for 

acute care hospitals and were paid their 

reasonable costs for inpatient services 

subject to a per discharge limitation or 

target amount under the TEFRA system. 

For each cost reporting period, a 

hospital-specific ceiling on payments 

was determined by multiplying the 

hospital’s updated target amount by the 

number of total current year Medicare 

discharges. The August 30, 2002 final 

rule further details payment policy 

under the TEFRA system (67 FR 55954). 

In the August 30, 2002 final rule, we 

presented an in-depth discussion of the 

LTCH PPS, including the patient 

classification system, relative weights, 

payment rates, additional payments, 

and the budget neutrality requirements 

mandated by section 123 of Pub. L. 106–

113. The same final rule that established 

regulations for the LTCH PPS under 42 

CFR part 412, subpart O, also contained 

LTCH provisions related to covered 

inpatient services, limitation on charges 

to beneficiaries, medical review 

requirements, furnishing of inpatient 

hospital services directly or under 

arrangement, and reporting and 

recordkeeping requirements. 

We refer readers to the August 30, 

2002 final (67 FR 55954) rule for a 

comprehensive discussion of the 

research and data that supported the 

establishment of the LTCH PPS. 

On June 6, 2003, we published a final 

rule in the Federal Register (68 FR 

34122) that set forth the 2004 annual 

update of the payment rates for the 

Medicare PPS for inpatient hospital 

services furnished by LTCHs. It also 

changed the annual period for which 

the payment rates are effective. The 

annual updated rates are now effective 

from July 1 through June 30 instead of 

from October 1 through September 30. 

We refer to the July through June time 

period as a ‘‘long-term care hospital rate 

year’’ (LTCH PPS rate year). In addition, 

we changed the publication schedule for 

the annual update to allow for an 

effective date of July 1. The payment 

amounts and factors used to determine 

the annual update of the LTCH PPS 

Federal rate is based on a LTCH PPS 

rate year. While the LTCH payment rate 

update is effective July 1, the annual 

update of the LTC–DRG classifications 

and relative weights are linked to the 

annual adjustments of the acute care 

hospital inpatient diagnosis-related 

groups and are effective each October 1. 

On May 7, 2004 we published a final 

rule in the Federal Register (69 FR 

25674) that set forth the 2005 LTCH PPS 

rate year annual update of the payment 

rates for the Medicare PPS for inpatient 

hospital services provided by LTCHs. 

We also discussed clarification of the 

procedures under which a satellite 

facility or remote location of a LTCH 

may be designated as a separately 

certified LTCH. In addition, the final 

rule included a provision to expand the 

existing interrupted stay policy at 

§ 412.531, and a revision to the 

procedure for computing the day count 

in the average length of stay calculation 

for Medicare patients for hospitals 

qualifying as LTCHs at § 412.23(e)(3)(ii).

B. Criteria for Classification as a LTCH 

1. Classification as a LTCH 

Under the existing regulations at 

§ 412.23(e)(1) and (e)(2)(i), which 

implement section 1886(d)(1)(B)(iv)(I) of 

the Act, to qualify to be paid under the 

LTCH PPS, a hospital must have a 

provider agreement with Medicare and 

must have an average Medicare 

inpatient length of stay of greater than 

25 days. Alternatively, for cost reporting 

periods beginning on or after August 5, 

1997, a hospital that was first excluded 

from the PPS in 1986, and can 

demonstrate that at least 80 percent of 

its annual Medicare inpatient discharges 

in the 12-month cost reporting period 

ending in FY 1997 have a principal 

diagnosis that reflects a finding of 

neoplastic disease must have an average 

inpatient length of stay for all patients, 

including both Medicare and nonMedicare inpatients, of greater than 20 

days (§ 412.23(e)(2)(ii)). 

Regulations at § 412.23(e)(3) provide 

that, subject to the provisions of 

paragraphs (e)(3)(ii) through (e)(3)(iv) of 

this section, the average Medicare 

inpatient length of stay, specified under 

§ 412.23(e)(2)(i) is calculated by 

dividing the total number of covered 

and noncovered days of stay of 

Medicare inpatients (less leave or pass 

days) by the number of total Medicare 

discharges for the hospital’s most recent 

complete cost reporting period. Section 

412.23 also provides that subject to the 

provisions of paragraphs (e)(3)(ii) 

through (e)(3)(iv) of this section, the 

average inpatient length of stay 

specified under § 412.23(e)(2)(ii) is 

calculated by dividing the total number 

of days for all patients, including both 

Medicare and non-Medicare inpatients 

(less leave or pass days) by the number 

of total discharges for the hospital’s 

most recent complete cost reporting 

period. 

In the LTCH PPS final rule published 

on May 7, 2004, we specified the 

procedure for calculating a hospital’s 

inpatient average length of stay for 

purposes of classification as a LTCH. 

That is, if a patient’s stay includes days 

of care furnished during two or more 

separate consecutive cost reporting 

periods, the total days of a patient’s stay 

would be reported in the cost reporting 

period during which the patient is 

discharged (69 FR 25705). Therefore, we 

have revised the regulations at 

§ 412.23(e)(3)(ii) to specify that, 

effective for cost reporting periods 

beginning on or after July 1, 2004, in 

calculating a hospital’s average length of 

stay, if the days of a stay of an inpatient 

involves days of care furnished during 

two or more separate consecutive cost 

reporting periods, the total number of 

days of the stay are considered to have 

occurred in the cost reporting period 

during which the inpatient was 

discharged. 

Effective for cost reporting periods 

beginning on or after July 1, 2004, but 

before July 1, 2005, a one-year exception 

is provided in the event some providers 

failed to meet the 25-day ALOS criteria 

due to this change in policy. In these 

cases, the fiscal intermediary will do an 

additional calculation to determine if 

these providers meet the average length 

of stay methodology found in 

§ 412.23(e)(3)(i). 

Fiscal intermediaries verify that 

LTCHs meet the average length of stay 

requirements. We note that the inpatient 

days of a patient who is admitted to a 

LTCH without any remaining Medicare 

days of coverage, regardless of the fact 

that the patient is a Medicare 

beneficiary, will not be included in the 

above calculation. Because Medicare 

would not be paying for any of the 

patient’s treatment, data on the patient’s 

stay would not be included in the 

Medicare claims processing systems. In 

order for both covered and noncovered 

days of a LTCH hospitalization to be 

included, a patient admitted to the 

LTCH must have at least one remaining 

benefit day as described in § 409.61 (68 

FR 34123). 

The fiscal intermediary’s 

determination of whether or not a 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5727

hospital qualified as an LTCH is based 

on the hospital’s discharge data from the 

hospital’s most recent complete cost 

reporting period (§ 412.23(e)(3)) and is 

effective at the start of the hospital’s 

next cost reporting period (§ 412.22(d)). 

However, if the hospital does not meet 

the average length of stay requirement 

as specified in § 412.23(e)(2)(i) and (ii), 

the hospital may provide the 

intermediary with data indicating a 

change in the average length of stay by 

the same method for the period of at 

least 5 months of the immediately 

preceding 6-month period (69 FR 

25676). Our interpretation of the current 

regulations at § 412.23(e)(3) was to 

allow hospitals to submit data using a 

period of at least 5 months of the most 

recent data from the immediately 

preceding 6-month period. 

As we stated in the IPPS final rule, 

published August 1, 2003, prior to the 

implementation of the LTCH PPS, we 

did rely on data from the most recently 

submitted cost report for purposes of 

calculating the average length of stay. 

The calculation to determine whether 

an acute care hospital qualifies for 

LTCH status was based on total days 

and discharges for LTCH inpatients. 

However, with the implementation of 

the LTCH PPS, with respect to the 

average length of stay specified under 

§ 412.23(e)(2)(i), we revised 

§ 412.23(e)(3)(i) to only count total days 

and discharges for Medicare inpatients 

(68 FR 45464). In addition, the average 

length of stay specified under 

§ 412.23(e)(2)(ii) is calculated by 

dividing the total number of days for all 

patients, including both Medicare and 

non-Medicare inpatients (less leave or 

pass days) by the number of total 

discharges for the hospital’s most recent 

complete cost reporting period. As we 

pointed out in the IPPS final rule, we 

are unable to capture the necessary data 

from our present cost reporting forms. 

We have, therefore, notified fiscal 

intermediaries and LTCHs that until the 

cost reporting forms are revised, for 

purposes of calculating the average 

length of stay, we will be relying upon 

census data extracted from MedPAR 

files that reflect each LTCH’s cost 

reporting period (68 FR 45464). 

Requirements for hospitals seeking 

classification as LTCHs that have 

undergone a change in ownership, as 

described in § 489.18, are set forth in 

§ 412.23(e)(3)(iv).

In the May 7, 2004 final rule (69 FR 

25709), we revised the regulations at 

§ 412.23(e) to clarify our longstanding 

policy by stating that a satellite facility 

or remote location that voluntarily 

separates from its parent LTCH in order 

to become an independent LTCH it must 

first be considered a State-licensed and 

Medicare-certified hospital before 

seeking classification as a LTCH. In this 

regard, a satellite facility or remote 

location that voluntarily wishes to 

become an independent LTCH is 

required to demonstrate that it meets the 

average length of stay requirements, as 

specified under §412.23(e)(2)(i) and (ii), 

based on discharges that occur on or 

after the effective date of its 

participation under Medicare as a 

separate hospital. Once the satellite 

facility or remote location is Medicare 

certified, then the hospital may consider 

using the length of stay data 

accumulated as a hospital to satisfy the 

classification requirements for becoming 

a ‘‘specialty’’ hospital (in this case, a 

LTCH). That is, the hospital must 

demonstrate that it has a Medicare 

inpatient length of stay of greater than 

25 days. The data used to calculate the 

Medicare average length of stay is based 

on discharges that occur after the 

satellite facility or remote location has 

established itself as a separate 

participating hospital. However, there is 

an exception to this policy for satellite 

facilities and remote locations of LTCHs 

that are affected by § 413.65(e)(3) and 

that were in existence prior to the 

effective date of the provider-based 

location requirements; that is, cost 

reporting periods beginning on or after 

July 1, 2003. We will assign new 

Medicare provider numbers to former 

satellite facilities or remote locations 

that have become certified as Medicare 

participating hospitals. However, if 

these newly certified hospitals should 

fail the provider-based locations 

requirements under § 413.65(e)(3), they 

may be classified as LTCHs if they meet 

specific conditions. Under this 

exception, calculation of the ALOS for 

purposes of qualifying as a LTCH are 

based on discharge data during the 5 

months of the immediate 6 months 

preceding the facility’s separation from 

the main hospital. This provision only 

applies to those facilities or locations 

that became subject to the revised 

provider-based location rules on July 1, 

2003, and that seek classification as 

LTCHs for Medicare payment purposes. 

2. Hospitals Excluded From the LTCH 

PPS 

The following hospitals are paid 

under special payment provisions, as 

described in § 412.22(c) and, therefore, 

are not subject to the LTCH PPS rules: 

• Veterans Administration hospitals. 

• Hospitals that are reimbursed under 

State cost control systems approved 

under 42 CFR Part 403. 

• Hospitals that are reimbursed in 

accordance with demonstration projects 

authorized under section 402(a) of 

Public Law 90–248 (42 U.S.C. 1395b–1) 

or section 222(a) of Public Law 92–603 

(42 U.S.C. 1395b–1 (note)) (statewide 

all-payer systems, subject to the rate-ofincrease test at section 1814(b) of the 

Act). 

• Nonparticipating hospitals 

furnishing emergency services to 

Medicare beneficiaries. 

C. Transition Period for Implementation 

of the LTCH PPS 

In the August 30, 2002 final rule, we 

provided for a 5-year transition period 

from reasonable cost-based 

reimbursement to fully Federal 

prospective payment for LTCHs (67 FR 

56038). However, LTCHs have the 

option to elect to be paid based on 100 

percent of the Federal prospective 

payment. During the 5-year period, two 

payment percentages are to be used to 

determine a LTCH’s total payment 

under the PPS. The blend percentages 

are as follows:

Cost reporting periods beginning on or after Prospective payment 

Federal rate percentage 

Reasonable cost-based 

reimbursement rate percentage 

October 1, 2002 ....................................................................................................................... 20 80 

October 1, 2003 ....................................................................................................................... 40 60 

October 1, 2004 ....................................................................................................................... 60 40 

October 1, 2005 ....................................................................................................................... 80 20 

October 1, 2006 ....................................................................................................................... 100 0 

5728 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

D. Health Insurance Portability and 

Accountability Act Compliance 

We note that as of October 16, 2002, 

a LTCH that was required to comply 

with the Administrative Simplification 

Standards under the Health Insurance 

Portability and Accountability Act 

(HIPAA) (Pub. L. 104–191) and that had 

not obtained an extension in 

compliance with the Administrative 

Compliance Act (Pub. L. 107–105) is 

obligated to comply with the standards 

for submitting claim forms to the 

LTCH’s Medicare fiscal intermediary (45 

CFR 162.1002 and 45 CFR 162.1102). 

Beginning October 16, 2003, LTCHs that 

obtained an extension and that are 

required to comply with the HIPAA 

Administrative Simplification 

Standards must start submitting 

electronic claims in compliance with 

the HIPAA regulations cited above, 

among others. 

II. Summary of the Major Contents of 

This Proposed Rule 

In this proposed rule, we propose to 

set forth the annual update to the 

payment rates for the Medicare 2006 

LTCH PPS rate year. The following is a 

summary of the proposed update 

changes that we are addressing in this 

final rule: 

• In section IV. of this preamble, we 

discuss the annual update of LTC–DRG 

classifications and relative weights and 

specify that they remain linked to the 

annual adjustments of the acute care 

hospital inpatient DRG system, which 

are based on the annual revisions to the 

International Classification of Diseases, 

Ninth Revision, Clinical Modification 

(ICD–9–CM) codes, effective each 

October 1.

• As discussed in section IV.C.1. of 

this preamble, we are proposing to 

adopt new labor market area definitions 

for LTCHs which are based on the new 

Core-Based Statistical Areas (CBSAs), 

announced by the OMB late in 2000. 

The CBSAs were adopted for acute care 

hospitals under the IPPS effective 

October 1, 2004 in the FY 2005 IPPS 

final rule. 

• In sections VI. through IX. of this 

preamble, we are including proposed 

revisions to the wage index, the 

proposed excluded hospital with capital 

market basket that would be applied to 

the current standard Federal rate to 

determine the prospective payment 

rates, the applicable adjustments to 

payment rates, the proposed outlier 

threshold, the transition period, and the 

proposed budget neutrality factor. 

• In section IX. of this preamble, we 

discuss the recommendations made in 

the June 2004 MedPAC Report 

concerning the definition of LTCHs. In 

this section, we also discuss our 

continuing monitoring efforts to 

evaluate the LTCH PPS, including a 

review of the QIO’s role. 

• In section XII. of this preamble, we 

analyze the impact of the proposed 

changes in this proposed rule on 

Medicare expenditures and on 

Medicare-participating LTCHs and 

Medicare beneficiaries. 

III. Long-Term Care Diagnosis-Related 

Group (LTC–DRG) Classifications and 

Relative Weights 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘LTC–DRG CLASSIFICATIONS AND 

RELATIVE WEIGHTS’’ at the beginning 

of your comments.] 

A. Background 

Section 123 of Pub. L. 106–113 

specifically requires that the PPS for 

LTCHs be a per discharge system with 

a DRG-based patient classification 

system reflecting the differences in 

patient resources and costs in LTCHs 

while maintaining budget neutrality. 

Section 307(b)(1) of Pub. L. 106–554 

modified the requirements of section 

123 of Pub. L. 106–113 by specifically 

requiring that the Secretary examine 

‘‘the feasibility and the impact of basing 

payment under such a system [the 

LTCH PPS] on the use of existing (or 

refined) hospital DRGs that have been 

modified to account for different 

resource use of LTCH patients as well as 

the use of the most recently available 

hospital discharge data.’’

In accordance with section 307(b)(1) 

of Pub. L. 106–554 and § 412.515 of our 

existing regulations, the LTCH PPS uses 

information from LTCH patient records 

to classify patient cases into distinct 

LTC–DRGs based on clinical 

characteristics and expected resource 

needs. The LTC–DRGs used as the 

patient classification component of the 

LTCH PPS correspond to the hospital 

inpatient DRGs in the IPPS. We apply 

weights to the existing hospital 

inpatient DRGs to account for the 

difference in resource use by patients 

exhibiting the case complexity and 

multiple medical problems 

characteristic of LTCHs. 

In a departure from the IPPS, we use 

low volume LTC–DRGs (less than 25 

LTCH cases) in determining the LTC–

DRG weights, since LTCHs do not 

typically treat the full range of 

diagnoses as do acute care hospitals. In 

order to deal with the large number of 

low volume DRGs (all DRGs with fewer 

than 25 cases), we group low volume 

DRGs into 5 quintiles based on average 

charge per discharge. (A listing of the 

composition of low volume quintiles 

appears in the August 30, 2002 LTCH 

PPS final rule at 67 FR 55986.) We also 

take into account adjustments to 

payments for cases in which the stay at 

the LTCH is five-sixths of the geometric 

average length of stay and classify these 

cases as short-stay outlier cases. (A 

detailed discussion of the application of 

the Lewin Group model that was used 

to develop the LTC–DRGs appears in the 

August 30, 2002 LTCH PPS final rule at 

67 FR 55978.) 

B. Patient Classifications Into DRGs 

Generally, under the LTCH PPS, 

Medicare payment is made at a 

predetermined specific rate for each 

discharge; that payment varies by the 

LTC–DRG to which a beneficiary’s stay 

is assigned. Cases are classified into 

LTC–DRGs for payment based on the 

following six data elements: 

(1) Principal diagnosis. 

(2) Up to eight additional diagnoses. 

(3) Up to six procedures performed. 

(4) Age. 

(5) Sex. 

(6) Discharge status of the patient. 

As indicated in the August 30, 2002 

LTCH PPS final rule, upon the discharge 

of the patient from a LTCH, the LTCH 

must assign appropriate diagnosis and 

procedure codes from the most current 

version of the International 

Classification of Diseases, Ninth 

Edition, Clinical Modification (ICD–9–

CM). As of October 16, 2002, a LTCH 

that was required to comply with the 

HIPAA Administrative Simplification 

Standards and that had not obtained an 

extension in compliance with the 

Administrative Compliance Act (Pub. L. 

107–105) is obligated to comply with 

the standards at 45 CFR 162.1002 and 

45 CFR 162.1102. Completed claim 

forms are to be submitted to the LTCH’s 

Medicare fiscal intermediary. 

Medicare fiscal intermediaries enter 

the clinical and demographic 

information into their claims processing 

systems and subject this information to 

a series of automated screening 

processes called the Medicare Code 

Editor (MCE). These screens are 

designed to identify cases that require 

further review before assignment into a 

DRG can be made. During this process, 

the following types of cases are selected 

for further development: 

• Cases that are improperly coded. 

(For example, diagnoses are shown that 

are inappropriate, given the sex of the 

patient. Code 68.6, Radical abdominal 

hysterectomy, would be an 

inappropriate code for a male.) 

• Cases including surgical procedures 

not covered under Medicare. (For 

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example, organ transplant in a 

nonapproved transplant center.) 

• Cases requiring more information. 

(For example, ICD–9–CM codes are 

required to be entered at their highest 

level of specificity. There are valid 3-

digit, 4-digit, and 5-digit codes. That is, 

code 136.3, Pneumocystosis, contains 

all appropriate digits, but if it is 

reported with either fewer or more than 

4 digits, the claim will be rejected by the 

MCE as invalid.)

• Cases with principal diagnoses that 

do not usually justify admission to the 

hospital. (For example, code 437.9, 

Unspecified cerebrovascular disease. 

While this code is valid according to the 

ICD–9–CM coding scheme, a more 

precise code should be used for the 

principal diagnosis.) 

After screening through the MCE, 

each claim will be classified into the 

appropriate LTC–DRG by the Medicare 

LTCH GROUPER. As indicated in 

August 30, 2002 LTCH PPS final, the 

Medicare GROUPER, which is used 

under the LTCH PPS, is specialized 

computer software, and is the same 

GROUPER software program used under 

the IPPS. The GROUPER software was 

developed as a means of classifying 

each case into a DRG on the basis of 

diagnosis and procedure codes and 

other demographic information (age, 

sex, and discharge status). Following the 

LTC–DRG assignment, the Medicare 

fiscal intermediary determines the 

prospective payment by using the 

Medicare PRICER program, which 

accounts for hospital-specific 

adjustments. As provided for under the 

IPPS, we provide an opportunity for the 

LTCH to review the LTC–DRG 

assignments made by the fiscal 

intermediary and to submit additional 

information within a specified 

timeframe (§ 412.513(c)). 

The GROUPER is used both to classify 

past cases in order to measure relative 

hospital resource consumption to 

establish the DRG weights and to 

classify current cases for purposes of 

determining payment. The records for 

all Medicare hospital inpatient 

discharges are maintained in the 

MedPAR file. The data in this file are 

used to evaluate possible DRG 

classification changes and to recalibrate 

the DRG weights during our annual 

update under both the IPPS (§ 412.60(e)) 

and the LTCH PPS (§ 412.517). As 

discussed in greater detail below in 

sections III.D. and E. of this preamble, 

with the implementation of section 

503(a) of Pub. L. 108–173, there is the 

possibility that one feature of the 

GROUPER software program may be 

updated twice during a Federal fiscal 

year (October 1 and April 1) as required 

by the statute for the IPPS (69 FR 

48954–48957), August 11, 2004). 

Specifically, ICD–9 diagnosis and 

procedure codes for new medical 

technology may be created and added to 

existing DRGs in the middle of the 

Federal fiscal year on April 1. This 

policy change will have no effect, 

however, on the LTC–DRG relative 

weights which will continue to be 

updated only once a year (October 1), 

nor will there be any impact on 

Medicare payments under the LTCH 

PPS. 

C. Organization of DRGs 

The DRGs are organized into 25 Major 

Diagnostic Categories (MDCs), most of 

which are based on a particular organ 

system of the body; the remainder 

involve multiple organ systems (such as 

MDC 22, Burns). Accordingly, the 

principal diagnosis determines MDC 

assignment. Within most MDCs, cases 

are then divided into surgical DRGs and 

medical DRGs. Surgical DRGs are 

assigned based on a surgical hierarchy 

that orders operating room (O.R.) 

procedures or groups of O.R. procedures 

by resource intensity. The GROUPER 

does not recognize all ICD–9–CM 

procedure codes as procedures that 

affect DRG assignment, that is, 

procedures which are not surgical (for 

example, EKG), or minor surgical 

procedures (for example, 86.11, Biopsy 

of skin and subcutaneous tissue). 

The medical DRGs are generally 

differentiated on the basis of diagnosis. 

Both medical and surgical DRGs may be 

further differentiated based on age, sex, 

discharge status, and presence or 

absence of complications or 

comorbidities (CC). We note that CCs 

are defined by certain secondary 

diagnoses not related to, or not 

inherently a part of, the disease process 

identified by the principal diagnosis. 

(For example, the GROUPER would not 

recognize a code from the 800.0x series, 

Skull fracture, as a CC when combined 

with principal diagnosis 850.4, 

Concussion with prolonged loss of 

consciousness, without return to 

preexisting conscious level.) In 

addition, we note that the presence of 

additional diagnoses does not 

automatically generate a CC, as not all 

DRGs recognize a comorbid or 

complicating condition in their 

definition. (For example, DRG 466, 

Aftercare without History of Malignancy 

as Secondary Diagnosis, is based solely 

on the principal diagnosis, without 

consideration of additional diagnoses 

for DRG determination.) 

In its June 2000 Report to Congress, 

MedPAC recommended that the 

Secretary ‘‘* * * improve the hospital 

inpatient prospective payment system 

by adopting, as soon as practicable, 

diagnosis-related group refinements that 

more fully capture differences in 

severity of illness among patients,’’ 

(Recommendation 3A, p. 63). We have 

determined it is not practical at this 

time to develop a refinement to 

inpatient hospital DRGs based on 

severity due to time and resource 

requirements. However, this does not 

preclude us from development of a 

severity-adjusted DRG refinement in the 

future. That is, a refinement to the list 

of comorbidities and complications 

could be incorporated into the existing 

DRG structure. It is also possible that a 

more comprehensive severity adjusted 

structure may be created if a new code 

set is adopted. That is, if ICD–9–CM is 

replaced by ICD–10–CM (for diagnostic 

coding) and ICD–10–PCS (for procedure 

coding) or by other code sets, a severity 

concept may be built into the resulting 

DRG assignments. Of course any change 

to the code set would be adopted 

through the process established in the 

HIPAA Administrative Simplification 

Standards provisions. 

D. Update of LTC–DRGs 

For FY 2005, the LTC–DRG patient 

classification system was based on 

LTCH data from the FY 2003 MedPAR 

file, which contained hospital bills data 

from the March 2004 update. The 

patient classification system consisted 

of 520 DRGs that formed the basis of the 

FY 2004 LTCH PPS GROUPER. The 520 

LTC–DRGs included two ‘‘error DRGs.’’ 

As in the IPPS, we included two error 

DRGs in which cases that cannot be 

assigned to valid DRGs will be grouped. 

These two error DRGs are DRG 469 

(Principal Diagnosis Invalid as a 

Discharge Diagnosis) and DRG 470 

(Ungroupable). (See the FY 2005 IPPS 

FY 2005 final rule (69 FR 408982–

49000).) The other 518 LTC–DRGs are 

the same DRGs used in the IPPS 

GROUPER for FY 2005 (Version 22.0).

In the past, in the health care 

industry, annual changes to the ICD–9–

CM codes were effective for discharges 

occurring on or after October 1 each 

year. Thus, the manual and electronic 

versions of the GROUPER software, 

which are based on the ICD–9–CM 

codes, were also revised annually and 

effective for discharges occurring on or 

after October 1 each year. As discussed 

earlier, the patient classification system 

for the LTCH PPS (LTC–DRGs) is based 

on the IPPS patient classification system 

(CMS–DRGs), which had historically 

been updated annually and was 

effective for discharges occurring on or 

after October 1 through September 30 

each year. 

5730 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

Recently, the ICD–9–CM coding 

update process has been revised as 

discussed in greater detail in the FY 

2005 IPPS final rule (69 FR 48954–

48957). Specifically, section 503(a) of 

Pub. L. 108–173 includes a requirement 

for updating ICD–9–CM codes twice a 

year instead of the current process of 

annual updates on October 1 of each 

year. This requirement is included as 

part of the amendments to the Act 

relating to recognition of new medical 

technology under the IPPS. Section 

503(a) of Pub. L. 108–173 amended 

section 1886(d)(5)(K) of the Act by 

adding a new clause (vii) which states 

that ‘‘the Secretary shall provide for the 

addition of new diagnosis and 

procedure codes by April 1 of each year, 

but the addition of such codes shall not 

require the Secretary to adjust the 

payment (or diagnosis-related group 

classification) * * * until the fiscal year 

that begins after such date.’’ This 

requirement will improve the 

recognition of new technologies under 

the IPPS by accounting for the 

GROUPER software at an earlier date. 

Despite the fact that aspects of the 

GROUPER software may be updated to 

recognize any new technology codes, 

there will be no impact on either LTC–

DRG assignments or payments under the 

LTCH PPS. That is, no new LTC–DRGs 

will be created or deleted and the 

relative weights will remain the same. 

In the August 30, 2002 final rule (67 

FR 55984), when we established the 

LTCH PPS, we determined that the 

DRG-based patient classification system 

for the LTCH PPS would use the same 

GROUPER software as the IPPS, and 

therefore would be updated each 

October 1, as set forth in § 412.8(b). In 

the June 6, 2003 LTCH PPS final rule 

(68 FR 34125–34128), when we revised 

the annual rate update for the LTCH 

PPS to a July 1 through June 30 

schedule, we specified that updates of 

the LTC–DRGs and re-weighting of 

LTC–DRG weights would remain linked 

to the IPPS GROUPER update which 

functions on an October 1 through 

September 30 schedule. Therefore, 

under this existing policy, during a 

LTCH PPS rate year, two versions of the 

GROUPER software are utilized for 

purposes of DRG creation or deletion 

and relative weight assignment during 

the LTCH PPS rate year that is 

established each July 1. The updated 

LTC–DRG classifications and relative 

weights in the GROUPER that were 

finalized on October 1, preceding the 

beginning of a LTCH rate year on July 

1, would be in effect with the new 

Federal rate from July 1 through 

September 30. On October 1, the 

updated version of the GROUPER would 

be used from that October 1 through 

June 30. 

The updated DRGs and GROUPER 

software, used by both the IPPS and the 

LTCH PPS, are based on the ICD–9–CM 

codes updated. (The use of the ICD–9–

CM codes in this manner is consistent 

with current usage and the HIPAA 

regulations.) As noted above, 

historically, these codes have been 

published annually in the IPPS 

proposed rule and final rule. Consistent 

with historical approaches taken in the 

IPPS and LTCH PPS, October 1 will 

continue to be the effective date of 

revisions to the CMS DRGs and the 

LTC–DRGs. However, because of the 

statutory changes under Section 503(a) 

of Pub. L. 108–173, new ICD–9–CM 

codes may become effective on both 

October 1 and April 1. In the past, the 

new or revised ICD–9–CM codes were 

not used by the industry for either the 

IPPS or the LTCH PPS until the 

beginning of the Federal fiscal year 

(effective for discharges occurring on or 

after October 1). Beginning with FY 

2005, as we explained above, under the 

authority of Section 503(a) of Pub. L. 

108–173 which amends section 

1886(d)(5)(K) of the Act, there is the 

potential for new ICD–9–CM codes to 

become effective both at the beginning 

of the Federal fiscal year, October 1, and 

also on April 1. As we have already 

noted, a full discussion along with a 

description of the implementation of 

this provision, was published in the 

Federal Register in the FY 2005 IPPS 

final rule (69 FR 48954–48957). We 

want to emphasize, however, that 

although it was established that the 

IPPS GROUPER, which is also used by 

the LTCH PPS, could be calibrated with 

respect to ICD–9–CM codes, two times 

each year, October and April, as 

necessary, to allow the inclusion of new 

codes reflecting new medical 

technologies and procedures for patients 

in acute care hospitals and that, 

therefore, the GROUPER could be 

updated to recognize any new codes in 

April, the inclusion of these new codes 

would not result in the creation or 

deletion of LTC–DRGs or changes in the 

relative weights and, therefore, would 

not affect the DRG assigned by the 

GROUPER for LTC–DRGs, nor payments 

under the LTCH PPS.

As noted above, updates to the 

GROUPER for both the IPPS and the 

LTCH PPS (with respect to relative 

weights and the creation or deletion of 

DRGs) are made in the annual IPPS 

proposed and final rules and are 

effective each October 1. We explained 

in the FY 2005 IPPS final rule (69 FR 

48956), that since we do not publish a 

mid-year IPPS rule, April 1 code 

updates discussed above will not be 

published in a mid-year IPPS rule. 

Rather, we will assign any new 

diagnostic or procedure codes to the 

same DRG in which its predecessor code 

was assigned, so that there will be no 

impact on the DRG assignment. Any 

proposed coding updates will be 

available through the Web sites 

indicated in the FY 2005 IPPS final rule 

(69 FR 48956) and provided below in 

section III.E.2. of this preamble and 

through the Coding Clinic for ICD–9–

CM. Publishers and software vendors 

currently obtain code changes through 

these sources in order to update their 

code books and software systems. If new 

codes are implemented on April 1, 

revised code books and software 

systems, including the GROUPER 

software program, will be necessary 

because we must use current ICD–9–CM 

codes. Therefore, for purposes of the 

LTCH PPS, since each ICD–9–CM code 

must be included in the GROUPER 

algorithm to classify each case into a 

LTC–DRG, the GROUPER software 

program used under the LTCH PPS 

would need to be revised to 

accommodate any new codes. 

As mentioned above, however, an 

April 1 update of the ICD–9–CM codes 

would only result in a change to the 

CMS DRG GROUPER software program 

effective April 1, so that it will 

recognize the new technology code and 

assign it to the appropriate DRG, but 

will not result in a change to the relative 

weights used under either the IPPS or 

the LTCH PPS, respectively. Consistent 

with our current practice, any changes 

to the DRGs or relative weights will be 

made at the beginning of the next 

Federal fiscal year (October 1). 

As specified in the May 7, 2004 LTCH 

PPS final rule (69 FR 25674) and the FY 

2005 IPPS final rule (69 FR 48982), and 

discussed above, we annually update to 

the LTCH PPS payment rates effective 

from July 1 through June 30 each year. 

As a result, the LTCH PPS currently 

uses two GROUPER software programs 

during a LTCH PPS rate year (July 1 

through June 30): one GROUPER for 3 

months (from July 1 through September 

30); and an updated GROUPER for 9 

months (from October 1 through June 

30). The need to use two GROUPERs 

was based upon the October 1 effective 

date of the updated ICD–9–CM coding 

system. As previously discussed, new 

ICD–9–CM codes may result in changes 

to the structure of the DRGs caused by 

mapping the new codes to existing 

DRGs. In order for the industry to be on 

the same schedule (for both the IPPS 

and the LTCH PPS) for the use of the 

most current ICD–9–CM codes, it had

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5731

been necessary for us to apply two 

GROUPER programs under the LTCH 

PPS. 

With the potential addition of new 

codes effective on April 1, the LTCH 

PPS may now use three GROUPER 

programs during the LTCH PPS rate year 

(July 1 through June 30), if new 

diagnosis and procedure codes are 

added on April 1. Specifically, one 

GROUPER (GROUPER 1) would be used 

for the first 3 months (from July 1 

through September 30); a second 

GROUPER (GROUPER 2) would be used 

for the next 6 months (from October 1 

through March 31); and the third 

GROUPER (GROUPER 3) would be used 

for the last 3 months (from April 1 

through June 30). The need to use three 

GROUPER software programs during a 

single LTCH PPS rate year in the event 

of an April 1 ICD–9–CM code update is 

because it is necessary to use the 

updated ICD–9–CM codes (as explained 

above) in order to classify each case into 

a LTC–DRG for payment purposes. The 

change from GROUPER 1 to GROUPER 

2 (on October 1) would coincide with 

the annual update to the LTC–DRGs and 

relative weights under § 412.517, which 

would be effective for that entire 

Federal fiscal year, just as it has been 

since we implemented the LTCH PPS. 

The change from GROUPER 2 to 

GROUPER 3 (on April 1) would only 

update the CMS DRG structure by 

mapping the new code to an existing 

DRG, and would not result in the 

addition or deletion of any DRGs nor 

would it result in a change to the LTC–

DRG relative weights. If no new 

diagnoses or procedure codes are added 

on April 1, however, there would be no 

need to update the GROUPER and we 

would continue to use 2 GROUPERs 

during the course of a LTCH PPS rate 

year as is currently done. But even with 

an April 1 update to the ICD–9–CM 

codes (and consequently the GROUPER 

software), only two sets of LTC–DRG 

relative weights will be used during a 

LTCH PPS rate year (July 1 through June 

30), one set from July 1 though 

September 30 and a second set from 

October 1 through June 30, just as we 

have done since we moved the annual 

LTCH PPS update to July 1 (effective 

beginning July 1, 2003). 

As we discussed in the FY 2005 IPPS 

final rule (69 FR 48956), in 

implementing section 503(a) of Pub. L. 

108–173, there will only be an April 1 

update if new technology codes are 

requested and approved. In that same 

IPPS final rule, we specified that there 

are no new codes for April 1, 2005 

implementation. However, if new codes 

had been approved for April 1, 2005 

implementation, the subsequent 

changes to the DRG structure (that is, 

the mapping of the new codes to 

existing DRGs), but not to FY 2005 LTC–

DRG relative weights and, consequently, 

LTCH PPS payment rates, would have 

resulted in the use of a third GROUPER 

during the 2005 LTCH PPS rate year. 

However, as noted above, since there are 

no new codes for April 1, 2005 

implementation, and the next update to 

the ICD–9–CM coding system will not 

occur until October 1, 2005, only two 

GROUPER software programs will be 

used during the 2005 LTCH PPS rate 

year (July 1, 2004 through June 30, 

2005): one GROUPER from July 1, 2004 

through September 30, 2004, and a 

second GROUPER from October 1, 2004 

through June 30, 2005. 

Discharges beginning on October 1, 

2004 and before October 1, 2005 

(Federal FY 2005) are using Version 

22.0 of the GROUPER software for both 

the IPPS and the LTCH PPS. Consistent 

with our current practice, any changes 

to the DRGs or relative weights will be 

made at the beginning of the Federal 

fiscal year (October 1). We will notify 

LTCHs of any revised LTC–DRG relative 

weights based on the final DRGs and the 

applicable GROUPER version for the 

IPPS that will be effective October 1, 

2005. Furthermore, as discussed above, 

we would notify LTCHs of any revisions 

to the CMS GROUPER that would be 

implemented April 1, 2006. 

E. ICD–9–CM Coding System 

1. Uniform Hospital Discharge Data Set 

(UHDDS) Definitions 

Because the assignment of a case to a 

particular LTC–DRG will help 

determine the amount that will be paid 

for the case, it is important that the 

coding is accurate. Classifications and 

terminology used in the LTCH PPS are 

consistent with the ICD–9–CM and the 

UHDDS, as recommended to the 

Secretary by the National Committee on 

Vital and Health Statistics (‘‘Uniform 

Hospital Discharge Data: Minimum Data 

Set, National Center for Health 

Statistics, April 1980’’) and as revised in 

1984 by the Health Information Policy 

Council (HIPC) of the U.S. Department 

of Health and Human Services.

We point out that the ICD–9–CM 

coding terminology and the definitions 

of principal and other diagnoses of the 

UHDDS are consistent with the 

requirements of the HIPAA 

Administrative Simplification Act of 

1996 (45 CFR Part 162). Furthermore, 

the UHDDS has been used as a standard 

for the development of policies and 

programs related to hospital discharge 

statistics by both governmental and 

nongovernmental sectors for over 30 

years. In addition, the following 

definitions (as described in the 1984 

Revision of the UHDDS, approved by 

the Secretary of Health and Human 

Services for use starting January 1986) 

are requirements of the ICD–9–CM 

coding system, and have been used as 

a standard for the development of the 

CMS–DRGs: 

• Diagnoses are defined to include all 

diagnoses that affect the current hospital 

stay. 

• Principal diagnosis is defined as the 

condition established after study to be 

chiefly responsible for occasioning the 

admission of the patient to the hospital 

for care. 

• Other diagnoses (also called 

secondary diagnoses or additional 

diagnoses) are defined as all conditions 

that coexist at the time of admission, 

that develop subsequently, or that affect 

the treatment received or the length of 

stay or both. Diagnoses that relate to an 

earlier episode of care that have no 

bearing on the current hospital stay are 

excluded. 

• All procedures performed will be 

reported. This includes those that are 

surgical in nature, carry a procedural 

risk, carry an anesthetic risk, or require 

specialized training. 

We provide LTCHs with a 60-day 

window after the date of the notice of 

the initial LTC–DRG assignment to 

request review of that assignment. 

Additional information may be 

provided by the LTCH to the fiscal 

intermediary as part of that review. 

2. Maintenance of the ICD–9–CM 

Coding System 

The ICD–9–CM Coordination and 

Maintenance (C&M) Committee is a 

Federal interdepartmental committee, 

co-chaired by the National Center for 

Health Statistics (NCHS) and CMS, that 

is, charged with maintaining and 

updating the ICD–9–CM system. The 

C&M Committee is jointly responsible 

for approving coding changes, and 

developing errata, addenda, and other 

modifications to the ICD–9–CM to 

reflect newly developed procedures and 

technologies and newly identified 

diseases. The C&M Committee is also 

responsible for promoting the use of 

Federal and non-Federal educational 

programs and other communication 

techniques with a view toward 

standardizing coding applications and 

upgrading the quality of the 

classification system. 

The NCHS has lead responsibility for 

the ICD–9–CM diagnosis codes included 

in the Tabular List and Alphabetic 

Index for Diseases, while CMS has lead 

responsibility for the ICD–9–CM 

procedure codes included in the 

5732 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

Tabular List and Alphabetic Index for 

Procedures. 

The C&M Committee encourages 

participation by health-related 

organizations in the above process and 

holds public meetings for discussion of 

educational issues and proposed coding 

changes twice a year at the CMS Central 

Office located in Baltimore, Maryland. 

The agenda and dates of the meetings 

can be accessed on our Web site at: 

http://www.cms.gov/paymentsystems/

icd9. 

As discussed above, section 503(a) of 

Pub. L. 108–173 includes a requirement 

for updating ICD–9–CM codes twice a 

year instead of the current process of 

annual updates on October 1 of each 

year. This requirement will improve the 

recognition of new technologies under 

the IPPS by accounting for them in the 

GROUPER software at an earlier date. 

Because this new statutory requirement 

could have a significant impact on 

health care providers, coding staff, 

publishers, system maintainers, and 

software systems, among others, we 

solicited comments on our proposed 

provisions to implement this 

requirement as part of the FY 2005 IPPS 

proposed rule (69 FR 28220–28221). We 

responded to comments and published 

our new policy regarding the updating 

of ICD–9–CM codes in the FY 2005 IPPS 

final rule (69 FR 48954–48957). 

While this new requirement states 

that the Secretary shall not adjust the 

payment of the DRG classification for 

any codes created for use on April 1, 

DRG software and other systems will 

have to be updated in order to recognize 

and accept the new codes. Because, as 

discussed above, the LTC–DRGs are the 

same DRGs used under the IPPS, this 

means that the Medicare GROUPER 

software program used under both the 

IPPS and the LTCH PPS would need to 

be revised to reflect ICD–9–CM codes, if 

any coding changes were implemented 

on April 1. Furthermore, although the 

CMS GROUPER software used under 

both the IPPS and the LTCH PPS would 

need to be revised to accommodate the 

new codes effective April 1, there would 

be no additions or deletions of DRGs nor 

would the relative weights used under 

the IPPS and the LTCH PPS, 

respectively, be changed until the 

annual update October 1 (to the extent 

that those changes are warranted), just 

as they have been historically updated. 

As the LTCH PPS is based on the IPPS, 

we will adopt the same approach used 

under the IPPS for potential April 1 

ICD–9–CM coding changes. That is, we 

will assign any new diagnosis codes or 

procedure codes to the same DRG in 

which its predecessor code was 

assigned, so there will be no DRG 

impact in terms of potential DRG 

assignment until the following October 

1. We will maintain the current method 

of publicizing any new code changes, as 

noted below. Current addendum and 

code title information is published on 

the CMS Web page at: http://

www.cms.hhs.gov/paymentsystem/icd9. 

Summary tables showing new, revised, 

and deleted code titles are also posted 

on the following CMS Web page:

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

icd9code.asp. Information on ICD–9–

CM diagnosis codes can be found at 

http://www.cdc.gov/nchs/icd9.htm. 

Information on new, revised, and 

deleted ICD–9–CM codes is also 

available in the AHA publication 

Coding Clinic for ICD–9–CM. AHA also 

distributes information to publishers 

and software vendors. We also send 

copies of all ICD–9–CM coding changes 

to our contractors for use in updating 

their systems and providing education 

to providers.

If the April 1 changes are made to 

ICD–9–CM diagnosis or procedure 

codes, LTCHs will be required to obtain 

the new codes, coding books, or encoder 

updates, and make other system changes 

in order to capture and report the new 

codes. We indicated in the IPPS final 

rule that we were aware of the 

additional burden this will have on 

health care providers. 

It should be noted that any new codes 

created for April 1 implementation will 

be limited to those diagnosis and 

procedure code revisions primarily 

needed to describe new technologies 

and medical services. However, we 

reiterate that the process for discussing 

updates to the ICD–9–CM has been an 

open process through the ICD–9–CM 

C&M Committee since 1995. Any 

requestor who makes a clear and 

convincing case for the need to update 

ICD–9–CM codes for purposes of the 

IPPS new technology add-on payment 

process through an April 1 update will 

be given the opportunity to present the 

merits of their proposed new code. 

To reiterate, at the October 2004 C&M 

Committee meeting, no new codes were 

proposed for update on April 1, 2005. 

While no DRG additions or deletions or 

changes to relative weights will occur 

prior to the usual October 1 update, in 

the event any new codes had been 

created to describe new technologies 

and medical services through an April 

1, 2005 update, under our proposed 

policy, LTCH systems would have been 

expected to recognize and report those 

new codes through the channels as 

described above in this section. 

As discussed above, the ICD–9–CM 

coding changes that have been adopted 

by the C&M Committee could become 

effective either at the beginning of each 

Federal fiscal year, October 1, or, in the 

case of codes created to capture new 

technology, April 1 of each year. Coders 

will be expected to use the most current 

updated ICD–9–CM codes, as updated. 

Because we do not publish a mid-year 

IPPS rule, the currently accepted 

avenues of information dissemination 

will be used to inform all ICD–9–CM 

code users of any changes to the coding 

system. These avenues were described 

above in section III.D. of this preamble 

and have been discussed at length in the 

FY 2005 IPPS final rule (69 FR 48956). 

Coders in LTCHs using the updated 

ICD–9–CM coding system will be on the 

same schedule as the rest of the health 

care industry. In the past, the updated 

ICD–9–CM was not available for use 

until October 1 of each year, which is 

5 months after the date that we publish 

the LTCH annual payment rate update 

final rule. 

Therefore, because the LTCH PPS and 

the IPPS uses the identical GROUPER 

software, the LTCH PPS will be directly 

affected by the statutory mandates 

directed at the IPPS, promulgated in 

section 503(a) of Pub. L. 108–173. The 

practical effect of this provision is that 

the GROUPER software must accept 

new ICD–9 codes reflecting the 

incorporation of new technologies into 

inpatient treatment at an acute care 

hospital prior to the scheduled annual 

update of the GROUPER software. 

Despite the fact that there are no 

provisions for additional payments for 

new technology under the LTCH PPS as 

there are under the IPPS, statutory 

compliance requires an alteration of the 

GROUPER software used by both the 

IPPS and the LTCH PPS. While DRG 

assignments would not change from 

October 1 through September 30, it is 

possible that there could be additional 

new ICD–9–CM diagnosis and 

procedure codes during that time, 

which would be assigned to predecessor 

DRGs (as described above). For both the 

IPPS and LTCH coders, it is possible 

that there will be ICD–9–CM codes in 

effect from October 1 through March 31, 

with additional ICD–9–CM codes in 

effect from April 1 through September 

30. Presently, as there were no coding 

changes suggested for an April 1, 2005 

update, the ICD–9–CM coding set 

implemented on October 1, 2004 will 

continue through September 30, 2005 

(FY 2005). 

Of particular note to LTCHs are the 

invalid diagnosis codes (Table 6C) and 

the invalid procedure codes (Table 6D) 

located in the annual proposed and final 

rules for the IPPS. Claims with invalid 

codes are not processed by the Medicare 

claims processing system. 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5733

3. Coding Rules and Use of ICD–9–CM 

Codes in LTCHs 

We emphasize the need for proper 

coding by LTCHs. Inappropriate coding 

of cases can adversely affect the 

uniformity of cases in each LTC–DRG 

and produce inappropriate weighting 

factors at recalibration. We continue to 

urge LTCHs to focus on improved 

coding practices. Because of concerns 

raised by LTCHs concerning correct 

coding, we have asked the American 

Hospital Association (AHA) to provide 

additional clarification or instruction on 

proper coding in the LTCH setting. The 

AHA will provide this instruction via 

their established process of addressing 

questions through their publication 

‘‘Coding Clinic for ICD–9–CM.’’ Written 

questions or requests for clarification 

may be addressed to the Central Office 

on ICD–9–CM, American Hospital 

Association, One North Franklin, 

Chicago, IL 60606. A form for the 

question(s) is available to be 

downloaded and mailed on AHA’s Web 

site at: www.ahacentraloffice.org. In 

addition, current coding guidelines are 

available at the National Center for 

Health Statistics (NCHS) Web site: 

www.cdc.gov/nchs.icd9.htm. 

In conjunction with the cooperating 

parties (AHA, the American Health 

Information Management Association 

(AHIMA), and NCHS), we reviewed 

actual medical records and are 

concerned about the quality of the 

documentation under the LTCH PPS, as 

was the case at the beginning of the 

IPPS. We fully believe that, with 

experience, the quality of the 

documentation and coding will 

improve, just as it did for the IPPS. As 

noted above, the cooperating parties 

have plans to assist their members with 

improvement in documentation and 

coding issues for the LTCHs through 

specific questions and coding 

guidelines. The importance of good 

documentation is emphasized in the 

revised ICD–9–CM Official Guidelines 

for Coding and Reporting: ‘‘A joint effort 

between the attending physician and 

coder is essential to achieve complete 

and accurate documentation, code 

assignment, and reporting of diagnoses 

and procedures. The importance of 

consistent, complete documentation in 

the medical record cannot be 

overemphasized. Without such 

documentation, the application of all 

coding guidelines is a difficult, if not 

impossible, task.’’ (Coding Clinic for 

ICD–9–CM, Fourth Quarter 2002, page 

115)

To improve medical record 

documentation, LTCHs should be aware 

that if the patient is being admitted for 

continuation of treatment of an acute or 

chronic condition, guidelines at Section 

I.B.10 of the Coding Clinic for ICD–9–

CM, Fourth Quarter 2002 (page 129) are 

applicable concerning selection of 

principal diagnosis. To clarify coding 

advice issued in the August 30, 2002 

final rule (67 FR 55979–55981), we 

would like to point out that at Guideline 

I.B.12, Late Effects, a late effect is 

considered to be the residual effect 

(condition produced) after the acute 

phase of an illness or injury has 

terminated (Coding Clinic for ICD–9–

CM, Fourth Quarter 2002, page 129). 

Regarding whether a LTCH should 

report the ICD–9–CM code(s) for an 

unresolved acute condition instead of 

the code(s) for late effect of 

rehabilitation, we emphasize that each 

case must be evaluated on its unique 

circumstances and coded appropriately. 

Depending on the documentation in the 

medical record, either a code reflecting 

the acute condition or rehabilitation 

could be appropriate in a LTCH. 

Since implementation of the LTCH 

PPS, our Medicare fiscal intermediaries 

have been conducting training and 

providing assistance to LTCHs in correct 

coding. We have also issued manuals 

containing procedures as well as coding 

instructions to LTCHs and fiscal 

intermediaries. We will continue to 

conduct such training and provide 

guidance on an as-needed basis. We also 

refer readers to the detailed discussion 

on correct coding practices in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 55979–55981). Additional coding 

instructions and examples will be 

published in Coding Clinic for ICD–9–

CM. 

F. Method for Updating the LTC–DRG 

Relative Weights 

As discussed in the May 7, 2004 

LTCH PPS final rule (68 FR 25681), 

under the LTCH PPS, each LTCH will 

receive a payment that represents an 

appropriate amount for the efficient 

delivery of care to Medicare patients. 

The system must be able to account 

adequately for each LTCH’s case-mix in 

order to ensure both fair distribution of 

Medicare payments and access to 

adequate care for those Medicare 

patients whose care is more costly. 

Therefore, in accordance with 

§ 412.523(c), we adjust the standard 

Federal PPS rate by the LTC–DRG 

relative weights in determining payment 

to LTCHs for each case. 

Under this payment system, relative 

weights for each LTC–DRG are a 

primary element used to account for the 

variations in cost per discharge and 

resource utilization among the payment 

groups (§ 412.515). To ensure that 

Medicare patients who are classified to 

each LTC–DRG have access to an 

appropriate level of services and to 

encourage efficiency, we calculate a 

relative weight for each LTC–DRG that 

represents the resources needed by an 

average inpatient LTCH case in that 

LTC–DRG. For example, cases in a LTC–

DRG with a relative weight of 2 will, on 

average, cost twice as much as cases in 

a LTC–DRG with a weight of 1. 

As we discussed in the FY 2005 IPPS 

final rule (69 FR 48982–49000), the 

LTC–DRG relative weights effective 

under the LTCH PPS for Federal FY 

2005 were calculated using the March 

2004 update of FY 2003 MedPAR data 

and Version 22.0 of the CMS GROUPER 

software. We use total days and total 

charges in the calculation of the LTC–

DRG relative weights. 

By nature, LTCHs often specialize in 

certain areas, such as ventilatordependent patients and rehabilitation 

and wound care. Some case types 

(DRGs) may be treated, to a large extent, 

in hospitals that have, from a 

perspective of charges, relatively high 

(or low) charges. Distribution of cases 

with relatively high (or low) charges in 

specific LTC–DRGs has the potential to 

inappropriately distort the measure of 

average charges. To account for the fact 

that cases may not be randomly 

distributed across LTCHs, we use a 

hospital-specific relative value method 

to calculate relative weights. We believe 

this method removes this hospitalspecific source of bias in measuring 

average charges. Specifically, we reduce 

the impact of the variation in charges 

across providers on any particular LTC–

DRG relative weight by converting each 

LTCH’s charge for a case to a relative 

value based on that LTCH’s average 

charge. (See the FY 2005 IPPS final rule 

(69 FR 48984) for further information on 

the hospital-specific relative value 

methodology.) 

In order to account for LTC–DRGs 

with low volume (that is, with fewer 

than 25 LTCH cases), we grouped those 

low volume LTC–DRGs into one of five 

categories (quintiles) based on average 

charges, for the purposes of determining 

relative weights. For FY 2005 based on 

the FY 2003 MedPAR data, we 

identified 172 LTC–DRGs that contained 

between 1 and 24 cases. This list of low 

volume LTC–DRGs was then divided 

into one of the five low volume 

quintiles, each containing a minimum of 

34 LTC–DRGs (172/5 = 34 with 2 LTC–

DRG as a remainder). Each of the low 

volume LTC–DRGs grouped to a specific 

quintile received the same relative 

weight and average length of stay using 

the formula applied to the regular LTC–

DRGs (25 or more cases), as described 

below. (See the FY 2005 IPPS final rule 

5734 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

(69 FR 48988–48989) for further 

explanation of the development and 

composition of each of the five low 

volume quintiles for FY 2005.)

After grouping the cases in the 

appropriate LTC–DRG, we calculated 

the relative weights by first removing 

statistical outliers and cases with a 

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

adjusted the number of cases in each 

LTC–DRG for the effect of short-stay 

outlier cases under § 412.529. The shortstay adjusted discharges and 

corresponding charges were used to 

calculate ‘‘relative adjusted weights’’ in 

each LTC–DRG using the hospitalspecific relative value method described 

above. (See the FY 2005 IPPS final rule 

(69 FR 48989–48992) for further details 

on the steps for calculating the LTC–

DRG relative weights.) 

We also adjusted the LTC–DRG 

relative weights to account for 

nonmonotonically increasing relative 

weights. That is, we made an 

adjustment if cases classified to the 

LTC–DRG ‘‘with comorbidities (CCs)’’ of 

a ‘‘with CC’’/‘‘without CC’’ pair had a 

lower average charge than the 

corresponding LTC–DRG ‘‘without CCs’’ 

by assigning the same weight to both 

LTC–DRGs in the ‘‘with CC’’/’’without 

CC’’ pair. (See August 11, 2003 IPPS 

final rule, 69 FR 48991–48992.) In 

addition, of the 520 LTC–DRGs in the 

LTCH PPS for FY 2005, based on the FY 

2003 MedPAR data, we identified 171 

LTC–DRGs for which there were no 

LTCH cases in the database. That is, no 

patients who would have been classified 

to those DRGs were treated in LTCHs 

during FY 2003 and, therefore, no 

charge data were reported for those 

DRGs. Thus, in the process of 

determining the relative weights of 

LTC–DRGs, we were unable to 

determine weights for these 171 LTC–

DRGs using the method described 

above. However, since patients with a 

number of the diagnoses under these 

LTC–DRGs may be treated at LTCHs 

beginning in FY 2005, we assigned 

relative weights to each of the 171 ‘‘no 

volume’’ LTC–DRGs based on clinical 

similarity and relative costliness to one 

of the remaining 349 (520¥171=349) 

LTC–DRGs for which we were able to 

determine relative weights, based on the 

FY 2003 claims data. (A list of the novolume LTC–DRGs and further 

explanation of their relative weight 

assignment can be found in the FY 2005 

IPPS final rule (69 FR 48992–48999).) 

Furthermore, for FY 2005, we 

established LTC–DRG relative weights 

of 0.0000 for heart, kidney, liver, lung, 

pancreas, and simultaneous pancreas/

kidney transplants (LTC–DRGs 103, 302, 

480, 495, 512 and 513, respectively) 

because Medicare will only cover these 

procedures if they are performed at a 

hospital that has been certified for the 

specific procedures by Medicare and 

presently no LTCH has been so certified. 

If in the future, however, a LTCH 

applies for certification as a Medicareapproved transplant center, we believe 

that the application and approval 

procedure would allow sufficient time 

for us to propose appropriate weights 

for the LTC–DRGs affected. At the 

present time, though, we included these 

six transplant LTC–DRGs in the 

GROUPER program for administrative 

purposes. As the LTCH PPS uses the 

same GROUPER program for LTCHs as 

is used under the IPPS, removing these 

DRGs would be administratively 

burdensome. 

As we stated in the FY 2005 IPPS 

final rule, we will continue to use the 

same LTC–DRGs and relative weights 

for FY 2005 until October 1, 2005. 

Accordingly, Table 3 in the Addendum 

to this proposed rule lists the LTC–

DRGs and their respective relative 

weights and arithmetic mean length of 

stay that we will continue to use for the 

period of July 1, 2005 through 

September 30, 2005. (This table is the 

same as Table 11 of the Addendum to 

the FY 2005 IPPS final rule (69 FR 

49738–49754), including the revisions 

to Table 11 published in the October 7, 

2004 correction notice (69 FR 60267–

60271)). As we noted above, the next 

update to the ICD–9–CM coding system 

will be presented in the FY 2006 IPPS 

proposed rule (since there were no April 

1 updates to the ICD–9–CM coding 

system) and the final DRGs and 

GROUPER for FY 2006 that will be used 

for the IPPS and the LTCH PPS, 

effective October 1, 2005, will be 

presented in the IPPS FY 2006 proposed 

and final rule in the Federal Register. 

Accordingly, we will notify LTCHs of 

the revised LTC–DRG relative weights 

for use in determining payments for 

discharges occurring between October 1, 

2005 and September 30, 2006 (unless 

there is an April 1, 2006 update to the 

ICD–9–CM coding system, as discussed 

above), based on the final DRGs and the 

applicable GROUPER version that will 

be established in FY 2006 IPPS final 

rule. 

IV. Proposed Changes to the LTCH PPS 

Rates and Proposed Changes in Policy 

for the 2006 LTCH PPS Rate Year 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘PROPOSED CHANGES TO LTCH PPS 

RATES AND POLICY FOR THE 2006 

LTCH PPS RATE YEAR’’ at the 

beginning of your comments.] 

A. Overview of the Development of the 

Payment Rates 

The LTCH PPS was effective for a 

LTCH’s first cost reporting period 

beginning on or after October 1, 2002. 

Effective with that cost reporting period, 

LTCHs are paid, during a 5-year 

transition period, on the basis of an 

increasing proportion of the LTCH PPS 

Federal rate and a decreasing proportion 

of a hospital’s payment under 

reasonable cost-based payment system, 

unless the hospital makes a one-time 

election to receive payment based on 

100 percent of the Federal rate (see

§ 412.533). New LTCHs (as defined at 

§ 412.23(e)(4)) are paid based on 100 

percent of the Federal rate, with no 

phase-in transition payments. 

The basic methodology for 

determining LTCH PPS Federal 

prospective payment rates is set forth in 

the regulations at §§ 412.515 through 

412.532. Below we discuss the proposed 

factors that would be used to update the 

LTCH PPS standard Federal rate for the 

2006 LTCH PPS rate year that would be 

effective for LTCHs discharges occurring 

on or after July 1, 2005 through June 30, 

2006. When we implemented the LTCH 

PPS in the August 30, 2002 LTCH PPS 

final rule (67 FR 56029–56031), we 

computed the LTCH PPS standard 

Federal payment rate for FY 2003 by 

updating the best available (FY 1998 or 

FY 1999) Medicare inpatient operating 

and capital costs per case data, using the 

excluded hospital market basket.

Section 123(a)(1) of Pub. L. 106–113 

requires that the PPS developed for 

LTCHs be budget neutral. Therefore, in 

calculating the standard Federal rate 

under § 412.523(d)(2), we set total 

estimated LTCH PPS payments equal to 

estimated payments that would have 

been made under the reasonable costbased payment methodology had the 

PPS for LTCHs not been implemented. 

Section 307(a) of Pub. L. 106–554 

specified that the increases to the 

hospital-specific target amounts and cap 

on the target amounts for LTCHs for FY 

2002 provided for by section 307(a)(1) of 

Pub. L. 106–554 shall not be taken into 

account in the development and 

implementation of the LTCH PPS. 

Furthermore, as specified at 

§ 412.523(d)(1), the standard Federal 

rate is reduced by an adjustment factor 

to account for the estimated proportion 

of outlier payments under the LTCH 

PPS to total LTCH PPS payments (8 

percent). For further details on the 

development of the FY 2003 standard 

Federal rate, see the August 30, 2002 

LTCH PPS final rule (67 FR 56027–

56037), for the 2004 LTCH PPS rate year 

rate, see the June 6, 2003 final rule (68 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5735

FR 34122–34190), and for the 2005 

LTCH PPS rate year rate, see the May 7, 

2004 LTCH PPS final rule (69 FR 

25674–25748). Under the existing 

regulations at § 412.523(c)(3)(ii), we 

update the standard Federal rate 

annually to adjust for the most recent 

estimate of the projected increases in 

prices for LTCH inpatient hospital 

services. The proposed update to the 

standard Federal rate for the 2006 LTCH 

PPS rate year is discussed below. 

B. Proposed Update to the Standard 

Federal Rate for the 2006 LTCH PPS 

Rate Year 

As established in the May 7, 2004 

LTCH PPS final rule (69 FR 25683), 

based on the most recent estimate of the 

excluded hospital with capital market 

basket, adjusted to account for the 

change in the LTCH PPS rate year 

update cycle, the current LTCH PPS 

standard Federal rate which is effective 

from July 1, 2004 through June 30, 2005 

(the 2005 LTCH PPS rate year), is 

$36,833.69. 

In the discussion that follows, we 

explain how we developed the proposed 

standard Federal rate for the 2006 LTCH 

PPS rate year. The proposed standard 

Federal rate for the 2006 LTCH PPS rate 

year would be calculated based on the 

update factor of 1.031. Thus, the 

proposed standard Federal rate for the 

2006 LTCH PPS rate year would 

increase 3.1 percent compared to the 

2005 LTCH PPS rate year standard 

Federal rate due to the proposed update 

to the LTCH PPS Federal rate. 

1. Proposed Standard Federal Rate 

Update 

Under § 412.523, the annual update to 

the LTCH PPS standard Federal rate 

must be equal to the percentage change 

in the excluded hospital with capital 

market basket (described in further 

detail below). As we discussed in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 56087), in the future we may 

propose to develop a framework to 

update payments to LTCHs that would 

account for other appropriate factors 

that affect the efficient delivery of 

services and care provided to Medicare 

patients. As we discussed in the May 7, 

2004 final rule (69 FR 25674), because 

the LTCH PPS has only been 

implemented for slightly more than 2 

years (that is, for cost reporting periods 

beginning on or after October 1, 2002), 

we have not yet collected sufficient data 

to allow for the analysis and 

development of an update framework 

under the LTCH PPS. Therefore, we are 

not addressing an update framework for 

the 2006 LTCH PPS rate year in this 

proposed rule. However, we note that a 

conceptual basis for the proposal of 

developing an update framework in the 

future can be found in Appendix B of 

the August 30, 2002 LTCH PPS final 

rule (67 FR 56086–56090). 

a. Description of the Proposed Market 

Basket for LTCHs for the 2006 LTCH 

PPS Rate Year. A market basket has 

historically been used in the Medicare 

program to account for price increases 

of the services furnished by providers. 

The market basket used for the LTCH 

PPS includes both operating and 

capital-related costs of LTCHs because 

the LTCH PPS uses a single payment 

rate for both operating and capitalrelated costs. The development of the 

LTCH PPS standard Federal rate is 

discussed in further detail in the August 

30, 2002 LTCH PPS final rule (67 FR 

56027–56037).

Under the reasonable cost-based 

payment system, the excluded hospital 

market basket was used to update the 

hospital-specific limits on payment for 

operating costs of LTCHs. Currently, the 

excluded hospital market basket is 

based on operating costs from cost 

report data from FY 1997 and includes 

data from Medicare-participating longterm care, rehabilitation, psychiatric, 

cancer, and children’s hospitals. Since 

LTCHs’ costs are included in the 

excluded hospital market basket, this 

market basket index, in part, also 

reflects the costs of LTCHs. However, in 

order to capture the total costs 

(operating and capital-related) of 

LTCHs, we added a capital component 

to the excluded hospital market basket 

for use under the LTCH PPS. We refer 

to this index as the excluded hospital 

with capital market basket. 

As we discussed in the August 30, 

2002 LTCH PPS final rule (67 FR 56016 

and 56086), beginning with the 

implementation of the LTCH PPS in FY 

2003, the excluded hospital with capital 

market basket, based on FY 1992 

Medicare cost report data, has been used 

for updating payments to LTCHs. In the 

May 7, 2004 LTCH PPS final rule (69 FR 

25683), we revised and rebased the 

excluded hospital with capital market 

basket, using more recent data, that is, 

using FY 1997 base year data beginning 

with the 2004 LTCH PPS rate year. (For 

further details on the development of 

the FY 1997-based LTCH PPS market 

basket, see the May 7, 2004 LTCH PPS 

final rule (69 FR 25683)). 

In the August 30, 2002 LTCH PPS 

final rule (67 FR 56016 and 56085–

56086), we discussed why we believe 

the excluded hospital with capital 

market basket provides a reasonable 

measure of the price changes facing 

LTCHs. In the May 7, 2004 LTCH PPS 

final rule (69 FR 25682–25683), we 

discussed our research into the 

feasibility of developing a market basket 

specific to LTCH services. However, 

based on this research, we did not 

develop a market basket specific to 

LTCH services. In that same final rule, 

we explained why we continue to 

believe that the excluded hospital with 

capital market basket is the appropriate 

market basket for the LTCH PPS. 

For the reasons discussed in those 

final rules (August 30, 2002 and May 7, 

2004), we continue to believe that an 

excluded hospital with capital market 

basket adequately reflects the price 

changes facing LTCHs. Therefore, in this 

proposed rule, we are proposing to 

continue to use the FY 1997-based 

excluded hospital with capital market 

basket as the LTCH PPS market basket 

for determining the proposed update to 

the LTCH PPS standard Federal rate for 

the 2006 LTCH PPS rate year. We 

continue to solicit comments about 

issues particular to LTCHs that should 

be considered in relation to the FY 

1997-based excluded hospital with 

capital market basket and to encourage 

suggestions for additional data sources 

that may be available. 

b. Proposed LTCH Market Basket 

Increase for the 2006 LTCH Rate Year.

As we discussed in the May 7, 2004 

LTCH PPS final rule (69 FR 25683), for 

the update to the 2005 LTCH PPS rate 

year, we calculated the estimated 

increase between the 2004 LTCH PPS 

rate year (July 1, 2003 through June 30, 

2004) and the 2005 LTCH PPS rate year 

(July 1, 2004 through June 30, 2005) 

based on Global Insight’s forecast of the 

revised and rebased FY 1997-based 

excluded hospital with capital market 

basket using data available through the 

fourth quarter of 2003. The market 

basket for the 2005 LTCH PPS rate year 

was 3.1 percent (69 FR 25683). 

Consistent with our historical practice 

of estimating market basket increases 

based on Global Insight’s forecast of the 

FY 1997-based excluded hospital with 

capital market basket using more recent 

data through the third quarter of 2004, 

we are proposing a 3.1 percent update 

to the Federal rate for the 2006 LTCH 

PPS rate year. In accordance with 

§ 412.523, this proposed update would 

represent the most recent estimate of the 

increase in the excluded hospital with 

capital market basket for the 2006 LTCH 

PPS rate year. 

2. Proposed Standard Federal Rate for 

the 2006 LTCH PPS Rate Year 

In the May 7, 2004 LTCH PPS final 

rule (69 FR 25683), we established a 

standard Federal rate of $36,833.69 for 

the 2005 LTCH PPS rate year that was 

5736 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

based on the best available data and 

policies established in that final rule. 

In this proposed rule, in accordance 

with § 412.523, we are proposing to 

establish a standard Federal rate of 

$37,975.53 based on the most recent 

estimate of the LTCH PPS market basket 

of 3.1 percent. Since the proposed 

standard Federal rate for the 2006 LTCH 

PPS rate year has already been adjusted 

for differences in case-mix, wages, costof-living, and high-cost outlier 

payments, we are not proposing to make 

any additional adjustments in the 

proposed standard Federal rate for these 

factors. 

C. Proposed Calculation of Proposed 

LTCH Prospective Payments for the 

2006 LTCH PPS Rate Year 

The basic methodology for 

determining prospective payment rates 

for LTCH inpatient operating and 

capital-related costs is set forth in 

§ 412.515 through § 412.532. In 

accordance with § 412.515, we assign 

appropriate weighting factors to each 

LTC–DRG to reflect the estimated 

relative cost of hospital resources used 

for discharges within that group as 

compared to discharges classified 

within other groups. The amount of the 

prospective payment is based on the 

standard Federal rate, established under 

§ 412.523, and adjusted for the LTC–

DRG relative weights, differences in area 

wage levels, cost-of-living in Alaska and 

Hawaii, high-cost outliers, and other 

special payment provisions (short-stay 

outliers under § 412.529 and interrupted 

stays under § 412.531). 

In accordance with § 412.533, during 

the 5-year transition period, payment is 

based on the applicable transition blend 

percentage of the adjusted Federal rate 

and the reasonable cost-based payment 

rate unless the LTCH makes a one-time 

election to receive payment based on 

100 percent of the Federal rate. A LTCH 

defined as ‘‘new’’ under § 412.23(e)(4) is 

paid based on 100 percent of the Federal 

rate with no blended transition 

payments (§ 412.533(d)). As discussed 

in the August 30, 2002 final rule (67 FR 

56038), and in accordance with 

§ 412.533(a), the applicable transition 

blends are as follows:

Cost reporting periods

beginning on or after Federal rate percentage 

Reasonable cost-based 

payment rate

percentage 

October 1, 2002 ....................................................................................................................... 20 80 

October 1, 2003 ....................................................................................................................... 40 60 

October 1, 2004 ....................................................................................................................... 60 40 

October 1, 2005 ....................................................................................................................... 80 20 

October 1, 2006 ....................................................................................................................... 100 0 

Accordingly, for cost reporting 

periods beginning during FY 2005 (that 

is, on or after October 1, 2004, and 

before September 30, 2005), blended 

payments under the transition 

methodology are based on 40 percent of 

the LTCH’s reasonable cost-based 

payment rate and 60 percent of the 

adjusted LTCH PPS Federal rate. For 

cost reporting periods that begin during 

FY 2006 (that is, on or after October 1, 

2005 and before September 30, 2006), 

blended payments under the transition 

methodology will be based on 20 

percent of the LTCH’s reasonable costbased payment rate and 80 percent of 

the adjusted LTCH PPS Federal rate. 

1. Proposed Adjustment for Area Wage 

Levels 

a. Background. Under the authority of 

section 307(b) of Pub. L. 106–554, we 

established an adjustment to the LTCH 

PPS Federal rate to account for 

differences in LTCH area wage levels at 

§ 412.525(c). The labor-related share of 

the LTCH PPS Federal rate, estimated by 

the excluded hospital with capital 

market basket, is adjusted to account for 

geographic differences in area wage 

levels by applying the applicable LTCH 

PPS wage index. The applicable LTCH 

PPS wage index is computed using wage 

data from inpatient acute care hospitals 

without regard to reclassification under 

section 1886(d)(8) or section 1886(d)(10) 

of the Act. Furthermore, as we 

discussed in the August 30, 2002 LTCH 

PPS final rule (67 FR 56015–56019), we 

established a 5-year transition to the full 

wage adjustment. The applicable wage 

index phase-in percentages are based on 

the start of a LTCH’s cost reporting 

period as shown in the following table:

Cost reporting periods beginning on or after 

Phase-in percentage of the 

full wage index 

(percent) 

October 1, 2002 ............... 1/5th (20).

October 1, 2003 ............... 2/5ths (40).

October 1, 2004 ............... 3/5ths (60).

October 1, 2005 ............... 4/5ths (80).

October 1, 2006 ............... 5/5ths (100).

For example, for cost reporting 

periods beginning on or after October 1, 

2004 and before September 30, 2005 (FY 

2005), the applicable LTCH wage index 

value is three-fifths of the applicable 

full LTCH PPS wage index value. 

Similarly, for cost reporting periods 

beginning on or after October 1, 2005 

and before September 30, 2006 (FY 

2006), the applicable LTCH wage index 

value will be four-fifths of the 

applicable full LTCH PPS wage index 

value. As we established in the August 

30, 2002 LTCH PPS final rule (67 FR 

56018), the applicable full LTCH PPS 

wage index value is calculated from 

acute-care hospital inpatient wage index 

data without taking into account 

geographic reclassification under 

sections 1886(d)(8) and (d)(10) of the 

Act. 

In that same final rule (67 FR 56018), 

we stated that we would continue to 

reevaluate LTCH data as they become 

available and would propose to adjust 

the phase-in if subsequent data support 

a change. As we discussed in the May 

7, 2004 LTCH PPS final rule (69 FR 

25674), because the LTCH PPS has only 

been recently implemented (slightly 

over 2 years) and because of the lag time 

in availability of cost report data, 

sufficient new data have not been 

generated that would enable us to 

conduct a comprehensive reevaluation 

of the appropriateness of adjusting the 

phase-in. However, we have reviewed 

the most recent data (FY 2001–FY 2003) 

available and did not find any evidence 

to support a change in the 5-year phasein of the wage index. Specifically, our 

statistical analysis still does not show a 

significant relationship between LTCHs’ 

costs and their geographic location. 

Therefore, in this proposed rule, we are 

not proposing a change in the phase-in 

of the adjustment for area wage levels 

under § 412.525(c). 

b. Proposed Labor-Related Share. In 

the August 30, 2002 LTCH PPS final 

rule (67 FR 56016), we established a 

labor-related share of 72.885 percent 

based on the relative importance of the 

labor-related share of operating costs 

(wages and salaries, employee benefits, 

professional fees, postal services, and all 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5737

other labor-intensive services) and 

capital costs of the excluded hospital 

with capital market basket based on FY 

1992 data. In the March 7, 2003 

proposed rule (68 FR 11249–11250), in 

conjunction with our revision and 

rebasing of the excluded hospital with 

capital market basket from a FY 1992 to 

a FY 1997 base year, we discussed 

revising the labor-related share based on 

the relative importance of the laborrelated share of operating and capital 

costs of the excluded hospital with 

capital market basket based on FY 1997 

data. However, in the June 6, 2003 final 

rule (68 FR 34142), while we adopted 

the revised and rebased FY 1997-based 

LTCH PPS market basket as the LTCH 

PPS update factor for the 2004 LTCH 

PPS rate year, we decided not to update 

the labor-related share under the LTCH 

PPS pending further analysis of the 

current labor share methodology. 

In the August 1, 2002 IPPS final rule, 

we did not update the IPPS or excluded 

hospital labor-related shares for FY 2003 

(67 FR 50041–50042), and we discussed 

our research into the appropriateness of 

this policy. Specifically, we discussed 

the methods that we were reviewing for 

establishing the labor-related share and 

our intention to continue to explore all 

options for alternative data and a 

methodology for determining the laborrelated share. We also stated that we 

would propose to update the IPPS and 

excluded hospital labor-related shares, 

if necessary, once our research is 

complete. 

As we discussed in greater detail in 

the May 7, 2004 LTCH PPS final rule (69 

FR 25685–25686), the LTCH PPS was 

modeled after the IPPS for short-term, 

acute care hospitals. Specifically, the 

LTCH PPS uses the same patient 

classification system (CMS–DRGs) as 

the IPPS, and many of the case-level and 

facility-level adjustments explored or 

adopted for the LTCH PPS are payment 

adjustments under the IPPS (69 FR 

25686). In fact, LTCHs are certified as 

acute care hospitals to participate as a 

hospital in the Medicare program, and 

in general, qualify for payment under 

the LTCH PPS instead of the IPPS solely 

because their Medicare inpatient 

average length of stay is greater than 25 

days (69 FR 25686). In addition, prior to 

qualifying as a LTCH, hospitals 

generally are paid under the IPPS 

during the period in which they 

demonstrate that they have an average 

Medicare inpatient length of stay of 

greater than 25 days (69 FR 25686).

The primary reason that we did not 

update the LTCH PPS labor-related 

share for the 2004 and 2005 LTCH PPS 

rate years was the same reason that we 

explained for not updating the laborrelated share under the IPPS for FY 

2004 (see August 1, 2003; 68 FR 27226) 

and FY 2005 (see FY 2005 IPPS final 

rule (69 FR 49069)), which are equally 

applicable to the LTCH PPS. As we 

noted above, and as we explained in the 

May 7, 2004 LTCH PPS final rule (69 FR 

5686), we did not revise the laborrelated share under the IPPS based on 

the revised and rebased FY 1997 

hospital market basket and the excluded 

hospital market basket because of data 

and methodological concerns. We 

indicated that we would conduct further 

analysis to determine the most 

appropriate methodology and data for 

determining the labor-related share. 

The IPPS labor-related share of 71.066 

percent was established in the August 

29, 1997 IPPS final rule (62 FR 45995), 

effective for IPPS discharges occurring 

on or after October 1, 1997 (FY 1998). 

This (71.066 percent) is the most recent 

estimate of ‘‘the proportion (as 

estimated by CMS from time to time) of 

Federal rates’’ under the IPPS adjusted 

to account for different area wage levels 

and labor-related costs (§ 412.62(k)). As 

also explained in the August 29, 1997 

IPPS final rule (62 FR 45995), the laborrelated portion of the IPPS operating 

standardized amounts is determined by 

summing the labor-related items of the 

revised 1992-based operating 

prospective payment hospital market 

basket (that is, wages and salaries, 

employee benefits, professional fees, 

business services, computer and data 

processing services, postage, and all 

other labor intensive services). This is 

the same methodology used to 

determine the operating portion of the 

current LTCH PPS labor-related share 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 56016), 

which is effective for LTCH PPS 

discharges occurring in cost reporting 

periods beginning on or after October 1, 

2002 (FY 2003). (Note, as discussed in 

the August 30, 2002 LTCH PPS final 

rule (67 FR 56016), because the LTCH 

PPS standard Federal rate includes both 

operating and capital costs, the LTCH 

PPS labor-related share includes the 

labor-related share of capital costs as 

well as the labor-related share of 

operating costs.) 

As noted above, the IPPS labor-related 

share of 71.066 percent became effective 

for IPPS discharges occurring on after 

October 1, 1997. As we also discussed 

in the May 7, 2004 LTCH PPS final rule 

(69 FR 25686), for purposes of payment 

under the IPPS, section 403 of Pub. L. 

108–173 amended section 1886(d) of the 

Act to provide that for discharges 

occurring on or after October 1, 2004, 

the Secretary must employ 62 percent as 

the labor-related share under the IPPS, 

unless this ‘‘would result in lower 

payments to a hospital than would 

otherwise be made.’’ That is, beginning 

in FY 2005 under the IPPS, the laborrelated share remains 71.066 percent for 

acute-care hospitals with a wage index 

greater than 1.0, while the labor-related 

share is equal to 62 percent for acutecare hospitals under the IPPS with a 

wage index less than or equal to 1.0 (69 

FR 49070). This alternative labor-related 

share is only applicable to acute care 

hospitals paid under the IPPS and does 

not apply to LTCHs. 

The current LTCH PPS labor share 

(72.885 percent) was developed using 

the same methodology used to develop 

the existing IPPS labor share (71.066). 

The statutory alternative (62 percent) is 

limited to acute care hospitals paid 

under the IPPS and does not apply to 

hospitals paid under the LTCH PPS. 

Since we had not yet completed the 

research of the labor-share methodology 

used to establish the current IPPS laborrelated share estimated by CMS from 

time (71.066 percent) and the current 

LTCH PPS labor-related share (72.885 

percent), we did not change the LTCH 

PPS labor-share for the 2005 LTCH PPS 

rate year. 

Since we are continuing our research 

into updating the hospital labor-related 

share and because we have not 

implemented a change in the 

methodology for determining both the 

existing IPPS labor-related share 

estimated by CMS from time to time (as 

discussed in the FY 2005 IPPS final rule 

(69 FR 49069–49070)) and the current 

LTCH PPS labor-related share, we are 

not proposing to change the LTCH PPS 

labor-related share at this time. 

Accordingly, we are proposing that the 

labor-related share for the 2006 LTCH 

PPS rate year remain at 72.885 percent. 

As is the case under the IPPS, once our 

research on the labor-related share is 

complete, any future revisions to the 

LTCH PPS labor-related share will be 

proposed and subject to public 

comment in a future rule. 

c. Proposed Revision of LTCH PPS 

Geographic Classifications. As 

discussed in the August 30, 2002 LTCH 

PPS final rule, which implemented the 

LTCH PPS (67 FR 56015), in 

establishing an adjustment for area wage 

levels under § 412.525(c), the laborrelated portion of a LTCH’s Federal 

prospective payment is adjusted by 

using an appropriate wage index. As set 

forth in § 412.525(c), a LTCH’s wage 

index is determined based on the 

location of the LTCH in an urban or 

rural area as defined in § 412.62(f)(1)(ii) 

and (f)(1)(iii), respectively. An urban 

area, under the LTCH PPS, is defined at 

§ 412.62(f)(1)(ii)(A) and (B). In general, 

5738 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

an urban area is defined as a 

Metropolitan Statistical Area (MSA) or 

New England County Metropolitan Area 

(NECMA) as defined by the Office of 

Management and Budget (OMB). (In 

addition, a few counties located outside 

of MSAs are considered urban as 

specified at § 412.62(f)(1)(ii)(B).) Under 

§ 412.62(f)(1)(iii), a rural area is defined 

as any area outside of an urban area. 

The geographic classifications defined 

in § 412.62(f)(1)(ii) and (f)(1)(iii), 

respectively, were used under the IPPS 

from FYs 1984 through 2004 

(§§ 412.62(f) and 412.63(b) ), and have 

been used under the LTCH PPS since it 

was implemented for cost reporting 

periods beginning on or after October 1, 

2002 (FY 2003). 

Under the IPPS, the wage index is 

calculated and assigned to hospitals on 

the basis of the labor market area in 

which the hospital is located or 

geographically reclassified to in 

accordance with sections 1886(d)(8) and 

(d)(10) of the Act. Under the LTCH PPS, 

the wage index is calculated using IPPS 

wage index data (as discussed below in 

section IV.C.1.d of this preamble) on the 

basis of the labor market area in which 

the hospital is located, but without 

taking into account geographic 

reclassification under sections 

1886(d)(8) and (d)(10) of the Act. The 

applicable LTCH wage index value is 

assigned to a LTCH on the basis of the 

labor market area in which the LTCH is 

geographically located.

The current LTCH PPS labor market 

areas are defined based on the 

definitions of MSAs, Primary MSAs 

(PMSAs), and NECMAs issued by the 

OMB (commonly referred to collectively 

as ‘‘MSAs’’). These MSA definitions, 

which are discussed in greater detail 

below, are currently used under the 

LTCH PPS and other non-IPPS 

prospective payment systems (that is, 

the inpatient rehabilitation facility PPS 

(IRF PPS), the inpatient psychiatric 

facility PPS (IPF PPS), the home health 

agency PPS (HHA PPS), and the skilled 

nursing facility PPS (SNF PPS)). In the 

FY 2005 IPPS final rule (67 FR 49026–

49034), revised labor market area 

definitions were adopted under the IPPS 

(§ 412.64(b)), which were effective 

October 1, 2004. These new standards, 

called Core-Based Statistical Areas 

(CBSAs), were announced by the OMB 

late in 2000 and are discussed in greater 

detail below. 

1. Current LTCH PPS Labor Market 

Areas Based on MSAs. Below, we will 

provide a description of the current 

labor markets that have been used for 

area wage adjustments under the LTCH 

PPS since its implementation for cost 

reporting periods beginning on or after 

October 1, 2002. Previously, we have 

not described the labor market areas 

used under the LTCH PPS in detail, 

although we have published each area’s 

wage index in tables, in the LTCH PPS 

final rules, each year and noted the use 

of the geographic area (MSA) in 

applying the wage index adjustment in 

LTCH PPS payment examples in the 

final regulation implementing the LTCH 

PPS (August 30, 2002 67 FR 56037–

56038). The LTCH industry has also 

understood that the same labor market 

areas in use under the IPPS (from the 

time LTCH PPS was implemented, for 

cost reporting periods beginning on or 

after October 1, 2002) would be used 

under the LTCH PPS. Because OMB has 

adopted new statistical area definitions 

(as discussed in greater detail below) 

and we are proposing to adopt new 

labor market area definitions based on 

these areas under the LTCH PPS (as 

discussed in greater detail below), we 

believe it is helpful to provide a more 

detailed description of the current 

LTCH PPS labor market areas, in order 

to better understand the proposed 

change to the LTCH PPS labor market 

areas presented below in this proposed 

rule. 

As mentioned earlier, since the 

implementation of the LTCH PPS in the 

August 30, 2002 LTCH PPS final rule, 

we have used labor market areas to 

further characterize urban and rural 

areas as determined under 

§ 412.62(f)(1)(ii) and (iii). To this end, 

we have defined labor market areas 

under the LTCH PPS based on the 

definitions of MSAs, PMSAs, and 

NECMAs issued by the OMB, which is 

consistent with the IPPS approach. The 

OMB also designates Consolidated 

MSAs (CMSAs). A CMSA is a 

metropolitan area with a population of 

one million or more, comprising two or 

more PMSAs (identified by their 

separate economic and social character). 

For purposes of the wage index, we use 

the PMSAs rather than CMSAs because 

they allow a more precise breakdown of 

labor costs. If a metropolitan area is not 

designated as part of a PMSA, we use 

the applicable MSA. 

These different designations use 

counties as the building blocks upon 

which they are based. Therefore, under 

the LTCH PPS, hospitals are assigned to 

either an MSA, PMSA, or NECMA based 

on whether the county in which the 

LTCH is located is part of that area. All 

of the counties in a State outside a 

designated MSA, PMSA, or NECMA are 

designated as rural. Specifically, for 

purposes of calculating the wage index, 

we currently combine all of the counties 

in a State outside a designated MSA, 

PMSA, or NECMA together to calculate 

the statewide rural wage index for each 

State. The labor market area definitions 

currently used under the LTCH PPS are 

the same as those used for acute care 

inpatient hospitals under the IPPS prior 

to FY 2005 (69 FR 49026). 

2. Core-Based Statistical Areas. The 

OMB reviews its Metropolitan Area 

(MA) definitions preceding each 

decennial census. As discussed in the 

FY 2005 IPPS final rule (69 FR 49027), 

in the fall of 1998, the OMB chartered 

the Metropolitan Area Standards 

Review Committee to examine the MA 

standards and develop 

recommendations for possible changes 

to those standards. Three notices related 

to the review of the standards, providing 

an opportunity for public comment on 

the recommendations of the Committee, 

were published in the Federal Register

on the following dates: December 21, 

1998 (63 FR 70526); October 20, 1999 

(64 FR 56628); and August 22, 2000 (65 

FR 51060). 

In the December 27, 2000 Federal 

Register (65 FR 82228–82238), the OMB 

announced its new standards. In that 

notice, the OMB defines a Core-Based 

Statistical Area (CBSA), beginning in 

2003, as ‘‘a geographic entity associated 

with at least one core of 10,000 or more 

population, plus adjacent territory that 

has a high degree of social and 

economic integration with the core as 

measured by commuting ties. The 

standards designate and define two 

categories of CBSAs: MSAs and 

Micropolitan Statistical Areas.’’ (65 FR 

82236)

According to the OMB, MSAs are 

based on urbanized areas of 50,000 or 

more population, and Micropolitan 

Statistical Areas (referred to in this 

discussion as Micropolitan Areas) are 

based on urban clusters of at least 

10,000 population, but less than 50,000 

population. Counties that do not fall 

within CBSAs (either MSAs or 

Micropolitan Areas) are deemed 

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

defined MSAs around areas with a 

minimum core population of 50,000, 

and smaller areas were ‘‘Outside 

MSAs.’’ On June 6, 2003, the OMB 

announced the new CBSAs, comprised 

of MSAs and the new Micropolitan 

Areas based on Census 2000 data. (A 

copy of the announcement may be 

obtained at the following Internet 

address: http://www.whitehouse.gov/

omb/bulletins/fy04/b04–03.html.) The 

new CBSA designations recognize 49 

new MSAs and 565 new Micropolitan 

Areas, and extensively revise the 

composition of many of the existing 

MSAs. There are 1,090 counties in 

MSAs under the new CBSA 

designations (previously, there were 848 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5739

counties in MSAs). Of these 1,090 

counties, 737 are in the same MSA as 

they were prior to the change in 

designations, 65 are in a different MSA, 

and 288 were not previously designated 

to any MSA. There are 674 counties in 

Micropolitan Areas. Of these, 41 were 

previously in an MSA, while 633 were 

not previously designated to an MSA. 

There are five counties that previously 

were designated to an MSA but are no 

longer designated to either an MSA or 

a new Micropolitan Area: Carter County, 

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

UT; Culpepper County, VA; and King 

George County, VA. For a more detailed 

discussion of the conceptual basis of the 

new CBSAs, refer to the FY 2005 IPPS 

final rule (67 FR 49026–49034). 

3. Proposed Revision of the LTCH PPS 

Labor Market Areas. In its June 6, 2003 

announcement, the OMB cautioned that 

these new definitions ‘‘should not be 

used to develop and implement Federal, 

State, and local nonstatistical programs 

and policies without full consideration 

of the effects of using these definitions 

for such purposes. These areas should 

not serve as a general-purpose 

geographic framework for nonstatistical 

activities, and they may or may not be 

suitable for use in program funding 

formulas.’’

As discussed in the FY 2005 IPPS 

final rule (69 FR 49027), we have 

previously examined alternatives to the 

use of MSAs for the purpose of 

establishing labor market areas for 

Medicare wage indices in general. For 

purposes of the proposed changes to the 

LTCH PPS labor market areas, we 

examined the same alternatives to the 

use of MSAs as examined under the 

IPPS. In the May 27, 1994, IPPS 

proposed rule (59 FR 27724), we 

presented our latest research concerning 

possible future refinements to the labor 

market areas. Specifically, we discussed 

and solicited comment on the proposal 

by the Prospective Payment Assessment 

Commission (ProPAC), a predecessor 

organization to the Medicare Payment 

Advisory Commission (MedPAC), for 

hospital-specific labor market areas 

based on each hospital’s nearest 

neighbors, and our research and 

analysis on alternative labor market 

areas. Even though we found that none 

of the alternative labor market areas that 

we studied provided a distinct 

improvement over the use of MSAs, we 

presented an option using the MSAbased wage index, but generally giving 

a hospital’s own wages a higher weight 

than under the current system. We also 

described for comment a State labor 

market option, under which hospitals 

would be allowed to design labor 

market areas within their own State 

boundaries. 

We described the comments we 

received in the June 2, 1995 IPPS 

proposed rule (60 FR 29219). 

Specifically, as we discussed in that 

same proposed rule, there was no 

consensus among the commenters on 

the choice for new labor market areas. 

Many individual hospitals that 

commented on that proposed rule 

expressed dissatisfaction with all of the 

proposals. However, several State 

hospital associations that commented 

on that proposed rule stated that the 

options merited further study. 

Therefore, at that time we contacted the 

association representatives that 

participated in our November 1993 

meeting on labor market issues in which 

we solicited ideas for additional types of 

labor market research to conduct. None 

of the individuals we contacted 

suggested any ideas for further research. 

After considering these same options for 

the LTCH PPS, we conclude that there 

is no basis for believing that either the 

nearest neighbor option or the State 

labor market option would result in a 

wage index adjustment that would be 

more appropriate for LTCHs than the 

MSA-based wage index adjustment. As 

discussed in the June 2, 1995 IPPS 

proposed rule (60 FR 29219), these 

options could inappropriately reward 

the highest cost hospitals with higher 

wage indexes and there would likely be 

less than full consent by hospitals to 

participate in the alternative options, 

particularly if hospitals face lower 

reimbursement due to the change. 

Consequently, consistent with the 

approach taken under the IPPS, we have 

used MSAs to define labor market areas 

for purposes of Medicare wage indices 

in the LTCH PPS since its 

implementation for cost reporting 

periods beginning on or after October 1, 

2002. In fact, MSAs are also used to 

define labor market areas for purposes 

of the wage index for many of the other 

Medicare payment systems (for 

example, IRF PPS, SNF PPS, HHA PPS, 

Outpatient PPS, and IPF PPS). While we 

recognize MSAs are not designed 

specifically to define labor market areas, 

we believe they do represent a useful 

proxy for this purpose, and our analysis 

and discussion here are focused on 

issues related to adopting the new 

CBSA-based designations to define labor 

market areas for purposes of the IPPS 

and for purposes of proposing them for 

LTCH PPS. 

Historically, Medicare prospective 

payment systems have utilized MA 

definitions developed by the OMB. The 

labor market areas currently used under 

the LTCH PPS (described above in 

section IV.C.1.c.1. of this preamble) are 

based on the MA definitions issued by 

the OMB. As noted above, the OMB 

reviews its MA definitions preceding 

each decennial census to reflect more 

recent population changes. As discussed 

in greater detail above in section 

IV.C.1.c.2., the CBSAs are the OMB’s 

latest MA definitions based on the 

Census 2000 data. Because we believe 

that the OMB’s latest MA designations 

more accurately reflect the local 

economies and wage levels of the areas 

in which hospitals are currently located, 

we adopted revised labor market area 

designations based on the OMB’s CBSA 

designations under the IPPS effective 

October 1, 2004.

When we implemented the wage 

index adjustment at § 412.525(c) under 

the LTCH PPS in the August 30, 2002 

LTCH PPS final rule (67 FR 56016), we 

explained that the LTCH PPS wage 

index adjustment was intended to 

reflect the relative hospital wage levels 

in the geographic area of the hospital as 

compared to the national average 

hospital wage level. Because we believe 

that the OMB’s CBSA designations 

based on Census 2000 data reflect the 

most recent available geographic 

classifications (MA definitions), we are 

proposing to revise the labor market 

area definitions used under the LTCH 

PPS based on the OMB’s CBSA 

designations to ensure that the LTCH 

PPS wage index adjustment most 

appropriately accounts for and reflects 

the relative hospital wage levels in the 

geographic area of the hospital as 

compared to the national average 

hospital wage level. Specifically, we are 

proposing to revise the LTCH PPS labor 

market definitions based on the OMB’s 

new CBSA designations (as discussed in 

greater detail below) effective for LTCH 

PPS discharges occurring on or after 

July 1, 2005. Accordingly, we are 

proposing to revise § 412.525(c) to 

specify that for discharges occurring on 

or after July 1, 2005, the application of 

the wage index under the LTCH PPS 

would be made on the basis of the 

location of the facility in an urban or 

rural area as defined in 

§ 412.64(b)(1)(ii)(A)–(C). (As a 

conforming change, we are also 

proposing to revise § 412.525(c) to state 

that the current labor area definitions in 

the existing § 412.525(c) would be 

effective for discharges occurring in cost 

reporting periods beginning on or after 

October 1, 2002 and before July 1, 2005.) 

We also note that these are the same 

labor market area definitions (based on 

the OMB’s new CBSA designations) 

implemented for acute care inpatient 

hospitals under the IPPS at § 412.64(b), 

which were effective for those hospitals 

5740 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

beginning October 1, 2004 as discussed 

in the FY 2005 IPPS final rule (69 FR 

49026–49034). As discussed above in 

section IV.C.1.b. of this preamble, the 

LTCH PPS was modeled after the IPPS 

for short-term acute care inpatient 

hospitals. The similarity between the 

IPPS and the LTCH PPS includes the 

adoption in the initial implementation 

of the LTCH PPS of the same labor 

market area definitions under the LTCH 

PPS that existed under the IPPS at that 

time, as well as the use of acute care 

inpatient hospitals’ wage data in 

calculating the LTCH PPS wage index. 

Therefore, besides reflecting the most 

recent available geographic 

classifications and, consequently, more 

accurately reflecting the current labor 

markets (which is the primary reason for 

proposing to adopt OMB’s new CBSAbased designations), we believe that 

proposing to revise the LTCH PPS labor 

marker area definitions based on OMB’s 

new CBSA-based designations is also 

consistent with our historical practice of 

modeling LTCH PPS policy after IPPS 

policy. 

Below, we discuss the composition of 

the proposed LTCH PPS labor market 

areas based on the OMB’s new CBSA 

designations. It should be noted that 

OMB’s new CBSA designations are 

comprised of several county-based area 

definitions as explained above, which 

include Metropolitan Areas, 

Micropolitan Areas, and areas ‘‘outside 

CBSAs.’’ Under the LTCH PPS, since the 

implementation of the LTCH PPS, we 

have used two types of labor market 

areas, urban and rural. As discussed in 

greater detail below, in this proposed 

rule, in proposing to adopt revised labor 

market areas under the LTCH PPS based 

on OMB’s new CBSA-based 

designations, we are proposing to 

continue to have 2 types of labor market 

areas (urban and rural). In the 

discussion that follows, we explain our 

proposal to recognize Metropolitan 

Areas, which include New England 

MSAs and Metropolitan Divisions, as 

urban. We also explain our proposal to 

recognize Micropolitan Areas and areas 

‘‘outside CBSAs’’ as rural. The following 

discussion will describe the proposed 

methodology for mapping OMB’s CBSAbased designations into the LTCH PPS 

(urban area or rural area) format. 

a. New England MSAs. As stated 

above, under the LTCH PPS, we 

currently use NECMAs to define labor 

market areas in New England, because 

these are county-based designations 

rather than the 1990 MSA definitions 

for New England, which used minor 

civil divisions such as cities and towns. 

Under the current MSA definitions, 

NECMAs provided more consistency in 

labor market definitions for New 

England compared with the rest of the 

country, where MSAs are county-based. 

Under the new CBSAs, the OMB has 

now defined the MSAs and 

Micropolitan Areas in New England on 

the basis of counties. The OMB also 

established New England City and 

Town Areas, which are similar to the 

previous New England MSAs. 

In order to create consistency across 

all LTCH labor market areas, under the 

LTCH PPS, we are proposing to use the 

county-based areas for all MSAs in the 

nation, including those in New England. 

The OMB has now defined the New 

England area based on counties, creating 

a city- and town-based system as an 

alternative. We believe that adopting 

county-based labor market areas for the 

entire country except those in New 

England would lead to inconsistencies 

in our designations. Adopting countybased labor market areas for the entire 

country provides consistency and 

stability in Medicare program payment 

because all of the labor market areas 

throughout the country, including New 

England, would be defined using the 

same system (that is, counties) rather 

than different systems in different areas 

of the county, and minimizes 

programmatic complexity. 

In addition, we have consistently 

employed a county-based system for 

New England for precisely that reason: 

to maintain consistency with the labor 

market definitions used throughout the 

country. Because we have never used 

cities and towns for defining LTCH 

labor market areas, employing a countybased system in New England maintains 

that consistent practice. We note that 

this is consistent with the 

implementation of the CBSA-based 

designations under the IPPS for New 

England (69 FR 49028). Accordingly, 

under the LTCH PPS we are proposing 

to use the New England MSAs as 

determined under the proposed new 

CBSA-based labor market area 

definitions in defining the proposed 

revised LTCH PPS labor market areas.

b. Metropolitan Divisions. Under the 

OMB’s new CBSA designations, a 

Metropolitan Division is a county or 

group of counties within a CBSA that 

contains a core population of at least 2.5 

million, representing an employment 

center, plus adjacent counties associated 

with the main county or counties 

through commuting ties. A county 

qualifies as a main county if 65 percent 

or more of its employed residents work 

within the county and the ratio of the 

number of jobs located in the county to 

the number of employed residents is at 

least 0.75. A county qualifies as a 

secondary county if 50 percent or more, 

but less than 65 percent, of its employed 

residents work within the county and 

the ratio of the number of jobs located 

in the county to the number of 

employed residents is at least .75. After 

all the main and secondary counties are 

identified and grouped, each additional 

county that already has qualified for 

inclusion in the MSA falls within the 

Metropolitan Division associated with 

the main/secondary county or counties 

with which the county at issue has the 

highest employment interchange 

measure. Counties in a Metropolitan 

Division must be contiguous. (65 FR 

82236) 

The construct of relatively large MSAs 

being comprised of Metropolitan 

Divisions is similar to the current 

construct of CMSAs comprised of 

PMSAs. As noted above, in the past, the 

OMB designated CMSAs as 

Metropolitan Areas with a population of 

one million or more and comprised of 

two or more PMSAs. Under the LTCH 

PPS, we currently use the PMSAs rather 

than CMSAs to define labor market 

areas because they comprise a smaller 

geographic area with potentially varying 

labor costs due to different local 

economies. We believe that CMSAs may 

be too large of an area with a relatively 

large number of hospitals, to accurately 

reflect the local labor costs of all of the 

individual hospitals included in that 

relatively ‘‘large’’ area. A large market 

area designation increases the 

likelihood of including many hospitals 

located in areas with very different labor 

market conditions within the same 

market area designation. This variation 

could increase the difficulty in 

calculating a single wage index that 

would be relevant for all hospitals 

within the market area designation. 

Similarly, we believe that MSAs with a 

population of 2.5 million or greater may 

be too large of an area to accurately 

reflect the local labor costs of all of the 

individual hospitals included in that 

relatively ‘‘large’’ area. Furthermore, as 

indicated above, Metropolitan Divisions 

represent the closest approximation to 

PMSAs, the building block of the 

current LTCH PPS labor market area 

definitions, and therefore, would most 

accurately maintain our current 

structuring of the LTCH PPS labor 

market areas. Therefore, as implemented 

under the IPPS (69 FR 49029), we are 

proposing to use the Metropolitan 

Divisions where applicable (as 

described below) under the proposed 

new CBSA-based labor market area 

definitions. 

In addition to being comparable to the 

organization of the labor market areas 

under current MSA designations (that 

is, the use of PMSAs rather than 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5741

CMSAs), we believe that proposing to 

use Metropolitan Divisions where 

applicable (as described below) under 

the LTCH PPS would result in a more 

accurate adjustment for the variation in 

local labor market areas for LTCHs. 

Specifically, if we would recognize the 

relatively ‘‘larger’’ CBSA that comprises 

two or more Metropolitan Divisions as 

an independent labor market area for 

purposes of the wage index, it would be 

too large and would include the data 

from too many hospitals to compute a 

wage index that would accurately reflect 

the various local labor costs of all of the 

individual hospitals included in that 

relatively ‘‘large’’ CBSA. As mentioned 

earlier, a large market area designation 

increases the likelihood of including 

many hospitals located in areas with 

very different labor market conditions 

within the same market area 

designation. This variation could 

increase the difficulty in calculating a 

single wage index that would be 

relevant for all hospitals within the 

market area designation. Rather, by 

proposing to recognize Metropolitan 

Divisions where applicable (as 

described below) under the proposed 

new CBSA-based labor market area 

definitions under the LTCH PPS, we 

believe that in addition to more 

accurately maintaining the current 

structuring of the LTCH PPS labor 

market areas, the local labor costs would 

be more accurately reflected, thereby 

resulting in a wage index adjustment 

that better reflects the variation in the 

local labor costs of the local economies 

of the LTCHs located in these relatively 

‘‘smaller’’ areas. 

Below we describe where 

Metropolitan Divisions would be 

applicable under the proposed new 

CBSA-based labor market area 

definitions under the LTCH PPS. 

Under OMB’s new CBSA-based 

designations, there are 11 MSAs 

containing Metropolitan Divisions: 

Boston; Chicago; Dallas; Detroit; Los 

Angeles; Miami; New York; 

Philadelphia; San Francisco; Seattle; 

and Washington, D.C. Although these 

MSAs were also CMSAs under the prior 

definitions, in some cases these areas 

have been significantly altered. Under 

the current LTCH PPS MSA 

designations, Boston is a single NECMA. 

Under the proposed CBSA-based labor 

market area designations, it would be 

comprised of 4 Metropolitan Divisions. 

Los Angeles would go from 4 PMSAs 

under the current LTCH PPS MSA 

designations to 2 Metropolitan Divisions 

under the proposed CBSA-based labor 

market area designations because 2 

MSAs became separate MSAs. The New 

York CMSA would go from 15 PMSAs 

under the current LTCH PPS MSA 

designations down to only 4 

Metropolitan Divisions under the 

proposed CBSA-based labor market area 

designations. Five PMSAs in 

Connecticut under the current LTCH 

PPS MSA designations would become 

separate MSAs under the proposed 

CBSA-based labor market area 

designations, and the number of PMSAs 

in New Jersey under the current LTCH 

PPS MSA designations would go from 5 

to 2, with the consolidation of 2 New 

Jersey PMSAs (Bergen-Passaic and 

Jersey City) into the New York-WayneWhite Plains, NY-NJ Division, under the 

proposed CBSA-based labor market area 

designations. In San Francisco, under 

the proposed CBSA-based labor market 

area designations, only 2 Divisions 

would remain where there were once 6 

PMSAs some of which are now separate 

MSAs under the current LTCH PPS 

labor market area designations.

Under the current LTCH PPS labor 

market area designations, Cincinnati, 

Cleveland, Denver, Houston, 

Milwaukee, Portland, Sacramento, and 

San Juan are all designated as CMSAs, 

but would no longer be designated as 

CMSAs under the proposed CBSA-based 

labor market area designations. As noted 

previously, the population threshold to 

be designated a CMSA under the current 

LTCH PPS labor market area 

designations is one million. In most of 

these cases, counties currently in a 

PMSA under the current LTCH PPS 

labor market area designations would 

become separate, independent MSAs 

under the proposed CBSA-based labor 

market area designations. 

c. Micropolitan Areas. Under the 

OMB’s new CBSA-based designations, 

Micropolitan Areas are essentially a 

third area definition made up mostly of 

currently rural areas, but also include 

some or all of areas that are currently 

designated as an urban MSA. As 

discussed in greater detail in the FY 

2005 IPPS final rule (69 FR 49029–

49032), how these areas are treated 

would have significant impacts on the 

calculation and application of the wage 

index. Specifically, whether or not 

Micropolitan Areas are included as part 

of the respective statewide rural wage 

indices would impact the value of 

statewide rural wage index of any State 

that contains a Micropolitan Area 

because a hospital’s classification as 

urban or rural affects which hospitals’ 

wage data are included in the statewide 

rural wage index. As discussed above in 

section IV.C.1.c.1., we combine all of 

the counties in a State outside a 

designated urban area together to 

calculate the statewide rural wage index 

for each State. 

In general, including Micropolitan 

Areas as part of the statewide rural labor 

market area would result in an increase 

to the statewide rural wage index 

because hospitals located in those 

Micropolitan Areas typically have 

higher labor costs than other rural 

hospitals in the State. Alternatively, as 

discussed in greater detail below, if 

Micropolitan Areas would be 

recognized as independent labor market 

areas, because there would be so few 

hospitals in each labor market area, the 

wage indices for LTCHs in those areas 

could become relatively unstable as they 

would change considerably from year to 

year. 

Because we currently use MSAs to 

define urban labor market areas and we 

group all the hospitals in counties 

within each State that are not assigned 

to an MSA together into a statewide 

rural labor market area, we have used 

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

indexes in the past for ease of reference. 

However, the introduction of 

Micropolitan Areas by the OMB 

potentially complicates this terminology 

because these areas include many 

hospitals that are currently included in 

the statewide rural labor market areas. 

We are proposing to treat 

Micropolitan Areas as rural labor market 

areas under the LTCH PPS for the 

reasons outlined below. That is, 

counties that are assigned to a 

Micropolitan area under the CBSAbased designations would be treated the 

same as other ‘‘rural’’ counties that are 

not assigned to either an MSA 

(Metropolitan Statistical Area) or a 

Micropolitan Area. Therefore, in 

determining a LTCH’s applicable wage 

index (based on IPPS hospital wage 

index data, as discussed in greater detail 

below in section IV.C.d. of this 

preamble), we propose that a LTCH in 

a Micropolitan Area under the OMB’s 

CBSA-based designations would be 

classified as ‘‘rural’’ and would be 

assigned the statewide rural wage index 

for the State in which it resides. 

In the FY 2005 IPPS final rule (69 FR 

49029–49032), we discuss our 

evaluation of the impact of treating 

Micropolitan Areas as part of the 

statewide rural labor market area 

instead of treating Micropolitan Areas as 

independent labor market areas for 

hospitals paid under the IPPS. As an 

alternative to treating Micropolitan 

Areas as part of the statewide rural labor 

market area for purposes of the LTCH 

PPS, we examined treating Micropolitan 

Areas as separate (urban) labor market 

areas, just as we did when 

implementing the revised labor market 

areas under the IPPS. As discussed in 

that same final rule, one of the reasons 

5742 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

Micropolitan Areas have such a 

dramatic impact on the wage index is, 

because Micropolitan Areas encompass 

smaller populations than MSAs, they 

tend to include fewer hospitals per 

Micropolitan Area. Currently, there are 

only 25 MSAs with one hospital in the 

MSA. However, under the new 

proposed CBSA-based definitions, there 

are 373 Micropolitan Areas with one 

hospital, and 49 MSAs with only one 

hospital. 

This large number of labor market 

areas with only one hospital and the 

increased potential for dramatic shifts in 

the wage indexes from 1 year to the next 

is a problem for several reasons. First, 

it creates instability in the wage index 

from year to year for a large number of 

hospitals. Second, it reduces the 

averaging effect (This averaging effect 

allows for more data points to be used 

to calculate a representative standard of 

measured labor costs within a market 

area.) lessening some of the incentive 

for hospitals to operate efficiently. This 

incentive is inherent in a system based 

on the average hourly wages for a large 

number of hospitals, as hospitals could 

profit more by operating below that 

average. In labor market areas with a 

single hospital, high wage costs are 

passed directly into the wage index with 

no counterbalancing averaging with 

lower wages paid at nearby competing 

hospitals. Third, it creates an arguably 

inequitable system when so many 

hospitals have wage indexes based 

solely on their own wages, while other 

hospitals’ wage indexes are based on an 

average hourly wage across many 

hospitals. 

For the reasons noted above, and 

consistent with the treatment of these 

areas under the IPPS, we are proposing 

not to adopt Micropolitan Areas as 

independent labor market areas under 

the LTCH PPS, but instead, we propose 

that Micropolitan Areas, under the 

CBSA-based labor market area 

definitions, would be considered part of 

the statewide rural labor market area. 

Accordingly, we are proposing that the 

LTCH PPS statewide rural wage index 

would be determined using acute-care 

IPPS hospital wage data (the rational for 

using IPPS hospital wage data is 

discussed in greater detail below in 

section IV.C.1.d. of this preamble) from 

hospitals located in non-MSA areas (for 

example, rural areas, including 

Micropolitan Areas) and that statewide 

rural wage index would be assigned to 

LTCHs located in those non-MSA areas.

4. Implementation of the Proposed 

Revised Labor Market Areas Under the 

LTCH PPS 

We note that, consistent with our 

policy under the IPPS, we are not 

proposing to adopt the proposed new 

labor market area definitions themselves 

in a budget neutral manner. As we 

discussed in the August 30, 2002 LTCH 

PPS final rule, under section 123 of Pub. 

L. 106–113, and section 307 of Pub. L. 

106–554, the Secretary generally has 

broad authority in developing the LTCH 

PPS, including whether and how to 

make adjustments to the LTCH PPS. In 

that same final rule we state that we will 

consider whether it is appropriate for us 

to propose a budget neutrality 

adjustment in the annual update of 

some aspects of the LTCH PPS under 

our broad discretionary authority under 

the statute to provide ‘‘appropriate 

adjustments’’ to the LTCH PPS. Until 

the 5-year transition from cost-based 

reimbursement to prospective payment 

is complete, including the end of the 

phase-in of the wage index adjustment 

under § 412.525(c), we believe that it 

would not be appropriate to update any 

aspects of the LTCH PPS in a budget 

neutral manner. A primary reason for 

waiting until after the transition is 

complete before evaluating aspects of 

the LTCH PPS, including the budget 

neutrality issue, is that the data 

available to analyze such issues is very 

limited, because the LTCH PPS is still 

relatively new and there is a lag time in 

data availability. Also, the fact that a 

number of LTCHs were and some still 

are operating under the transition 

period from TEFRA to LTCH PPS may 

make the available data even less 

appropriate for an analysis, since 

hospitals may still be modifying their 

behavior based on their transition to 

prospective payment and our data may 

not yet replace any operational changes 

LTCHs may have made in response to 

prospective payment. Once the 

transition is complete, we will have a 

better opportunity to evaluate the 

impacts of the implementation of this 

new payment system based on a number 

of years of LTCH PPS data. 

To facilitate an understanding of the 

proposed policies related to the 

proposed change to the LTCH PPS labor 

market areas discussed above, in Table 

4 of the Addendum of this proposed 

rule, we are providing a listing of each 

LTCH’s State and county location; 

existing labor market area designation; 

and its proposed new CBSA-based labor 

market area designation based on the 

best available cost report data from 

HCRIS (FYs 1999–2003) and county 

information from our OSCAR database. 

We encourage LTCHs to review the 

county location and both the current 

and proposed labor market area 

assignments for accuracy. Any questions 

or corrections (including additions or 

deletions) to the information provided 

in Table 4 should be emailed to the 

following CMS Web address: 

ltchpps@cms.hhs.gov. A link to this 

address can be found on the following 

CMS Web page http://

www.cms.hhs.gov/providers/longterm/

default.asp.

When the revised labor market areas 

based on the OMB’s new CBSA-based 

designations were adopted under the 

acute care hospital IPPS beginning on 

October 1, 2004, a transition to the new 

labor market area designations was 

established due to the scope and 

significant implications of these new 

boundaries and to buffer the subsequent 

significant impacts it may have on 

payments to numerous hospitals. As 

discussed in the FY 2005 IPPS final rule 

(69 FR 49032), during FY 2005, a blend 

of wage indexes is calculated for those 

acute care IPPS hospitals experiencing a 

drop in their wage indexes because of 

the adoption of the new labor market 

areas. Also, as described in that same 

final rule (69 FR 49032), under the IPPS, 

hospitals that previously were located 

in an urban MSA, but then became rural 

under the new CBSA-based definitions 

are assigned the wage index value of the 

urban area to which they previously 

belonged, for 3 years (FYs 2005–2007). 

Because the former MSA-based labor 

market areas used under the IPPS had 

been used for payment for over 10 years, 

we believe it was necessary to provide 

additional protection given the scope 

and potentially significant implications 

of these new labor market areas on 

numerous acute-care hospitals. 

Therefore, we implemented a transition 

under the IPPS from the former MSAbased labor market area designation to 

the new CBSA-based labor market area 

designation for acute-care hospitals that 

would receive a lower wage index as a 

result of the change in the labor market 

area designations. 

We recognize that, just like IPPS 

hospitals, many LTCHs would 

experience decreases in their wage 

index as a result of the proposed labor 

market area changes. At the same time, 

a significant number of LTCHs would 

benefit from these proposed changes. 

However, because we are in the midst 

of a transition to a full wage-index 

adjustment under the LTCH PPS, we 

believe that the effects on the LTCH PPS 

wage index from the proposed changes 

to the LTCH PPS labor market areas 

definitions would be mitigated. 

Specifically, as noted above, most 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5743

LTCHs are presently still in their FY 

2004 cost reporting period (the vast 

majority of LTCHs start their cost 

reporting periods on July 1 or 

September 1), and are, therefore, in the 

2nd year of the 5-year phase-in of the 

LTCH PPS wage index adjustment, and 

the applicable wage index value is 2⁄5ths 

(40 percent) of the applicable full LTCH 

PPS wage index adjustment. Since most 

LTCHs are only in the 2nd year of the 

5-year phase-in of the wage index 

adjustment, for most LTCHs, the laborrelated portion of the standard Federal 

rate is only adjusted by 40 percent of the 

applicable full wage index (that is, 2⁄5ths 

wage index value). As also noted above, 

the LTCH PPS wage index adjustment is 

made by multiplying the LTCH PPS 

standard Federal rate by the applicable 

wage index value, and the current LTCH 

PPS labor related-share is 72.885 

percent. Consequently, for most LTCHs, 

only 29 percent of the standard Federal 

rate is affected by the wage index 

adjustment (72.885 percent × 0.4 = 

29.154 percent), and the proposed 

revision to the labor market area 

definitions based on OMB’s new CBSAbased designations would only have a 

minimal impact on LTCH PPS 

payments. Therefore, we do not believe 

it is necessary to propose a transition 

policy for the proposed revision to the 

LTCH PPS labor market area definitions 

because the impact of the proposed 

revision to the labor market area 

definitions would only have a minimal 

impact on LTCH PPS payments (as 

explained above).

For the reasons discussed in greater 

detail below, we are not proposing a 

transition under the LTCH PPS from the 

current MSA-based labor market area 

designations to the new CBSA-based 

labor market area designations. Rather, 

we are proposing under the LTCH PPS 

to adopt the new CBSA-based labor 

market area definitions beginning with 

the 2006 LTCH PPS rate year without a 

transition period. As also discussed in 

greater detail below, we believe that this 

proposed policy is appropriate because 

despite significant similarities between 

the LTCH PPS and the IPPS, there are 

clear distinctions between the payment 

systems, particularly regarding wage 

index issues. 

The most significant distinction upon 

which we have based this proposed 

policy determination is that where acute 

care hospitals under the IPPS have been 

paid using full wage index adjusted 

payments since 1983 and had used the 

previous IPPS MSA-based labor market 

area designations for over 10 years, 

under the LTCH PPS, a wage index 

adjustment is being phased-in over a 5-

year period, and as noted above, most 

LTCHs are only in the 2nd year of the 

5-year phase-in of the wage index 

adjustment (that is, LTCH cost reporting 

periods beginning during FY 2004 as 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 56016–

56019)). As explained in greater detail 

above, the impact that the wage index 

can have on LTCH PPS payments is 

limited at this point, since only a small 

percentage of the LTCH PPS standard 

Federal rate is affected by the wage 

index (approximately 29 percent in 

most cases, as explained above) because 

of the 5-year phase-in of the wage index 

adjustment. 

Our initial analysis of the 

appropriateness of including a wage 

index adjustment in the March 22, 2004 

proposed rule for the LTCH PPS (67 FR 

13465–13466) indicated that a wage 

adjustment did not lead to an increase 

in the accuracy of LTCH PPS payments 

because a statistical analysis did not 

show a significant relationship between 

LTCHs costs and their geographic 

location. However, based upon 

comments, we revisited this proposed 

determination after additional data 

analysis and a more general policy 

evaluation, and we stated that we 

‘‘believe that the conceptual reasons for 

having an area wage adjustment support 

transitioning into a wage adjustment, 

notwithstanding the data problems and 

issues with the regression analysis’’ (see

August 30, 2002 LTCH PPS final rule 

(67 FR 56018)). However, given the lack 

of strong empirical evidence to support 

a wage index adjustment under the 

LTCH PPS, we provided for a 5-year 

transition to the full implementation of 

the wage index adjustment. We also 

noted that we would ‘‘* * * continue 

to reevaluate LTCH data as they become 

available and would propose to adjust 

the phase-in if subsequent data support 

a change.’’ In each subsequent LTCH 

PPS proposed and final rule since FY 

2003, we have evaluated the most recent 

LTCH data available and still have 

found no empirical evidence to support 

a change in the 5-year phase-in of the 

wage index adjustment under the LTCH 

PPS. 

Therefore, where a wage index 

adjustment has been a stable feature of 

the acute care hospital IPPS since its 

1983 implementation and had utilized 

the prior MSA-based labor market area 

designation for over 10 years, this is not 

the case for the LTCH PPS which has 

only been implemented since October 1, 

2002. Furthermore, as explained above, 

most LTCHs are presently still in their 

FY 2004 cost reporting period (the vast 

majority of LTCHs start their cost 

reporting periods on July 1 or 

September 1), and are, therefore, in the 

2nd year of the 5-year phase-in of the 

LTCH PPS wage index adjustment, and 

the applicable wage index value is 2⁄5ths 

(40 percent) of the full LTCH PPS wage 

index adjustment. As also noted above, 

the LTCH PPS wage index adjustment is 

made by multiplying the LTCH PPS 

standard Federal rate by the applicable 

wage index value, and the current LTCH 

PPS labor related-share is 72.885 

percent. Consequently, for most LTCHs, 

only 29 percent of the standard Federal 

rate is affected by the wage index 

adjustment (72.885 percent × 0.4 = 

29.154 percent). Therefore, the proposed 

revision to the labor market area 

definitions based on OMB’s new CBSAbased designations would only have a 

minimal impact on LTCH PPS 

payments. 

Because the impact of the proposed 

revision to the labor market area 

definitions would only have a minimal 

impact on LTCH PPS payments (as 

explained above), we do not believe it 

is necessary to propose a transition 

policy for the proposed revision to the 

LTCH PPS labor market area definitions. 

In contrast, a transition policy to the 

revised IPPS labor market area 

definitions under the IPPS was 

appropriate because, as there is no 

phase-in of a wage index adjustment 

under the IPPS as there currently is 

under the LTCH PPS, the full laborrelated share of either 71.066 percent or 

62 percent (as discussed above in 

section IV.C.1.b. of this preamble) of the 

IPPS standardized amount (that is, 

Federal rate) is affected by the IPPS 

wage index adjustment, which resulted 

in a more significant projected impact 

for acute care hospitals under the IPPS. 

Furthermore, we do believe that it is 

necessary to further transition any 

proposed changes to the LTCH PPS 

wage index adjustment, including the 

proposed revision of the labor market 

area definitions, because, in fact, the 

LTCH PPS wage index adjustment is 

still being phased-in over 5 years as 

established in the August 30, 2002 final 

rule (67 FR 56018). Accordingly, to the 

extent the new CBSA-based labor 

market area definitions are 

implemented, we would not expect 

them to have as significant of an impact 

on LTCHs, as they do for IPPS hospitals 

since the full wage index adjustment 

had been a stable factor of IPPS payment 

for over 20 years.

An additional distinction between the 

IPPS and the LTCH PPS regarding the 

wage index adjustment is that the IPPS 

policies that provide for blended and 

hold-harmless payments during the 

transition from MSA-based labor market 

areas to CBSA-based labor market areas 

described above were implemented in a 

5744 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

budget neutral manner under the IPPS 

(69 FR 49034–49035 and 49275). (We 

note the new labor market area 

definitions themselves, not the 

transition policies that provide for 

blended and hold-harmless payments, 

under the IPPS were not adopted in a 

budget neutral manner (69 FR 49034). 

However, as noted above, wage index 

changes are not budget neutral under 

the LTCH PPS. Under the IPPS, 

hospitals located in areas with a lower 

wage index being calculated under their 

new CBSA designation in comparison to 

what they would have been assigned 

under the old MSA designation were 

given a blend consisting of 50 percent 

of the new CBSA wage index and 50 

percent of the old MSA wage index. 

This essentially increases the wage 

index for those hospitals, which results 

in an increase in their payment since 

the blended MSA/CBSA wage index is 

higher than the full CBSA wage index. 

However, because the IPPS wage index 

transition payments were implemented 

in a budget neutral manner, it did not 

result in increased spending by 

Medicare, but rather a redistribution of 

dollars across IPPS acute-care hospitals. 

If we were to propose a similar 

transition under the LTCH PPS to the 

one implemented under the IPPS, it 

would result in additional LTCH 

spending by the Medicare program if we 

did so without a budget neutrality 

adjustment. 

Therefore, given the fact that the 

LTCH PPS has only been implemented 

for hospital cost reporting periods 

beginning on or after October 1, 2002, 

(which means that payments to many 

LTCHs have only been governed by the 

LTCH PPS for slightly more than 2 

years), and that even for LTCHs that are 

negatively affected by the new CBSAbased designations, the LTCH PPS wage 

index adjustment, at this point, has not 

been fully implemented and we do not 

believe that it is appropriate or 

necessary to propose a transition to the 

proposed new CBSA-based labor market 

areas for purposes of the LTCH PPS 

wage index adjustment under 

§ 412.525(c). 

In addition, we are proposing to 

revise § 412.525(c) to clarify the 

application of the current adjustment for 

area wage levels under the LTCH PPS, 

which was originally established in the 

August 30, 2002 final rule (67 FR 

56015–56019). Specifically, we are 

proposing to revise § 412.525(c) to state 

that the labor portion of a LTCH’s 

Federal prospective payment is adjusted 

to account for geographical differences 

in the area wage levels using an 

appropriate wage index (established by 

CMS). The wage index reflects the 

relative level of hospital wages and 

wage-related costs in the geographic 

area of the hospital compared to the 

national average level of hospital wages 

and wage-related costs. Currently, urban 

or rural area is determined in 

accordance with the definitions at 

§ 412.62(f)(1)(ii) and (iii). As we 

discussed above, because we are 

proposing to revise those definitions in 

this proposed rule, urban or rural area 

would be determined in accordance 

with the proposed revisions to 

§ 412.525(c)(1) or the proposed revisions 

to § 412.525(c)(2), respectively. In 

addition, § 412.525(c) would be revised 

to specify that the appropriate wage 

index (established by CMS) is updated 

annually. We note that this proposed 

revision to the language in § 412.525(c), 

which codifies our existing policy into 

regulations, is similar to the wage index 

adjustment codified in regulations 

under the IPPS at § 412.64(h). As stated 

above, this proposed clarification to 

§ 412.525(c) clearly outlines in 

regulations our established methodology 

for the application of the area wage 

adjustment under the LTCH PPS. As 

noted above, this methodology was 

established when we implemented the 

LTCH PPS (that is, cost reporting 

periods beginning on or after October 1, 

2002) in the August 30, 2002 final rule 

(67 FR 56015–56019). 

d. Wage Index Data. In the May 7, 

2004 final rule (69 FR 25684–25686), we 

established LTCH PPS wage index 

values for the 2005 LTCH PPS rate year 

calculated from the same data 

(generated in cost reporting periods 

beginning during FY 2000) used to 

compute the FY 2004 acute care 

hospital inpatient wage index data 

without taking into account geographic 

reclassification under sections 

1886(d)(8) and (d)(10) of the Act. The 

LTCH wage index values applicable for 

discharges occurring on or after July 1, 

2004 through June 30, 2005 are shown 

in Table 1 (for urban areas) and Table 

2 (for rural areas) in the Addendum to 

that final rule. Acute care hospital 

inpatient wage index data is also used 

to establish the wage index adjustment 

used in the IRF PPS, IPF PPS, HHA PPS, 

SNF PPS, and inpatient psychiatric 

facility PPS (IPF). As we discussed in 

the August 30, 2002 LTCH PPS final 

rule (67 FR 56019), since hospitals that 

are excluded from the IPPS are not 

required to provide wage-related 

information on the Medicare cost report 

and because we would need to establish 

instructions for the collection of this 

LTCH data in order to establish a 

geographic reclassification adjustment 

under the LTCH PPS, the wage 

adjustment established under the LTCH 

PPS is based on a LTCH’s actual 

location without regard to the urban or 

rural designation of any related or 

affiliated provider. Thus, because 

complete LTCH wage-related data are 

not currently available on the cost 

report, we do not have complete LTCH 

wage related data to use for the 

purposes of creating a LTCH wage index 

based on LTCH wage data, and since the 

labor market areas of acute care 

hospitals under the IPPS are similar to 

those of LTCHs, we believe wage data of 

acute care IPPS hospitals accurately 

capture the relationship between the 

wage related costs for LTCHs in an area 

as compared to the national average. 

Therefore, we believe IPPS acute care 

hospitals’ wage data are the best 

available data to use for the wage index 

under the LTCH PPS.

In this proposed rule, we are 

proposing that for the for the 2006 

LTCH PPS rate year, acute care hospital 

inpatient wage index data generated 

from cost reporting periods beginning 

during FY 2001 without taking into 

account geographic reclassification 

under sections 1886(d)(8) and (d)(10) of 

the Act would be used to determine the 

applicable wage index values under the 

LTCH PPS because these data (FY 2001) 

are the most recent complete data. 

These data are the same FY 2001 acute 

care hospital inpatient wage data that 

were used to compute the FY 2005 wage 

indices currently used under the IPPS, 

SNF PPS, and HHA PPS. The proposed 

full wage index values that would be 

applicable for LTCH PPS discharges 

occurring on or after July 1, 2005 

through June 30, 2006 are shown in 

Tables 1 and 2 in the Addendum of this 

proposed rule. 

The proposed LTCH wage index 

values that would be applicable for 

discharges occurring on or after July 1, 

2005 through June 30, 2006, are shown 

in Table 1 (for urban areas) and Table 

2 (for rural areas) in the Addendum of 

this proposed rule. (We note a labeling 

error published in prior years wage 

index tables used in the LTCH PPS. 

That labeling error was the listing of 

Stanly County, NC as one of the areas 

under MSA 1520 when, in fact, we 

consider Stanly County, NC to be a rural 

area in North Carolina. Stanly County 

wage data have always been correctly 

treated as rural in the actual creation of 

the LTCH wage index values, and it has 

only been the listing of Stanly County 

under MSA 1520 in prior years LTCH 

PPS index tables that was in error. 

Consequently, Table 1a in the 

Addendum of this proposed rule 

correctly removes Stanly County from 

the list of areas that fall under the MSA 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5745

1520 wage index. As this is strictly a 

labeling correction that does not affect 

the actual computation of the wage 

index values, any LTCHs located in 

Stanly County, NC, will continue to fall 

under, and use, the wage index for rural 

North Carolina.) 

As noted above, a listing of each 

LTCH’s State and county location; 

existing MSA-based labor market area 

designation; and its proposed new 

CBSA-based labor market area 

designation based on the best available 

cost report data (FYs 1999–2003) from 

HCRIS and county information from our 

OSCAR database, are shown in Table 4 

of the Addendum of this proposed rule. 

As we also noted earlier in this section, 

we encourage LTCHs to review the 

county location and both the current 

and proposed labor market area 

assignments for accuracy. Any questions 

or corrections (including additions or 

deletions) to the information provided 

in Table 4 should be e-mailed to the 

following CMS web address: 

ltchpps@cms.hhs.gov. A link to this 

address can be found on the following 

CMS Web page http://

www.cms.hhs.gov/providers/longterm/

default.asp.

As discussed earlier in this section 

(IV.C.1.a.), the applicable wage index 

phase-in percentages are based on the 

start of a LTCH’s cost reporting period 

beginning on or after October 1 of each 

year during the 5-year transition period. 

Thus, for cost reporting periods 

beginning on or after October 1, 2004 

and before October 1, 2005 (FY 2005), 

the labor portion of the standard Federal 

rate would be adjusted by three-fifths of 

the applicable LTCH wage index value. 

For example, for a LTCH’s discharges 

occurring during the 2006 LTCH PPS 

rate year (that is, July 1, 2005 through 

June 30, 2006) and occurring in the 

LTCH’s cost reporting period beginning 

during FY 2005, the applicable wage 

index value would be three-fifths of the 

full FY 2005 acute care hospital 

inpatient wage index data, without 

taking into account geographic 

reclassification under sections 

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

in Tables 1 and 2 of the Addendum to 

this proposed rule). Similarly, for a 

LTCH’s discharges occurring during the 

2006 LTCH PPS rate year (that is, July 

1, 2005 through June 30, 2006) and 

occurring in the LTCH’s cost reporting 

period beginning during FY 2006, the 

applicable wage index value would be 

four-fifths of the full FY 2005 acute care 

hospital inpatient wage index data, 

without taking into account geographic 

reclassification under sections 

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

in Tables 1 and 2 in the Addendum to 

this proposed rule). 

Because the phase-in of the wage 

index does not coincide with the LTCH 

PPS rate year (July 1 through June 30), 

most LTCHs will experience a change in 

the wage index phase-in percentages 

during the LTCH PPS rate year. For 

example, during the 2006 LTCH PPS 

rate year, for a LTCH with a January 1 

fiscal year, the three-fifths wage index 

would be applicable for the first 6 

months of the 2006 LTCH PPS rate year 

(July 1, 2005 through December 31, 

2005) and the four-fifths wage index 

would be applicable for the second 6 

months of the 2006 LTCH PPS rate year 

(January 1, 2006 through June 30, 2006). 

We also note that some providers will 

still be in the second year of the 5-year 

phase-in of the LTCH wage index (that 

is, those LTCHs who began the second 

year of the 5-year phase-in during their 

cost reporting periods that began 

between July 1, 2004 and September 30, 

2004). For the remainder of those 

LTCHs’ FY 2004 cost reporting periods 

which will conclude during the first 3 

months of the 2006 LTCH PPS rate year, 

the applicable wage index value would 

be two-fifths of the full FY 2005 acute 

care hospital inpatient wage index data, 

without taking into account geographic 

reclassification under sections 

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

shown in Tables 1 and 2 in the 

Addendum to this proposed rule. Since 

there are no longer any LTCHs in their 

cost reporting period that began during 

FY 2003 (the first year of the 5-year 

wage index phase-in), we are no longer 

showing the 1⁄5th wage index value in 

Tables 1 and 2 in the Addendum to this 

proposed rule. 

2. Proposed Adjustment for Cost-ofLiving in Alaska and Hawaii 

In the August 30, 2002 LTCH PPS 

final rule (67 FR 56022), we established, 

under § 412.525(b), a cost-of-living 

adjustment (COLA) for LTCHs located 

in Alaska and Hawaii to account for the 

higher costs incurred in those States. 

(The inadvertent omission of 

§ 412.525(b) by the OFR noted in the 

May 7, 2004 LTCH PPS final rule (69 FR 

25686) has been corrected in 42 CFR 

Parts 400 to 429 revised as of October 

1, 2004) In the May 7, 2004 final rule 

(69 FR 25686), for the 2005 LTCH PPS 

rate year, we established that we make 

a COLA to payments for LTCHs located 

in Alaska and Hawaii by multiplying 

the standard Federal payment rate by 

the appropriate factor listed in Table I 

of that same final rule.

Similarly, in this proposed rule, for 

the 2006 LTCH PPS rate year we are 

proposing to make a COLA to payments 

to LTCHs located in Alaska and Hawaii 

by multiplying the proposed standard 

Federal payment rate by the proposed 

factors listed in Table I below. These 

proposed factors are obtained from the 

U.S. Office of Personnel Management 

(OPM) and are currently used under the 

IPPS. In addition, we propose that if the 

OPM releases revised COLA factors 

before March 1, 2005, we would use 

them for the development of the 

payments for the 2006 LTCH rate year 

and publish them in the LTCH PPS final 

rule.

TABLE I.—PROPOSED COST-OF-LIVING

ADJUSTMENT FACTORS FOR ALASKA

AND HAWAII HOSPITALS FOR THE

2006 LTCH PPS RATE YEAR

Alaska: 

All areas .............................. 1.25 

Hawaii: 

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

Hawaii County ..................... 1.165 

Kauai County ...................... 1.2325 

Maui County ........................ 1.2375 

Kalawao County .................. 1.2375 

3. Proposed Adjustment for High-Cost 

Outliers 

a. Background. Under § 412.525(a), 

we make an adjustment for additional 

payments for outlier cases that have 

extraordinarily high costs relative to the 

costs of most discharges. Providing 

additional payments for outliers 

strongly improves the accuracy of the 

LTCH PPS in determining resource costs 

at the patient and hospital level. These 

additional payments reduce the 

financial losses that would otherwise be 

caused by treating patients who require 

more costly care and, therefore, reduce 

the incentives to under serve these 

patients. We set the outlier threshold 

before the beginning of the applicable 

rate year so that total outlier payments 

are projected to equal 8 percent of total 

payments under the LTCH PPS. 

Under § 412.525(a), we make outlier 

payments for any discharges if the 

estimated cost of a case exceeds the 

adjusted LTCH PPS payment for the 

LTC–DRG plus a fixed-loss amount. The 

fixed-loss amount is the amount used to 

limit the loss that a hospital will incur 

under an outlier policy. This results in 

Medicare and the LTCH sharing 

financial risk in the treatment of 

extraordinarily costly cases. The LTCH’s 

loss is limited to the fixed-loss amount 

and a fixed percentage of costs above 

the marginal cost factor. We calculate 

the estimated cost of a case by 

multiplying the overall hospital cost-tocharge ratio by the Medicare allowable 

covered charge. In accordance with 

5746 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

§ 412.525(a), we pay outlier cases 80 

percent of the difference between the 

estimated cost of the patient case and 

the outlier threshold (the sum of the 

adjusted Federal prospective payment 

for the LTC–DRG and the fixed-loss 

amount). 

Under the LTCH PPS, we determine a 

fixed-loss amount, that is, the maximum 

loss that a LTCH can incur under the 

LTCH PPS for a case with unusually 

high costs before the LTCH will receive 

any additional payments. We calculate 

the fixed-loss amount by simulating 

aggregate payments with and without an 

outlier policy. The fixed-loss amount 

would result in estimated total outlier 

payments being projected to be equal to 

8 percent of projected total LTCH PPS 

payments. Currently, MedPAR claims 

data and cost-to-charge ratios based on 

data from the latest available cost report 

data from Hospital Cost Report 

Information System (HCRIS) and 

corresponding MedPAR claims data are 

used to establish a fixed-loss threshold 

amount under the LTCH PPS. 

b. Cost-to-charge ratios (CCRs). As we 

noted above, we calculate the estimate 

of the cost of the case used in 

determining LTCH PPS outlier 

payments by multiplying the Medicare 

allowable charges for the case by the 

LTCH’s overall CCR. As we established 

in the June 9, 2003 IPPS high-cost 

outlier final rule (68 FR 34494–34515), 

currently (for discharges occurring on or 

after October 1, 2003) fiscal 

intermediaries (FIs) use either the most 

recent settled cost report or the most 

recent tentative settled cost report, 

whichever is from the later period, to 

determine a LTCH’s CCR. As we 

specified in Program Memorandum 

Transmittal A–02–093 when we 

implemented the LTCH PPS and as 

codified in regulation at 

§ 412.525(a)(4)(ii), for discharges 

occurring on or after August 8, 2003, for 

LTCHs that we are unable to compute a 

CCR (for example, due to faulty or 

unavailable data), we assign the 

applicable statewide average CCR to the 

LTCH. (Currently, the applicable 

statewide average CCRs can be found in 

Tables 8A and 8B of the FY 2005 IPPS 

final rule (69 FR 49687–49688).) 

As set forth in § 412.525(a)(4)(ii), by 

cross-referencing § 412.84(i)(3), 

currently, we apply the applicable 

statewide average CCR when a LTCH’s 

CCR exceeds the maximum CCR 

threshold (ceiling) set forth specifically 

at § 412.84(i)(3)(ii). As we explained in 

the June 9, 2003 high cost outlier final 

rule (68 FR 34506–34507), CCRs above 

this range are probably due to faulty 

data reporting or entry. Therefore, these 

CCRs should not be used to identify and 

make payments for outlier cases because 

the data are clearly errors and should 

not be relied upon. We also made a 

similar change to the short-stay outlier 

policy at § 412.529. Since CCRs are also 

used in determining short-stay outlier 

payments, the rationale for that change 

mirrors that for high-cost outliers. (The 

current LTCH PPS CCR ceiling is 1.409, 

which is equal to the combined 

operating and capital CCR ceilings (as 

established in the FY 2005 IPPS final 

rule (69 FR 49287)).)

Currently, (for discharges occurring 

on or after August 8, 2003, only a 

maximum CCR threshold (ceiling) is 

applied to a LTCH’s CCR ratio. For 

discharges occurring on or after August 

8, 2003), a minimum CCR threshold 

(floor) is no longer applicable (See June 

8, 2003, 68 FR 34506–34507). As 

discussed above, if a LTCH’s cost-tocharge ratio is above the ceiling, the 

applicable statewide average CCR is 

assigned to the LTCH. However, a 

LTCH’s CCR is no longer raised to the 

applicable statewide average CCR if it 

falls below a minimum CCR threshold 

(floor) for discharges occurring on or 

after August 8, 2003, as we discussed in 

the June 9, 2003 high cost outlier final 

rule (68 FR 34507), in order to prevent 

hospitals from receiving inappropriately 

high outlier payments. (Refer to the June 

9, 2003 high-cost outlier final rule (68 

FR 34507) for further explanation of the 

establishment of the current CCR 

policy.) 

c. Establishment of the Proposed 

Fixed-Loss Amount. When we 

implemented the LTCH PPS, as 

discussed in the August 30, 2002 final 

rule (67 FR 56022–56026), we establish 

a fixed-loss amount so that total 

estimated outlier payments are 

projected to equal 8 percent of total 

estimated payments under the LTCH 

PPS. To determine the fixed-loss 

amount, we estimate outlier payments 

and total LTCH PPS payments for each 

case using claims data from the 

MedPAR. Specifically, to determine the 

outlier payment for each case, we 

estimate the cost of the case by 

multiplying the Medicare covered 

charges from the claim by the LTCH’s 

hospital specific CCR. In accordance 

with § 412.525(a)(3), if the estimated 

cost of the case exceeds the outlier 

threshold (the sum of the adjusted 

Federal prospective payment for the 

LTC–DRG and the fixed-loss amount), 

we pay an outlier payment equal to 80 

percent of the difference between the 

estimated cost of the case and the 

outlier threshold (the sum of the 

adjusted Federal prospective payment 

for the LTC–DRG and the proposed 

fixed-loss amount). 

In the May 7, 2004 final rule, in 

calculating the fixed-loss amount that 

would result in outlier payments 

projected to be equal to 8 percent of 

total payments for the 2005 LTCH PPS 

rate year, we used claims data from the 

December 2003 update of the FY 2003 

MedPAR files, as that was the best 

available data at that time. We 

calculated LTCHs’ CCRs for determining 

the fixed-loss amount based on the 

latest available cost report data in 

HCRIS from FYs 1999 through 2002. 

Also, as we explained in that same final 

rule (68 FR 25687), we calculated a 

single fixed-loss amount for the 2005 

LTCH PPS rate year based on Version 

21.0 of the GROUPER, which was the 

version in effect as of the beginning of 

the LTCH PPS rate year (that is, July 1, 

2004 for the 2005 LTCH PPS rate year). 

We also applied the current outlier 

policy under § 412.525(a) in 

determining the fixed-loss amount for 

the 2005 LTCH PPS rate year; that is, we 

assigned the applicable statewide 

average CCR only to LTCHs whose CCRs 

exceeded the ceiling (and not when they 

fell below the floor). Accordingly, we 

used the FY 2004 IPPS combined 

operating and capital CCR ceiling of 

1.366 (as explained in the IPPS final 

rule, published August 1, 2003 (68 FR 

45346)). As we explained in that same 

final rule, we believe that using the FY 

2004 combined IPPS operating and 

capital CCR ceiling for LTCHs is 

appropriate for the same reasons we 

stated above regarding the use of the FY 

2004 combined operating and capital 

CCR ceiling under the IPPS. 

For the 2005 LTCH PPS rate year, in 

the May 7, 2004 final rule (69 FR 

25689), we established a fixed-loss 

amount of $17,864. Thus, in the 2005 

LTCH PPS rate year we pay an outlier 

case 80 percent of the difference 

between the estimated cost of the case 

and the outlier threshold (the sum of the 

adjusted Federal LTCH PPS payment for 

the LTC–DRG and the fixed-loss amount 

of $17,864). 

In this proposed rule, we are not 

proposing a change in our established 

methodology for determining the fixedloss amount. However, we are proposing 

to use more recently available data to 

determine the proposed fixed-loss 

amount for the 2006 LTCH PPS rate 

year, including the most recent available 

claims data and data from the Provider 

Specific File (PSF). Specifically, for the 

2006 LTCH PPS rate year, we are 

proposing to use the September 2004 

update of the FY 2003 MedPAR claims 

data to determine a proposed fixed-loss 

amount that would result in projected 

outlier payments being equal to 8 

percent of total projected LTCH PPS 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5747

payments, based on the policies 

described in this proposed rule, because 

these data are the best LTCH data 

available. As noted above, we 

determined the proposed fixed-loss 

amount based on the version of the 

GROUPER that would be in effect as of 

the beginning of the 2006 LTCH PPS 

rate year (July 1, 2005), that is, Version 

22.0 of the LTCH PPS GROUPER (69 FR 

48982). 

As we explained above, in 

determining the LTCH PPS fixed-loss 

amount, CCRs are used to estimate the 

cost of each case by multiplying the 

Medicare covered charges from the 

claim by the LTCH’s CCR. Rather than 

using CCRs calculated from the latest 

available cost report data in HCRIS and 

corresponding claims data from the 

MedPAR data as we did when we 

determined the 2005 LTCH PPS rate 

year fixed-loss amount (as noted above), 

in this proposed rule, for purposes of 

determining the proposed fixed-loss 

amount for the 2006 LTCH PPS rate 

year, we are proposing to use CCRs from 

the PSF as they are the best available 

data for the LTCH PPS because, as we 

discuss in greater detail below, they are 

more recent data and were actually used 

to make LTCH PPS payment. 

The PSF contains CCRs computed by 

FIs in accordance with Program 

Memorandum Transmittal A–02–093 

and Program Memorandum Transmittal 

A–03–058, which reflects the changes 

made in the June 9, 2003 high-cost 

outlier final rule (68 FR 34494), 

including the use of either the most 

recently settled or tentatively settled 

cost report, whichever is later, to 

determine a LTCH’s CCR. This also 

includes the assignment of the 

applicable statewide average CCR by the 

FI in cases where the FI was unable to 

compute a CCR (for example, due to 

faulty or unavailable data), or the CCR 

computed by the FI exceeded the 

applicable CCR ceiling. While FIs have 

been determining a CCR for each LTCH 

and entering them on the PSF (as 

instructed in Program Transmittal A–

02–093) in order to determine the LTCH 

PPS payment for each discharge using 

the LTCH PPS PRICER software, we 

have only recently had access to the 

complete PSF data for all LTCHs due to 

the lag time in data availability (the 

LTCH PPS has only been implemented 

for slightly over 2 years, that is cost 

reporting periods beginning on or after 

October 1, 2002). Thus, this is the first 

opportunity that we have had to use 

CCRs from the PSF in determining the 

fixed-loss amount.

We are proposing to use CCRs from 

the PSF rather than computing CCRs 

from the latest MedPAR claims data and 

corresponding cost report data for 

purposes of determining the proposed 

fixed-loss amount under the LTCH PPS 

because we believe that using these 

CCRs to estimate the cost of the case 

used determining outlier payments 

would be more accurate than they 

would be using our current source for 

obtaining CCRs to estimate the fixedloss amount (that is, calculating CCRs 

from the latest cost report data in HCRIS 

and corresponding claims data in the 

MedPAR files, as explained above). 

Specifically, as we discuss in greater 

detail below, CCRs in the PSF are based 

on the most recently settled or 

tentatively settled cost report, 

whichever is later, where as the CCRs 

computed from HCRIS and 

corresponding MedPAR data are several 

years old due to the lag time in data 

availability. Increasing the accuracy of 

estimated outlier payments in 

determining the fixed-loss amount by 

using CCRs from the PSF rather than 

CCRs computed from HCRIS and 

corresponding MedPAR data would 

help ensure that outlier payments are 

projected to equal 8 percent of total 

LTCH PPS payments as we established 

in the August 30, 2002 final rule (67 FR 

56026). Using CCRs from the PSF 

should result in a more precise fixedloss amount because these CCRs are 

based on more recent available data and, 

as explained above, these are the CCRs 

actually used by FIs to make LTCH PPS 

payments using the LTCH PPS PRICER 

software. 

Specifically, for purposes of 

determining the proposed 2006 LTCH 

PPS rate year fixed-loss amount, we are 

proposing to use CCRs from the June 

2004 update of the PSF, which are the 

CCRs that were used by FIs to make 

LTCH PPS payments to LTCHs as of 

June 30, 2004. As noted above, the CCRs 

in this file also reflect the changes to the 

CCR and outlier policy made in the June 

9, 2003 high cost outlier final rule (68 

FR 34494), which includes the use of 

either the most recently settled or 

tentatively settled cost reports, 

whichever is later, by FIs to determine 

a LTCHs CCR. 

In addition, because all LTCHs paid 

under the LTCH PPS have an entry in 

the PSF, for all of the LTCHs with 

claims in the September 2004 update of 

the Fy 2003 MedPAR files (which we 

used to determine the proposed fixedloss amount), there were no LTCHs with 

missing CCRs, and, therefore, there was 

no need to assign the applicable 

statewide average CCR to any LTCHs in 

determining the proposed fixed-loss 

amount (unless this was already done 

by the FI when entering the CCR in the 

PSF). This results in a more accurate 

CCR for each LTCH, and therefore a 

more accurate estimate of the cost of 

each case for LTCHs that, in the past, 

were assigned the applicable statewide 

average CCR in determining the fixedloss amount because the data needed to 

compute a CCR were unavailable. (We 

note that consistent with our established 

methodology for determining CCRs for 

the purposes of determining the fixedloss amount, if, in the future, a LTCH 

were missing a CCR in the PSF, we 

would assign the applicable statewide 

average CCR.) 

We believe that CCRs from the PSF 

are a better approximation of the CCRs 

that would be used to determine LTCHs’ 

LTCH PPS payments during the 2006 

LTCH PPS rate year because these are 

the most recent available CCRs actually 

used to make LTCH PPS payments. The 

CCRs that we have previously used to 

estimate the fixed-loss amount, 

computed from cost report data in 

HCRIS and corresponding claims data in 

the MedPAR files, were not used by FIs 

to make LTCH payments. Data from the 

PSF have only recently become 

available for all LTCHs because the 

LTCH PPS has only been implemented 

for slightly over 2 years (that is, cost 

reporting periods beginning on or after 

October 1, 2002). Prior to the 

availability of PSF data, for purposes of 

determining the fixed-loss amount, 

CCRs were computed based on the best 

available data (that is, from cost report 

data in HCRIS and corresponding 

MedPAR claims data). However, 

because there is lag time in the 

submission of cost report data in HCRIS, 

CCRs may have been computed from 

cost reports that were several years old. 

In addition, often the applicable 

statewide average CCR was assigned to 

LTCHs when cost report and 

corresponding claims data to compute a 

CCR were unavailable. This proposed 

change in the source of obtaining CCRs 

for computing the fixed-loss amount 

results in more up-to-date and generally 

lower CCRs. This is the same data 

source used for obtaining CCRs under 

the IPPS for determining the IPPS fixedloss amount annually (FY 2005 IPPS 

final rule, 69 FR 49276). 

As stated above, in this proposed rule, 

we are only proposing to change the 

data source for obtaining the CCRs used 

in determining the fixed-loss amount 

and not our established methodology for 

determining the fixed-loss amount or 

our established rules for determining 

CCRs for LTCH PPS payment purposes. 

Accordingly, based on the data and 

policies described above, we are 

proposing a fixed-loss amount of 

$11,544 for the 2006 LTCH PPS rate 

year. Thus, we would pay an outlier 

5748 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

case 80 percent of the difference 

between the estimated cost of the case 

and the proposed outlier threshold (the 

sum of the adjusted proposed Federal 

LTCH payment for the LTC–DRG and 

the proposed fixed-loss amount of 

$11,544). 

We note that the proposed fixed-loss 

amount of $11,544 for the 2006 LTCH 

PPS rate year is significantly lower than 

the current fixed-loss amount of $17,864 

for the 2005 LTCH PPS rate year. This 

notable change in the proposed fixedloss amount is primarily due to the 

proposed change in the source of 

LTCHs’ CCRs used to estimate costs 

when estimating LTCH PPS payments 

(specifically, using CCRs from the PSF 

rather than computing them from HCRIS 

and corresponding MedPAR data). As 

described above, in the past we have 

used CCRs calculated using costs from 

the most recent available cost report 

data in HCRIS and corresponding 

charges from MedPAR claims data. As 

also noted above, often the statewide 

average CCR was assigned to LTCHs 

when data to compute a CCR was 

unavailable. However, for the 2006 

LTCH PPS rate year, in determining the 

proposed fixed-loss amount, we are 

proposing to use CCRs from the PSF 

because, as we discussed above, we 

believe that these CCRs would more 

closely approximate the CCRs that will 

be used to make payments to LTCHs 

during the 2006 LTCH PPS rate and 

would result in a more accurate estimate 

of the cost of each case used in 

determining outlier payments.

As we noted above, CCRs from the 

PSF are based on more recent data and 

are generally lower than the CCRs 

computed from cost report data in 

HCRIS and corresponding claims data in 

the MedPAR files. Specifically, in 

comparing the best available data for 

301 LTCHs, we found that almost 40 

percent of LTCHs would experience a 

decrease in the CCR we used for 

computing the proposed fixed-loss 

amount. The decrease in the CCRs was 

in excess of 75 percent for some LTCHs 

in which the applicable statewide 

average CCR was assigned in 

determining the 2005 LTCH PPS rate 

year fixed-loss amount where data to 

compute a CCR was unavailable. 

In determining estimated outlier 

payments (80 percent of costs beyond 

the fixed-loss amount), as discussed 

above, costs are estimated by 

multiplying the Medicare covered 

charges for the case by the LTCH’s CCR. 

When relatively lower CCRs are used to 

estimate costs from charges, the 

resulting estimated cost of each case is 

lower, thereby reducing outlier 

payments since outlier payments are 

equal to 80 percent of the difference 

between the estimated cost of the case 

and the outlier threshold (the sum of the 

adjusted Federal prospective payment 

for the LTC–DRG and the fixed-loss 

amount). Lowering the fixed-loss 

amount results in more cases qualifying 

as outlier cases as well as increases the 

amount of the outlier payment for 

outlier cases because the maximum loss 

that a LTCH must incur before receiving 

an outlier payment (that is, the fixedloss amount) would be smaller. Thus, in 

order to maintain that outlier payments 

would be equal to 8 percent of total 

LTCH PPS payments, the outlier fixedloss should be lowered. 

As stated above, we have established 

that under the LTCH PPS, outlier 

payments are estimated to be equal to 8 

percent of total LTCH PPS payments. 

An analysis of recent LTCH PPS claims 

indicates that the 2004 and 2005 LTCH 

PPS rate year outlier fixed-loss amounts 

may have resulted in LTCH PPS outlier 

payments that fell below the estimated 

8 percent. Specifically, based on claims 

discharged during the 2004 LTCH PPS 

rate year (July 1, 2003 through June 30, 

2004), we estimate that outlier payments 

equal about 6 percent of total LTCH PPS 

payments. 

As an alternative to lowering the 

fixed-loss amount, we examined 

adjusting the marginal cost factor (that 

is, the percentage that Medicare will pay 

of the estimated cost of a case that 

exceeds the sum of the adjusted Federal 

prospective payment for the LTC–DRG 

and the fixed-loss amount for LTCH PPS 

outlier cases (§ 412.525(a)(3)), as a 

means of assuring that estimated outlier 

payments would be projected to equal 8 

percent of total LTCH PPS payments. 

Under the LTCH PPS high-cost outlier 

policy at § 412.525(a)(3), the marginal 

cost factor is currently equal to 80 

percent, as we established in the August 

30, 2002 final rule (67 FR 56022–56026). 

As we discuss in that same final rule, a 

marginal cost factor equal to 80 percent 

means that we pay the LTCH for an 

outlier case, 80 percent of the difference 

between the estimated cost of the case 

and the outlier threshold (the sum of the 

adjusted Federal rate for the LTC–DRG 

PPS payment and the fixed-loss 

amount). 

As we discussed in the August 30, 

2002 final rule (67 FR 56023), the 

marginal cost factor is designed to share 

the financial risk of treating extremely 

costly LTCH cases between LTCHs and 

the Medicare program by providing ‘‘a 

balance between the need to protect 

LTCHs financially, while encouraging 

them to treat expensive patients and 

maintain the incentives of a prospective 

payment system to improve the efficient 

delivery of care.’’ Increasing the 

marginal cost factor from the established 

80 percent, while maintaining the 

existing fixed-loss amount would 

increase total outlier payments because 

we would pay a larger percentage of the 

estimated costs that exceed the outlier 

threshold (the sum of the adjusted 

Federal rate for the LTC–DRG and the 

fixed-loss amount). For example, if we 

were to propose to increase the marginal 

cost factor to 90 percent without 

lowering the fixed-loss amount, we 

would pay outlier cases an additional 10 

percent (90 percent minus 80 percent) of 

the estimated costs that exceed the 

outlier threshold (the sum of the 

adjusted Federal rate for the LTC–DRG 

and the fixed-loss amount). 

While this alternative would also 

ensure that outlier payments are 

projected to equal 8 percent of total 

LTCH PPS payments, it would not 

maintain the incentive for LTCHs to 

treat expensive patients and improve 

the efficient delivery of care. It would 

significantly reduce the LTCHs’ share of 

the financial risk in treating those costly 

patients. As we discussed in the August 

30, 2002 final rule (67 FR 56023–56024), 

our analysis of payment to cost ratios for 

outlier cases showed that a marginal 

cost factor of 80 percent appropriately 

addresses outlier cases that are 

significantly more expensive than nonoutlier cases, while simultaneously 

maintaining the integrity of the LTCH 

PPS.

Our proposal to lower the fixed-loss 

amount from the current fixed-loss 

amount of $17,864 to the proposed 

fixed-loss amount of $11,544 would 

reduce the amount of the loss that a 

LTCH must incur under the LTCH PPS 

for a case with unusually high costs 

before the LTCH will receive any 

additional Medicare payments. 

However, as we explain above, we 

believe the 80 percent marginal cost 

factor would continue to adequately 

maintain the LTCHs’ share of the 

financial risk in treating those costly 

patients and ensure the efficient 

delivery of services. Under our 

proposed fixed-loss amount, LTCHs 

would still have to first lose $11,544 

before receiving any additional payment 

for treating an unusually costly case. We 

believe the proposed fixed-loss amount 

of $11,544 in conjunction with the 

requirement that the LTCH is 

responsible for 20 percent of all 

estimated cost incurred beyond the 

outlier threshold (the sum of the 

adjusted Federal rate for the LTC–DRG 

PPS payment and the fixed-loss amount) 

would be significant enough to avoid 

the ‘‘incentive’’ to reach the outlier 

threshold in order to receive an 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5749

additional payment. Therefore, we 

believe the proposed fixed-loss amount 

of $11,544 would sufficiently identify 

unusually costly LTCH cases while 

maintaining the integrity of the LTCH 

PPS. 

Accordingly, we are not proposing to 

adjust the marginal cost factor under the 

LTCH PPS high-cost outlier policy. 

Rather, as discussed in detail above, we 

believe that employing actual CCR data 

from the PSF for purposes of 

determining the proposed fixed-loss 

amount, which were actually used to 

make LTCH PPS payments, would result 

in a more accurate estimate of LTCH 

PPS outlier payments. Therefore, a 

decrease in the fixed-loss amount is 

appropriate and necessary to maintain 

that outlier payments would equal 8 

percent of total LTCH PPS payments, as 

required under § 412.525(a). 

d. Reconciliation of Outlier Payments 

Upon Cost Report Settlement. In the 

June 9, 2003 high-cost outlier final rule 

(68 FR 34508–34512), consistent with 

the change made for acute care hospitals 

under the IPPS at § 412.84(m), we 

established under § 412.525(a)(4)(ii), by 

cross-referencing § 412.84(m), that 

effective for LTCH PPS discharges 

occurring on or after August 8, 2003, 

reconciliation of outlier payments may 

be made upon cost report settlement to 

account for differences between the 

actual CCR and the estimated CCR ratio 

for the period during which the 

discharge occurs. As is the case with the 

changes made to the outlier policy for 

acute care hospitals under the IPPS, the 

instructions for implementing these 

regulations are discussed in further 

detail in Program Memorandum 

Transmittal A–03–058. In addition, in 

that same final rule (68 FR 34513), we 

established a similar change to the 

short-stay outlier policy at 

§ 412.529(c)(5)(ii). 

We also discussed in the June 9, 2003 

IPPS high-cost outlier final rule (68 FR 

34494–34515), consistent with the 

policy change for acute care hospitals 

under the IPPS at § 412.84(i)(2), that, for 

LTCH PPS discharges occurring on or 

after October 1, 2003, FIs will use either 

the most recent settled cost report or the 

most recent tentative settled cost report, 

whichever is from the later period, to 

determine a LTCH’s CCR. In addition, in 

that same final rule, we established a 

similar change to the short-stay outlier 

policy at § 412.529(c)(5)(iii). 

e. Application of Outlier Policy to 

Short-Stay Outlier Cases. As we 

discussed in the August 30, 2002 LTCH 

PPS final rule (67 FR 56026), under 

some rare circumstances, a LTCH 

discharge could qualify as a short-stay 

outlier case (as defined under § 412.529 

and discussed in section V.B.4. of this 

preamble) and also as a high-cost outlier 

case. In such a scenario, a patient could 

be hospitalized for less than five-sixths 

of the geometric average length of stay 

for the specific LTC–DRG, and yet incur 

extraordinarily high treatment costs. If 

the costs exceeded the outlier threshold 

(that is, the short-stay outlier payment 

plus the fixed-loss amount), the 

discharge would be eligible for payment 

as a high-cost outlier. Thus, for a shortstay outlier case in the 2006 LTCH PPS 

rate year, the high-cost outlier payment 

will be 80 percent of the difference 

between the estimated cost of the case 

and the outlier threshold (the sum of the 

proposed fixed-loss amount of $11,544 

and the amount paid under the shortstay outlier policy). 

4. Proposed Adjustments for Special 

Cases 

a. General. As discussed in the August 

30, 2002 LTCH PPS final rule (67 FR 

55995), under section 123 of Pub. L. 

106–113, the Secretary generally has 

broad authority in developing the PPS 

for LTCHs, including whether (and 

how) to provide for adjustments to 

reflect variations in the necessary costs 

of treatment among LTCHs. 

Generally, LTCHs, as described in 

section 1886(d)(1)(B)(iv) of the Act, are 

distinguished from other inpatient 

hospital settings by maintaining an 

average inpatient length of stay of 

greater than 25 days. However, LTCHs 

may have cases that have stays of 

considerably less than the average 

length of stay and that receive 

significantly less than the full course of 

treatment for a specific LTC–DRG. As 

we explained in the August 30, 2002 

LTCH PPS final rule (67 FR 55954), 

these cases would be paid 

inappropriately if the hospital were to 

receive the full LTC–DRG payment. 

Below we discuss the payment 

methodology for these special cases. 

b. Adjustment for Short-Stay Outlier 

Cases. A short-stay outlier case may 

occur when a beneficiary receives less 

than the full course of treatment at the 

LTCH before being discharged. These 

patients may be discharged to another 

site of care or they may be discharged 

and not readmitted because they no 

longer require treatment. Furthermore, 

patients may expire early in their LTCH 

stay. 

Generally, LTCHs are defined by 

statute as having an average inpatient 

length of stay of greater than 25 days. 

We believe that a payment adjustment 

for short-stay outlier cases results in 

more appropriate payments because 

these cases most likely would not 

receive a full course of treatment in this 

short period of time and a full LTC–DRG 

payment may not always be appropriate. 

Payment-to-cost ratios simulated for 

LTCHs, for the cases described above, 

show that if LTCHs receive a full LTC–

DRG payment for those cases, they 

would be significantly ‘‘overpaid’’ for 

the resources they have actually 

expended.

Under § 412.529, in general, we adjust 

the per discharge payment to the least 

of 120 percent of the cost of the case, 

120 percent of the LTC–DRG specific 

per diem amount multiplied by the 

length of stay of that discharge, or the 

full LTC–DRG payment, for all cases 

with a length of stay up to and 

including five-sixths of the geometric 

average length of stay of the LTC–DRG. 

As we noted in section V.C.3. of this 

preamble, in the June 9, 2003 high-cost 

outlier final rule (68 FR 34494–34515), 

we revised the methodology for 

determining CCRs for acute care 

hospitals under the IPPS because we 

became aware that payment 

vulnerabilities existed in the previous 

IPPS outlier policy. Consistent with the 

policy established for acute care 

hospitals under the IPPS at § 412.84(i) 

and (m) in the June 9, 2003 high-cost 

outlier final rule (68 FR 34515), and 

similar to the policy change described 

above for LTCH PPS high-cost outlier 

payments at § 412.525(a)(4)(ii), we 

established under § 412.529(c)(5)(ii) that 

for discharges on or after August 8, 

2003, short-stay outlier payments are 

subject to the provisions in the 

regulations at § 412.84(i)(1), (i)(3) and 

(i)(4), and (m). 

In addition, we also discussed in the 

June 9, 2003 high-cost outlier final rule 

(68 FR 34508–34513) that short-stay 

outlier payments are subject to the 

provisions in the regulations at 

§ 412.84(i)(2) for discharges on or after 

October 1, 2003 in accordance with 

§ 412.529(c)(5)(iii). In addition, in that 

same final rule, we established that the 

applicable statewide average CCR is 

applied when a LTCH’s CCR exceeds 

the ceiling. Thus, the applicable 

statewide average CCR is no longer 

applied when a LTCH’s CCR falls below 

the floor. Furthermore, we also 

established that any reconciliation of 

payments for short-stay outliers may be 

made upon cost report settlement to 

account for differences between the 

estimated CCR and the actual CCR for 

the period during which the discharge 

occurs. In the June 6, 2003 final rule (68 

FR 34146–34148), for certain hospitals 

that qualify as LTCHs under section 

1886(d)(1)(B)(iv)(II) of the Act 

(‘‘subclause (II)’’ LTCHs) as added by 

section 4417(b) of Pub. L. 105–33, and 

implemented in § 412.23(e)(2)(ii), we 

5750 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

established a temporary adjustment to 

the short-stay outlier policy during the 

5-year transition period. Under 

§ 412.529(c)(4), effective for discharges 

from a ‘‘subclause (II)’’ LTCH occurring 

on or after July 1, 2003, the short-stay 

outlier percentage is 195 percent during 

the first year of the hospital’s 5-year 

transition. For the second cost reporting 

period, the short-stay outlier percentage 

is 193 percent; for the third cost 

reporting period, the percentage is 165 

percent; for the fourth cost reporting 

period, the percentage is 136 percent; 

and for the final cost reporting period of 

the 5-year transition (and future cost 

reporting periods), the short-stay outlier 

percentage is 120 percent, that is, the 

same as it is for all other LTCHs under 

the LTCH PPS. 

As we discussed in the June 6, 2003 

final rule (68 FR 34147), we established 

this formula with the expectation that 

an adjustment to short-stay outlier 

payments during the transition will 

result in reducing the difference 

between payments and costs for a 

‘‘subclause (II)’’ LTCH for the period of 

July 1, 2003 through the end of the 

transition period, when the LTCH PPS 

will be fully phased-in. 

As we stated in that same final rule, 

we also expect that during this 5-year 

period, ‘‘subclause (II)’’ LTCHs will 

make every attempt to adopt the type of 

efficiency enhancing policies that 

generally result from the 

implementation of prospective payment 

systems in other health care settings. We 

are not proposing any changes to the 

short-stay outlier policy in this 

proposed rule. 

5. Hospital-within-Hospitals and 

Satellites of LTCHs Notification 

Requirements 

In the August 30, 2002 LTCH PPS 

final rule, we established a notification 

requirement for LTCHS that were HwHs 

as defined in § 412.22(e) and satellites of 

LTCHs, defined at § 412.22(h)(5) and for 

LTCHs and satellites of LTCHs that were 

subject to onsite provider payment 

adjustment under § 412.532. At 

§ 412.22(e)(3) and (h)(5) and 

§ 412.532(i), respectively, we require 

LTCHs to notify their FIs and CMS of 

their co-located status within 60 days of 

the start of the hospital’s first cost 

reporting period under the LTCH PPS. 

We also established an additional 

notification requirement at § 412.532(i), 

for LTCHs subject to the onsite provider 

payment adjustment at § 412.532, to 

notify their FIs and CMS within 60 days 

of a change in co-located status. We 

intended that these regulations also 

require the LTCHs to identify the 

Medicare providers, that is, acute care 

hospitals, as well as other excluded 

hospitals and units (IRFs and IPFs), and 

SNFs with which they were co-located.

It appears, however, that this 

expectation is unclear in our present 

regulations because we have been 

informed by our Regional offices and FIs 

that LTCHs, for which they are 

responsible, have in many cases 

neglected to specify the names, 

addresses, and provider identification 

numbers of their co-located providers. 

We are proposing to clarify our policy 

that when a LTCH informs its fiscal 

intermediary of its co-located status, it 

also would be required to include the 

name, address, and the provider 

numbers of the other co-located 

providers (that is, acute care hospitals, 

as well as other excluded hospitals and 

units (IRFs and IPFs) and SNFs) with 

which they were co-located. 

Furthermore, since the existing 

regulation text at § 412.22(e)(3) and 

(h)(5) required that the notification take 

place within 60 days of the LTCH’s first 

cost reporting period beginning on or 

after October 1, 2002 and § 412.532(i) 

required that the notification occur 

within 60 days of the effective date of 

the original regulation (October 1, 2002), 

and this timeframe for many providers 

has long since passed, we are proposing 

to eliminate that specific timing 

requirement in favor of the on-going, 

prospective notification requirement 

described above, which is also clearer 

and more comprehensive. We are also 

proposing to delete the phrase ‘‘and 

within 60 days of a change in co-located 

status’’ from § 412.532(i) because we 

believe that this proposed continuing 

notification requirement in the 

proposed revised regulation text at 

§ 412.22(e)(3) and (h)(5), as well as at 

§ 412.532(i) would include the 

obligation to notify CMS and the fiscal 

intermediary in writing of any changes 

in co-located status and the obligation to 

provide the requisite information 

detailed above. We are proposing 

revisions to each of the three 

notification provisions, therefore, to 

establish consistency and to clearly state 

the on-going requirement that LTCH 

HwHs and satellites of LTCHs inform 

their fiscal intermediary and CMS in 

writing of the names, addresses, and 

provider numbers of other applicable 

co-located Medicare providers. 

6. Other Payment Adjustments 

As indicated earlier, we have broad 

authority under section 123 of Pub. L. 

106–113, including whether (and how) 

to provide for adjustments to reflect 

variations in the necessary costs of 

treatment among LTCHs. Thus, in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 56014–56027), we discussed our 

extensive data analysis and rationale for 

not implementing an adjustment for 

geographic reclassification, rural 

location, treating a disproportionate 

share of low-income patients (DSH), or 

indirect medical education (IME) costs. 

In that same final rule, we stated that we 

would collect data and reevaluate the 

appropriateness of these adjustments in 

the future once more LTCH data become 

available after the LTCH PPS is 

implemented. 

Because the LTCH PPS has only been 

implemented for a few years and there 

is a lag-time in data availability, 

sufficient new data have still not yet 

been generated that would enable us to 

conduct a comprehensive reevaluation 

of these payment adjustments. 

Nonetheless, we have reviewed the 

limited data that are available and have 

found no evidence to support additional 

proposed policy changes. Therefore, in 

this proposed rule, we are not proposing 

to make any adjustments for geographic 

reclassification, rural location, DSH, or 

IME. However, we will continue to 

collect and interpret new data as they 

become available in the future to 

determine if these data support 

proposing any additional payment 

adjustments. 

7. Proposed Budget Neutrality Offset to 

Account for the Transition Methodology 

Under § 412.533, we implemented a 

5-year transition period from reasonable 

cost-based payment to prospective 

payment, during which a LTCH is paid 

an increasing percentage of the LTCH 

PPS rate and a decreasing percentage of 

its payments under the reasonable costbased payment methodology for each 

discharge. Furthermore, we allow a 

LTCH to elect to be paid based on 100 

percent of the standard Federal rate in 

lieu of the blended methodology. 

The standard Federal rate was 

determined as if all LTCHs will be paid 

based on 100 percent of the standard 

Federal rate. As stated earlier, we 

provide for a 5-year transition period 

that allows LTCHs to receive payments 

based partially on the reasonable costbased methodology. Section 123(a)(1) of 

the Pub. L. 106–113 requires that the 

Secretary shall develop a per discharge 

prospective payment system for LTCHs 

and such system shall ‘‘maintain budget 

neutrality.’’ Accordingly, as we 

established in the August 30, 2002 final 

rule (67 FR 56033–56036), during the 5-

year transition period, we reduce all 

LTCH Medicare payments (whether a 

LTCH elects payment based on 100 

percent of the Federal rate or whether a 

LTCH is being paid under the transition 

blend methodology). 

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Specifically, we reduce all LTCH 

Medicare payments during the 5-year 

transition by a factor that is equal to 1 

minus the ratio of the estimated TEFRA 

reasonable cost-based payments that 

would have been made if the LTCH PPS 

had not been implemented, to the 

projected total Medicare program PPS 

payments (that is, payments made under 

the transition methodology and the 

option to elect payment based on 100 

percent of the Federal rate).

In the May 7, 2004 final rule (69 FR 

25702), based on the best available data 

at that time, we projected that 

approximately 93 percent of LTCHs will 

be paid based on 100 percent of the 

standard Federal rate rather than receive 

payment under the transition blend 

methodology for the 2005 LTCH PPS 

rate year. Using the same methodology 

described in the August 30, 2002 LTCH 

PPS final rule (67 FR 56034), this 

projection, which used updated data 

and inflation factors, was based on our 

estimate that either: (1) A LTCH has 

already elected payment based on 100 

percent of the Federal rate prior to the 

start of the 2005 LTCH PPS rate year 

(July 1, 2004); or (2) a LTCH would 

receive higher payments based on 100 

percent of the 2005 LTCH PPS rate year 

standard Federal rate compared to the 

payments it would receive under the 

transition blend methodology. 

Similarly, we projected that the 

remaining 7 percent of LTCHs will 

choose to be paid based on the 

applicable transition blend methodology 

(as set forth under § 412.533(a)) because 

they would receive higher payments 

than if they were paid based on 100 

percent of the 2005 LTCH PPS rate year 

standard Federal rate. 

In that same final rule, based on the 

best available data at that time and 

policy revisions described in that same 

rule, we projected that the full effect of 

the remaining 4 years of the transition 

period (including the election option) 

would result in a cost to the Medicare 

program of $29 million. Specifically, for 

the 2005 LTCH PPS rate year, we 

estimated that the cost of the transition 

would be $15 million. In order to 

maintain budget neutrality, using the 

methodology established in the August 

30, 2002 LTCH PPS final rule (67 FR 

56034) based on updated data and the 

policies and rates discussed in the May 

7, 2004 LTCH PPS final rule, we 

established a 0.5 percent reduction 

(0.995) to all LTCH payments in the 

2005 LTCH PPS rate year to account for 

the $15 million estimate cost of the 

transition period methodology 

(including the option to elect payment 

based on 100 percent of the Federal rate) 

for the 2005 LTCH PPS rate year. 

Furthermore, we indicated that we 

would propose a budget neutrality offset 

for each of the remaining years of the 

transition period to account for the 

estimated costs for the respective LTCH 

PPS rate years 

In this proposed rule, based on the 

most recent available data, using the 

same methodology established in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 56034), we are projecting that 

approximately 94 percent of LTCHs 

would be paid based on 100 percent of 

the proposed standard Federal rate 

rather than receive payment under the 

transition blend methodology during the 

2006 LTCH PPS rate year. This 

projection, which used updated data is 

based on our estimate that either: (1) A 

LTCH has already elected payment 

based on 100 percent of the Federal rate 

prior to the beginning of the 2006 LTCH 

PPS rate year (July 1, 2005); or (2) a 

LTCH would receive higher payments 

based on 100 percent of the proposed 

standard Federal rate compared to the 

payments they would receive under the 

transition blend methodology. 

Similarly, we project that the remaining 

6 percent of LTCHs would choose to be 

paid based on the transition blend 

methodology at § 412.533 because those 

payments are estimated to be higher 

than if they were paid based on 100 

percent of the proposed standard 

Federal rate. The applicable transition 

blend percentage is applicable for a 

LTCH’s entire cost reporting period 

beginning on or after October 1 (unless 

the LTCH elects payment based on 100 

percent of the Federal rate). 

Based on the best available data and 

the proposed policies described in this 

proposed rule, we are projecting that in 

the absence of a transition period budget 

neutrality offset, the full effect of the 

remaining 3 years of the transition 

period (including the election option) as 

compared to payments as if all LTCHs 

would be paid based on 100 percent of 

the Federal rate would result in a cost 

to the Medicare program of $10 million 

as follows:

LTCH PPS rate year Estimated cost 

(in millions) 

2006 .................................. 7 

2007 .................................. 3 

2008 .................................. 0 

We are no longer projecting a small 

cost for the 2008 LTCH PPS rate year 

(July 1, 2007 through June 30, 2008) 

even though some LTCH’s will have a 

cost reporting period for the 5th year of 

the transition period which will be 

concluding in the first 3 months of the 

2008 LTCH PPS rate year because as we 

discussed above, based on the most 

recent available data, we are projecting 

that the vast majority of LTCHs will 

have made the election to be paid based 

on 100 percent of the Federal rate rather 

than the transition blend. 

Accordingly, using the methodology 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 56034) 

based on updated data and the policies 

and rates discussed in this proposed 

rule, we are proposing to implement a 

0.2 percent reduction (0.998) to all 

LTCHs’ payments for discharges 

occurring on or after July 1, 2005 and 

through June 30, 2006, to account for 

the estimated cost of the transition 

period methodology (including the 

option to elect payment based on 100 

percent of the Federal rate) of the $7 

million for the 2006 LTCH PPS rate 

year.

As noted above, in order to maintain 

budget neutrality, we indicated that we 

would propose a budget neutrality offset 

for each of the remaining years of the 

transition period to account for the 

estimated costs for the respective LTCH 

PPS rate years. In this proposed rule, 

based on the best available data, we 

estimate the following proposed budget 

neutrality offsets to LTCH PPS 

payments during the remaining years of 

the transition period: 0.1 percent (0.999) 

for the 2007 LTCH PPS rate year, and 0 

percent (no adjustment) for the 2008 

LTCH PPS rate year. As noted above, we 

believe there is no longer a need for a 

small offset in the 2008 LTCH PPS rate 

year because we project that the vast 

majority of those LTCHs whose 5th year 

of the transition period will be 

concluding in the first 3 months of the 

2008 LTCH PPS rate year will be paid 

based on 100 percent of the Federal rate 

rather than the transition blend. 

As we discussed in the August 30, 

2002 LTCH PPS final rule (67 FR 

56036), consistent with the statutory 

requirement for budget neutrality in 

section 123(a)(1) of Public Law 106–113, 

we intended that estimated aggregate 

payments under the LTCH PPS for FY 

2003 equal the estimated aggregate 

payments that would be made if the 

LTCH PPS were not implemented. Our 

methodology for estimating payments 

for purposes of the budget neutrality 

calculations uses the best available data 

at the time and necessarily reflect 

assumptions. As the LTCH PPS 

progresses, we are monitoring payment 

data and will evaluate the ultimate 

accuracy of the assumptions used in the 

budget neutrality calculations (for 

example, inflation factors, intensity of 

services provided, or behavioral 

response to the implementation of the 

LTCH PPS) described in the August 30, 

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2002 LTCH PPS final rule (67 FR 

56027–56037). To the extent these 

assumptions significantly differ from 

actual experience, the aggregate amount 

of actual payments may turn out to be 

significantly higher or lower than the 

estimates on which the budget 

neutrality calculations were based. 

Section 123 of Pub. L. 106–113 and 

section 307 of Pub. L. 106–554 provide 

broad authority to the Secretary in 

developing the LTCH PPS, including the 

authority for appropriate adjustments. 

Under this broad authority, as 

implemented in the regulations at 

§ 412.523(d)(3), we have provided for 

the possibility of making a one-time 

prospective adjustment to the LTCH 

PPS rates by October 1, 2006, so that the 

effect of any significant difference 

between actual payments and estimated 

payments for the first year of the LTCH 

PPS would not be perpetuated in the 

LTCH PPS rates for future years. 

In the May 7, 2004 LTCH PPS final 

(69 FR 25703–25704), based on the best 

available data at that time, we estimated 

that total Medicare program payments 

for LTCH services over the next 5 LTCH 

PPS rate years would be $2.96 billion 

for the 2005 LTCH PPS rate year; $2.98 

billion for the 2006 LTCH PPS rate year; 

$2.95 billion for the 2007 LTCH PPS 

rate year; $3.01 billion for the 2008 

LTCH PPS rate year; and $3.12 billion 

for the 2009 LTCH PPS rate year. 

In this proposed rule, consistent with 

the methodology established in the 

August 30, 2002 LTCH PPS final rule 

(67 FR 56036), based on the most recent 

available data, we estimate that total 

Medicare program payments for LTCH 

services for the next 5 LTCH PPS rate 

years would be as follows:

LTCH PPS rate year Estimated payments ($ in billions) 

2006 .............................. 2.94 

2007 .............................. 2.90 

2008 .............................. 2.96 

2009 .............................. 3.08 

2010 .............................. 3.24 

In accordance with the methodology 

established in the August 30, 2002 

LTCH PPS final rule (67 FR 56037), 

these estimates are based on the 

projection that 94 percent of LTCHs 

would elect to be paid based on 100 

percent of the 2006 LTCH PPS rate year 

proposed standard Federal rate rather 

than the applicable transition blend, 

and our estimate of 2006 LTCH PPS rate 

year payments to LTCHs using our 

Office of the Actuary’s most recent 

estimate of the excluded hospital with 

capital market basket of 3.1 percent for 

the 2006 LTCH PPS rate year, 2.9 

percent for the 2007 LTCH PPS rate 

year, 2.7 for the 2008 LTCH PPS rate 

year, and 2.9 percent for the 2009 and 

2010 LTCH PPS rate years. We also took 

into account our Office of the Actuary’s 

projection that there would be a change 

in Medicare beneficiary enrollment of 

¥4.9 percent in the 2006 LTCH PPS rate 

year, ¥6.5 percent in the 2007 LTCH 

PPS rate year, ¥1.1 percent in the 2008 

LTCH PPS rate year, 0.2 percent in the 

2009 LTCH PPS rate year, and 0.8 

percent in the 2010 LTCH PPS rate year. 

(We note that, based on the most recent 

available data, our Office of the Actuary 

is projecting a decrease in Medicare feefor-service Part A enrollment, in part, 

because they are projecting an increase 

in Medicare managed care enrollment as 

a result of the implementation of several 

provisions of the Medicare Prescription 

Drug, Improvement, and Modernization 

Act of 2003.)

As we discussed in the May 7, 2004 

LTCH PPS final rule (69 FR 25704), 

because the LTCH PPS has only been 

recently implemented, sufficient new 

data have not been generated that would 

enable us to conduct a comprehensive 

reevaluation of our budget neutrality 

calculations. Accordingly, we did not 

make a one-time adjustment under 

§ 412.523(d)(3). At this time, we still do 

not have sufficient new data to enable 

us to conduct a comprehensive 

reevaluation of our budget neutrality 

calculations. Therefore, in this proposed 

rule, we are not proposing to make a 

one-time adjustment under 

§ 412.523(d)(3) so that the effect of any 

significant difference between actual 

payments and estimated payments for 

the first year of the LTCH PPS is not 

perpetuated in the PPS rates for future 

years. However, we will continue to 

collect and interpret new data as the 

data become available in the future to 

determine if such an adjustment should 

be proposed. 

8. Extension of the Interrupted Stay 

Policy 

In the May 7, 2004 LTCH PPS final 

rule, we revised the definition of an 

‘‘interruption of a stay’’ at § 412.531 by 

establishing two distinct categories, ‘‘[a] 

3-day or less interruption of stay’’ at 

(a)(1) and ‘‘[a] greater than 3-day 

interruption of stay’’ at (a)(2). The 

‘‘greater than 3-day interruption of stay’’ 

which was directly based on the original 

‘‘interruption of stay’’ policy that had 

been implemented at the start of the 

LTCH prospective payment system 

(August 30, 2002 LTCH PPS final rule, 

67 FR 56002) is defined as a stay at a 

LTCH during which a Medicare 

inpatient is discharged from the LTCH 

to an acute care hospital, an IRF, or a 

SNF (or swing bed) for a period of 

greater than 3 days, but is readmitted to 

the LTCH within the applicable fixed 

day period, that is, between 4 and 9 

consecutive days for an acute care 

hospital, between 4 and 27 consecutive 

days for an IRF, and between 4 and 45 

consecutive days for a SNF. In each of 

these cases, the day count begins on the 

day of discharge from the LTCH, (which 

is also the day of admission to the other 

site of care), even though the payment 

features of the greater than 3-day policy 

itself govern the stay only after day 4 

once the 3-day policy, described below, 

no longer applies. 

As defined in the previous paragraph, 

for purposes of Medicare payment to the 

LTCH, a greater than 3-day interruption 

of stay is treated as only one discharge 

from the LTCH and generates only one 

LTC–DRG payment. However, under 

this policy, Medicare makes a separate 

payment to the intervening provider 

(that is, acute care hospital, IRF, or SNF) 

for the treatment or care given to the 

beneficiary during the interruption. 

In implementing this policy, we 

provided that, in the event a Medicare 

inpatient is discharged from a LTCH 

and is readmitted and the stay qualifies 

as an interrupted stay, the provider 

must cancel the claim generated by the 

original stay in the LTCH and submit 

one claim for the entire stay. (For 

further details, see Medicare Program 

Memorandum Transmittal A–02–093, 

September 2002.) 

On the other hand, if the patient stay 

exceeds the total fixed-day threshold 

outside of the LTCH at the other facility 

before being readmitted, two separate 

LTCH PPS payments would be made. 

One would be based on the principal 

diagnosis and length of stay for the first 

discharge from the LTCH and the other 

based on the principal diagnosis and 

length of stay for the second discharge 

from the LTCH. Depending upon their 

lengths of stay, both stays could result 

in payments as a short-stay outlier 

(§ 412.529), a full LTC–DRG, or even a 

high-cost outlier. Further, if the 

principal diagnosis is the same for both 

admissions, the hospital could receive 

two similar payments. It is also 

important to note that under the existing 

greater than 3-day interrupted stay 

policy, a separate Medicare payment is 

made to the intervening provider under 

that provider’s payment system. 

The 3-day or less interruption of stay 

policy is defined at § 412.531(a)(1) as ‘‘a 

stay at a long-term care hospital during 

which a Medicare inpatient is 

discharged from the long-term care 

hospital to an acute care hospital, IRF, 

SNF, or the patient’s home and 

readmitted to the same long-term care 

hospital within 3-days of the discharge 

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from the long-term care hospital. The 3-

day or less period begins with the date 

of discharge from the long-term care 

hospital and ends not later than 

midnight of the third day.’’ As 

discussed in detail in the May 7, 2004 

LTCH PPS final rule (69 FR 25691–

25700), there are several components to 

this policy. First, only one LTC–DRG 

payment will be made to the LTCH for 

the patient who is discharged from the 

LTCH to an acute care hospital, IRF, 

SNF, or patient’s home and readmitted 

to the same LTCH within 3 days. 

Secondly, any off-site tests or medical 

treatment, either inpatient or outpatient, 

delivered at an acute care hospital or an 

IRF, or care at a SNF, will be covered 

by the LTCH ‘‘under arrangements’’ if 

the patient is readmitted to the LTCH 

within 3 days. (We established a 

specific exception to the ‘‘under 

arrangements’’ requirement during the 

2005 LTCH PPS rate year, which we 

will review below, at 

§ 412.531(b)(1)(ii)(A)(1), in the event 

that the treatment was grouped to a 

surgical DRG under the IPPS at an acute 

care hospital.)

Existing regulations at § 412.509(c) 

require a LTCH to furnish all necessary 

covered services for a Medicare 

beneficiary who is an inpatient of the 

hospital either directly or ‘‘under 

arrangements’’ (as defined in § 409.3). 

The ‘‘under arrangements’’ policy set 

forth in § 412.509 derives from the 

regulations at § 411.15(m), which 

implement section 1862(a)(14) of the 

Act. Section 1862(a) of the Act specifies 

the services for which no payment may 

be made under Medicare Part A and Part 

B and also specifies the exception for 

certain services to be furnished ‘‘under 

arrangements’’ by providers. Under 

section 1862(a)(14) of the Act, 

notwithstanding any other provision of 

this title, ‘‘no payment may be made 

under part A or part B for any expenses 

incurred for items or services which are 

other than physicians’ services (as 

defined in regulations promulgated 

specifically for purposes of this 

paragraph), services described by 

section 1861(s)(2)(K) of the Act 

(certified nurse-midwife services, 

qualified psychologist services, and 

services of a certified registered nurse 

anesthetist, and which are furnished to 

an individual who is a patient of a 

hospital or critical access hospital by an 

entity other than the hospital or critical 

access hospital, unless the services are 

furnished under arrangements (as 

defined in section 1861(w)(1) of the 

Act)) with the entity made by the 

hospital or critical access hospital.’’ 

Section 1861(w)(1) of the Act states that 

‘‘[t]he term ‘arrangements’ is limited to 

arrangements under which receipt of 

payment by the hospital, critical access 

hospital, skilled nursing facility, home 

health agency, or hospice program 

(whether in its own right or as agent), 

with respect to services for which an 

individual is entitled to have payment 

made under this title, discharges the 

liability of such individual or any other 

person to pay for the services.’’ We 

believed the objective of these statutory 

provisions, which were implemented 

for inpatient acute care hospitals in 

regulations at § 411.15(m) and 

subsequently at § 412.509 for LTCHs, 

was to discharge financial liability for 

inpatients who may have received 

additional care off-premises and to 

assign payment responsibility for the 

care to the hospital that is being paid for 

that beneficiary’s total care for that spell 

of illness. 

Over the years, we have often referred 

to this as the ‘‘prohibition against 

unbundling’’ for purposes of 

emphasizing that if a Medicare provider 

‘‘unbundles’’ specific components of a 

beneficiary’s total inpatient care 

(provided either ‘‘directly’’ or ‘‘under 

arrangements’’) and sends separate 

claims to Medicare for those tests or 

treatments, the provider would be acting 

in violation of the statute and applicable 

regulations. Since LTCHs treat patients 

with multicomorbidities who are often 

in need of a wide range of diagnostic 

and treatment modalities and lengthy 

hospitalizations, we believe that in this 

particular setting, this statutory 

requirement was particularly vulnerable 

to gaming. For that reason, in 

formulating the ‘‘3-days or less 

interruption of stay policy’’ at 

§ 412.531(a), we clarified the existing 

general unbundling prohibition and the 

unbundling prohibition as it applied to 

the interrupted stay policy under the 

LTCH PPS. 

As noted above, we were concerned 

that LTCH patients, under active 

treatment, were being inappropriately 

discharged to other treatment sites, 

receiving tests or procedures related to 

one of the diagnoses for which the 

patient was being hospitalized and 

which otherwise should have been 

provided at the LTCH either directly or 

‘‘under arrangements’’ (§ 412.509) prior 

to being readmitted to the LTCH. Such 

behavior resulted in another claim being 

submitted to Medicare by the other 

treatment site for those tests or 

procedures. Since it is a fundamental 

principle of all prospective payment 

systems that payments associated with 

specific diagnostic group include all 

costs associated with rendering care to 

the type of patients treated, the behavior 

described above on the part of the 

LTCH, would result in an additional 

and inappropriate Medicare payments 

for services delivered by an intervening 

provider. 

If a LTCH obtains, from another 

facility ‘‘under arrangements,’’ a specific 

test or procedure that is not available on 

the LTCH’s premises for one of its 

inpatients, as contemplated by 

§ 412.509, a discharge and a subsequent 

readmission would therefore be 

unnecessary and inappropriate. This is 

true even if it is necessary to transport 

the patient to another facility to receive 

the arranged-for service. In this 

situation, generally, the LTCH would 

include the medically necessary test or 

procedure on its patient claim to 

Medicare which could have an effect on 

the assignment of the LTC–DRG and, 

thus, the Medicare payment to the 

LTCH, and the LTCH would be 

responsible for paying the provider 

directly for the test or procedure. Under 

the 3-day or less interruption of stay 

policy, if a LTCH patient is discharged 

to an acute care hospital, IRF, SNF, or 

patient’s home and returns to the LTCH 

for further hospital-level care within 3 

days, any Medicare-covered services 

delivered during that interruption will 

be deemed to have been delivered 

‘‘under arrangements and included in 

the one episode of care for which 

Medicare will pay the LTCH. 

Furthermore, under § 409.3, when 

services are furnished ‘‘under 

arrangements,’’ Medicare payments 

made to the provider that arranged for 

the services discharges the liability of 

the beneficiary or any other person to 

pay for those services. Our policy was 

premised on the belief that 3 days, in 

most instances, represented an 

appropriate interval for establishing 

whether or not the reason for the 

patient’s readmission was directly 

connected to the original episode of care 

at the LTCH. Therefore, no additional 

claim can be submitted to Medicare by 

the other provider that actually 

furnished the test or procedure if the 

patient is readmitted to the LTCH 

within 3 days since the initial LTCH 

admission triggered a Medicare payment 

under the LTCH prospective payment 

system that has been calibrated to cover 

payment for all necessary Medicare 

covered services delivered to a 

beneficiary during that episode of care. 

Moreover, under this finalized policy, 

where the LTCH is required to pay for 

outpatient or inpatient medical 

treatment or care provided at an acute 

care hospital, an IRF or SNF during any 

days of the 3-day or less interruption, all 

days of the 3-day or less interruption 

that the patient is away from the LTCH 

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will be included in that patient’s day 

count at the LTCH. If the LTCH patient 

goes home during the interruption and 

receives no additional medical care 

prior to being readmitted to the LTCH, 

the intervening days will not be 

included in the day count because the 

LTCH did not deliver any services to the 

patient during those days either directly 

or ‘‘under arrangement’’.

In the final policy, as established in 

the May 7, 2004 LTCH PPS final rule, 

for LTCH rate year 2005, we did provide 

a limited exception to the prohibition 

against additional Medicare payments to 

an intervening provider under the less 

than 3-day interruption of stay policy at 

§ 412.531(b)(1)(ii)(A)(1). Under this 

exception, if a patient was discharged 

from a LTCH, admitted as an inpatient 

to an acute care hospital and readmitted 

to the same LTCH within 3 days, and if 

the treatment that was delivered at the 

acute care hospital was grouped to a 

surgical DRG Medicare will pay the 

acute care hospital separately for that 

surgical treatment. We established this 

exception in response to comments on 

the original policy that we proposed in 

the January 30, 2004 proposed rule (69 

FR 4768–4772) requesting that we take 

into consideration the following 

scenario: The occurrence of an 

emergency ‘‘totally unrelated’’ to a 

LTCH patient’s admitting diagnoses that 

occurred and requiring surgery at an 

acute inpatient hospital, followed by the 

readmission of the patient within 3 days 

to the LTCH for a continuation of 

treatment of the patient’s initial medical 

problems. 

In our response to these concerns, we 

noted that the 3-day or less interruption 

of stay policy at 412.531 resulted from 

our concern that if a LTCH patient was 

discharged to an acute care hospital for 

only 1, 2, or 3 days, followed by a 

readmission to the LTCH, there could be 

reason to believe that the treatment 

delivered, even if it was grouped to a 

surgical DRG, was not a major 

procedure because of the relatively short 

length of stay, and, therefore, should 

have been provided ‘‘under 

arrangements.’’

In the May 7, 2004 LTCH PPS final 

rule, we stated that over the course of 

the first year of implementation of the 

revised 3-day or less interrupted stay 

policy, we would study relevant claims 

data in order to evaluate whether further 

proposed refinements to this policy 

would be warranted in this year’s rule. 

Specifically, we stated that we would 

analyze new data to determine whether 

problems associated with LTCH 

interrupted stays equally affected all 

settings to which LTCH patients may 

have been discharged and subsequently 

readmitted; and we would closely 

monitor patterns of discharges and 

readmissions under the first year of this 

policy. In order to pursue these 

analyses, we stated that we would be 

using relevant claims data as soon as 

they were available to determine 

whether our policy was producing its 

desired effect of reducing unnecessary 

and inappropriate Medicare payments 

while not compromising beneficiary 

access to medically necessary services. 

The 3-day interruption of stay policy 

was first implemented on July 1, 2004, 

and, therefore, we do not yet have 

sufficient data to accomplish the above 

evaluations. Therefore, we are 

proposing to extend the surgical DRG 

exception through the 2006 LTCH rate 

year, from July 1, 2005 through June 30, 

2006. At that point, the policy will have 

been in effect for 12 months and we 

believe that we will be able to better 

evaluate whether this exception should 

be extended further as well as whether 

the overall policy requires modification 

in order to serve the overall goals of the 

Medicare program. 

9. Onsite Discharges and Readmittances 

Under § 412.532, generally, if more 

than 5 percent of all Medicare 

discharges during a cost reporting 

period are patients who are discharged 

to an onsite SNF, IRF, or psychiatric 

facility, or to an onsite acute care 

hospital and who are then directly 

readmitted to the LTCH (including a 

satellite facility), only one LTC–DRG 

payment will be made to the LTCH for 

these type of discharges and 

readmittances during the LTCH’s cost 

reporting period. Therefore, payment for 

the entire stay will be paid either as one 

full LTC–DRG payment or a short-stay 

outlier, depending on the duration of 

the entire LTCH stay. 

In applying the 5-percent threshold, 

we apply one threshold for discharges 

and readmittances with the co-located 

acute care hospital. There is also a 

separate 5-percent threshold for the 

aggregate of all discharges and 

readmittances to the LTCH from its colocated SNFs, IRFs, and psychiatric 

facilities. In the case of a LTCH that is 

co-located with an acute care hospital, 

an IRF, or a SNF, the interrupted stay 

policy at § 412.531 applies until the 5-

percent threshold is reached. Once the 

applicable 5-percent threshold is 

reached, all LTCH discharges and 

readmittances from the co-located acute 

care hospital for that cost reporting 

period are paid as one discharge 

pursuant to § 412.532. This means that 

once the 5-percent threshold has been 

reached, even if a discharged LTCH 

Medicare patient was readmitted to the 

LTCH following a stay in an acute care 

hospital of greater than 9 days, if the 

facilities share a common location, the 

subsequent discharge from the LTCH 

will not represent a separate 

hospitalization for payment purposes. 

Under this policy, the total stay for a 

patient will include LTCH days prior to 

the interruption and, also, the days after 

the readmission to the LTCH that 

followed the interruption and Medicare 

will make one LTC–DRG payment when 

the patient is discharged during a cost 

reporting period. One LTC–DRG will be 

assigned based upon all patient 

diagnoses and care delivered to the 

patient during the entire LTCH stay and 

included on the discharge claim 

regardless of the length of stay at the 

acute care hospital during the 

interruption. 

Similarly, if the LTCH has exceeded 

its 5-percent threshold for all discharges 

to an onsite IRF, SNF, or psychiatric 

hospital or unit, which were readmitted 

to the LTCH from those providers, the 

subsequent LTCH discharge for those 

patients will not be treated as a separate 

discharge for Medicare payment 

purposes. (Unless the up to 3-day 

interrupted stay policy is applicable, 

payment to an acute care hospital under 

the IPPS, to the IRF under the IRF PPS, 

or to a SNF under the SNF PPS, will not 

be affected. Payments to the psychiatric 

facility also will not be affected.)

In the August 30, 2002 LTCH PPS 

final rule, we established a notification 

requirement for LTCHs that were HwHs 

as defined in § 412.22(e) and satellites of 

LTCHs, defined at § 412.22(h)(5) and for 

LTCHs and for satellites of LTCHs that 

were subject to the onsite provider 

payment adjustment under § 412.532(i) 

because they were co-located with other 

Medicare providers, as specified in 

§ 412.532(a). At § 412.22(e)(3) and (h)(5), 

as well as at § 412.532(i), respectively, 

we require LTCHs to notify us and their 

FIs of their co-located status within 60 

days of the start of the hospital’s first 

cost reporting period under the LTCH 

PPS. At § 412.532(i), we also established 

an additional notification requirement 

for LTCHs subject to the onsite provider 

payment adjustment at § 412.532, to 

notify their FIs and CMS within 60 days 

of a change in co-located status. We 

intended that these regulations also 

require the LTCHs to identify the 

Medicare providers, that is, acute care 

hospitals, as well as other excluded 

hospitals and units (IRFs and IPFs), and 

SNFs with which they were co-located 

and their addresses and Medicare 

provider numbers for purposes of 

implementing the payment adjustment 

for co-located providers described 

above.

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It appears, however, that this 

expectation is unclear in our existing 

regulations because we have been 

informed by our Regional offices and FIs 

that LTCHs, for which they are 

responsible, have in many cases 

neglected to specify the names, 

addresses, and provider identification 

numbers of their co-located providers. 

We are proposing to clarify our policy 

that when a LTCH informs its fiscal 

intermediary of its co-located status, it 

also would be required to include the 

name, address, and the provider 

numbers of the other co-located 

providers (that is, acute care hospitals, 

as well as other excluded hospitals and 

units (IRFs and IPFs) and SNFs) with 

which they were co-located. 

Furthermore, since the existing 

regulation text at § 412.22(e)(3) and 

(h)(5) required that the notification take 

place within 60 days of the LTCH’s first 

cost reporting period beginning on or 

after October 1, 2002 and § 412.532(i) 

required that the notification occur 

within 60 days of the effective date of 

the original regulation (October 1, 2002), 

and this timeframe for many LTCHs has 

long since passed, we are eliminating 

that specific timing requirement in favor 

of the on-going prospective notification 

requirement described above, which is 

also clearer and more comprehensive. 

We are proposing to delete the phrase 

‘‘and within 60 days of a change in colocated status’’ from § 412.532(i) 

because we believe that this continuing 

notification requirement in the 

proposed revised regulation text at 

§ 412.532(i) as well as at § 412.22(e)(3) 

and (h)(5) would include the obligation 

to notify CMS and the fiscal 

intermediary in writing of any change in 

co-located status and the obligation to 

provide the requisite information 

detailed above. We are proposing 

revisions to each of the notification 

provisions at § 412.531(i), and at 

§ 412.22(e)(3) and (h)(5) to establish 

consistency and to clearly state the ongoing requirement that LTCH HwHs and 

satellites of LTCHs inform their fiscal 

intermediaries and CMS of the names, 

addresses, and provider numbers of 

other co-located Medicare providers. 

Although § 412.532(i) previously 

mentioned LTCHs and satellites of 

LTCHs that occupy space in a building 

used by another hospital, or in one or 

more entire buildings located on the 

same campus as buildings used by 

another hospital and that meet the 

criteria of § 412.22(h)(1) through (h)(4), 

the scope of § 412.532 is clearly broader 

than this. Specifically, § 412.532(a) also 

includes SNFs among the providers 

subject to this policy. We are, therefore, 

proposing to revise the regulation text at 

§ 412.532(i) to include all providers at 

§ 412.532(a). 

V. Computing the Proposed Adjusted 

Federal Prospective Payments for the 

2006 LTCH PPS Rate Year 

[If you choose to comment on issues in 

this section, please include the caption 

‘‘PROPOSED ADJUSTED FEDERAL 

PROSPECTIVE PAYMENTS’’ at the 

beginning of your comments.]

In accordance with § 412.525 and as 

discussed in section IV.C. of this 

proposed rule, the standard Federal rate 

is adjusted to account for differences in 

area wages by multiplying the laborrelated share of the standard Federal 

rate by the appropriate LTCH PPS wage 

index (as shown in Tables 1 and 2 of the 

Addendum to this proposed rule). The 

standard Federal rate is also adjusted to 

account for the higher costs of hospitals 

in Alaska and Hawaii by multiplying 

the nonlabor-related share of the 

standard Federal rate by the appropriate 

cost-of-living factor (shown in Table I in 

section IV.C.2. of this preamble). In the 

May 7, 2004 final rule (69 FR 25674), we 

established a standard Federal rate of 

$36,833.69 for the 2005 LTCH PPS rate 

year. In this proposed rule, based on the 

best available data, previously 

established policies, and the proposed 

policies described in this rule, we are 

proposing to establish a standard 

Federal rate of $37,975.53 for the 2006 

LTCH PPS rate year as discussed in 

section IV.B. of this preamble. We 

illustrate the methodology used to 

adjust the proposed Federal prospective 

payments for the 2006 LTCH PPS rate 

year in the following example: During 

the 2006 LTCH PPS rate year, a 

Medicare patient is in a LTCH located 

in Chicago-Naperville-Joliet, Illinois 

(CBSA 16974). This LTCH is in the third 

year of the wage index phase-in, thus, 

the proposed three-fifths wage index 

values are applicable. The proposed 

three-fifths wage index value for CBSA 

16974 is 1.0521 (see Table 1 in the 

Addendum to this proposed rule). The 

Medicare patient is classified into LTC–

DRG 9 (Spinal Disorders and Injuries), 

which has a relative weight of 1.0950 

(see Table 3 of the Addendum to this 

proposed rule). To calculate the LTCH’s 

total proposed adjusted Federal 

prospective payment for this Medicare 

patient, we compute the proposed wageadjusted Federal prospective payment 

amount by multiplying the proposed 

unadjusted standard Federal rate 

($37,975.53) by the proposed laborrelated share (72.885 percent) and the 

proposed wage index value (1.0521). 

This proposed wage-adjusted amount is 

then added to the nonlabor-related 

portion of the proposed unadjusted 

standard Federal rate (27.115 percent; 

adjusted for cost of living, if applicable) 

to determine the adjusted Federal rate, 

which is then multiplied by the LTC–

DRG relative weight (1.0950) to 

calculate the total proposed adjusted 

Federal prospective payment for the 

2006 LTCH PPS rate year ($43,162.25). 

Finally, as discussed in section IV.C.6. 

of this preamble, for the 2006 LTCH PPS 

rate year, the total proposed adjusted 

Federal prospective payment is reduced 

by the proposed 0.2 percent budget 

neutrality offset to account for the costs 

of the transition methodology. 

The following illustrates the 

components of the calculations in this 

example:

Unadjusted Standard Federal Prospective ...................................................................................................................................... $37,975.53 

Payment Rate: 

Labor-Related Share .................................................................................................................................................................. 0.72885 

Labor-Related Portion of the Federal Rate ........................................................................................................................ = $27,678.47 

3/5ths Wage Index (CBSA 16974) ............................................................................................................................................ 1.0521 

Wage-Adjusted Labor Share of Federal Rate .................................................................................................................... = $29,120.52 

Nonlabor-Related Portion of the Federal Rate ($37,975.53 × 0.27115) .................................................................................. + $ 10,297.06 

Adjusted Federal Rate Amount ......................................................................................................................................... = $39,417.58 

LTC–DRG 9 Relative Weight .................................................................................................................................................... × 1.0950 

Total Adjusted Federal Prospective Payment (Before the Budget Neutrality Offset) .................................................... = $43,162.25 

Budget Neutrality Offset ........................................................................................................................................................... × 0.998 

Total Federal Prospective Payment (Including the Budget Neutrality Offset) ............................................................... = $42,816.95 

5756 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

VI. Transition Period 

To provide a stable fiscal base for 

LTCHs, under § 412.533, we 

implemented a 5-year transition period 

from reasonable cost-based 

reimbursement under the TEFRA 

system to a prospective payment based 

on industry-wide average operating and 

capital-related costs. Under the average 

pricing system, payment is not based on 

the experience of an individual hospital. 

As discussed in the August 30, 2002 

final rule (67 FR 56038), we believe that 

a 5-year phase-in provides LTCHs time 

to adjust their operations and capital 

financing to the LTCH PPS, which is 

based on prospectively determined 

Federal payment rates. Furthermore, we 

believe that the 5-year phase-in of the 

LTCH PPS also allows LTCH personnel 

to develop proficiency with the LTC–

DRG coding system, which will result in 

improvement in the quality of the data 

used for generating our annual 

determination of relative weights and 

payment rates. 

In accordance with § 412.533, the 

transition period for all hospitals subject 

to the LTCH PPS begins with the 

hospital’s first cost reporting period 

beginning on or after October 1, 2002 

and extends through the hospital’s last 

cost reporting period beginning before 

October 1, 2006. During the 5-year 

transition period, a LTCH’s total 

payment under the LTCH PPS is based 

on two payment percentages—one based 

on reasonable cost-based (TEFRA) 

payments and the other based on the 

standard Federal prospective payment 

rate. The percentage of payment based 

on the LTCH PPS Federal rate increases 

by 20 percentage points each year, while 

the reasonable cost-based payment rate 

percentage decreases by 20 percentage 

points each year, for the next 2 fiscal 

years. For cost reporting periods 

beginning on or after October 1, 2006, 

Medicare payment to LTCHs will be 

determined entirely under the Federal 

rate. The blend percentages as set forth 

in § 412.533(a) are as follows:

Cost reporting periods beginning on or after Federal rate 

percentage 

Reasonable 

cost

principles 

Rate

percentage 

October 1, 2002 ............................................................................................................................................................... 20 80 

October 1, 2003 ............................................................................................................................................................... 40 60 

October 1, 2004 ............................................................................................................................................................... 60 40 

October 1, 2005 ............................................................................................................................................................... 80 20 

October 1, 2006 ............................................................................................................................................................... 100 0 

For cost reporting periods that begin 

on or after October 1, 2004, and before 

October 1, 2005 (FY 2005), the total 

payment for a LTCH is 40 percent of the 

amount calculated under reasonable 

cost principles for that specific LTCH 

and 60 percent of the Federal 

prospective payment amount. For cost 

reporting periods that begin on or after 

October 1, 2005 and before October 1, 

2006 (FY 2006), the total payment for a 

LTCH will be 20 percent of the amount 

calculated under reasonable cost 

principles for that specific LTCH and 80 

percent of the Federal prospective 

payment amount. As we noted in the 

May 7, 2004 final rule (69 FR 25674), 

the change in the effective date of the 

annual LTCH PPS rate update from 

October 1 to July 1 has no effect on the 

LTCH PPS transition period as set forth 

in § 412.533(a). That is, LTCHs paid 

under the transition blend under 

§ 412.533(a) will receive those blend 

percentages for the entire 5-year 

transition period (unless they elect 

payments based on 100 percent of the 

Federal rate). Furthermore, LTCHs paid 

under the transition blend will receive 

the appropriate blend percentages of the 

Federal and reasonable cost-based rate 

for their entire cost reporting period as 

prescribed in § 412.533(a)(1) through 

(a)(5). 

The reasonable cost-based rate 

percentage is a LTCH specific amount 

that is based on the amount that the 

LTCH would have been paid (under 

TEFRA) if the PPS were not 

implemented. Medicare fiscal 

intermediaries will continue to compute 

the LTCH reasonable cost-based 

payment amount according to 

§ 412.22(b) of the regulations and 

sections 1886(d) and (g) of the Act. 

In implementing the PPS for LTCHs, 

one of our goals is to transition hospitals 

to full prospective payments as soon as 

appropriate. Therefore, under 

§ 412.533(c), we allow a LTCH, which is 

subject to a blended rate, to elect 

payment based on 100 percent of the 

Federal rate at the start of any of its cost 

reporting periods during the 5-year 

transition period rather than 

incrementally shifting from reasonable 

cost-based payments to prospective 

payments. Once a LTCH elects to be 

paid based on 100 percent of the Federal 

rate, it will not be able to revert to the 

transition blend. For cost reporting 

periods that began on or after December 

1, 2002, and for the remainder of the 5-

year transition period, a LTCH must 

notify its fiscal intermediary in writing 

of its election on or before the 30th day 

prior to the start of the LTCH’s next cost 

reporting period. For example, a LTCH 

with a cost reporting period that begins 

on May 1, 2005, must notify its fiscal 

intermediary in writing of an election 

before April 1, 2005. 

Under § 412.533(c)(2)(i), the 

notification by the LTCH to make the 

election must be made in writing to the 

Medicare fiscal intermediary. Under 

§§ 412.533(c)(2)(ii) and (c)(2)(iii), the 

intermediary must receive the request 

on or before the specified date (that is, 

on or before the 30th day before the 

applicable cost reporting period begins 

for cost reporting periods beginning on 

or after December 1, 2002 through 

September 30, 2006), regardless of any 

postmarks or anticipated delivery dates. 

Notifications received, postmarked, or 

delivered by other means after the 

specified date will not be accepted. If 

the specified date falls on a day that the 

postal service or other delivery sources 

are not open for business, the LTCH will 

be responsible for allowing sufficient 

time for the delivery of the request 

before the deadline. If a LTCH’s 

notification is not received timely, 

payment will be based on the transition 

period blend percentages. 

VII. Payments to New LTCHs 

Under § 412.23(e)(4), for purposes of 

Medicare payment under the LTCH PPS, 

we define a new LTCH as a provider of 

inpatient hospital services that 

otherwise meets the qualifying criteria 

for LTCHs, set forth in § 412.23(e)(1) 

and (e)(2), under present or previous 

ownership (or both), and its first cost 

reporting period as a LTCH begins on or 

after October 1, 2002. We also specify in 

§ 412.500 that the LTCH PPS is 

applicable to hospitals with a cost 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5757

reporting period that began on or after 

October 1, 2002. 

As we discussed in the August 30, 

2002 final rule (67 FR 56040), this 

definition of new LTCHs should not be 

confused with those LTCHs first paid 

under the TEFRA payment system for 

discharges occurring on or after October 

1, 1997, described in section 

1886(b)(7)(A) of the Act, as added by 

section 4416 of Public Law 105–33. As 

stated in § 413.40(f)(2)(ii), for cost 

reporting periods beginning on or after 

October 1, 1997, the payment amount 

for a ‘‘new’’ (post-FY 1998) LTCH is the 

lower of the hospital’s net inpatient 

operating cost per case or 110 percent of 

the national median target amount 

payment limit for hospitals in the same 

class for cost reporting periods ending 

during FY 1996, updated to the 

applicable cost reporting period (see 62 

FR 46019, August 29, 1997). Under the 

LTCH PPS, those ‘‘new’’ LTCHs that 

meet the definition of ‘‘new’’ under 

§ 413.40(f)(2)(ii) and that have their first 

cost reporting period as a LTCH 

beginning prior to October 1, 2002, will 

be paid under the transition 

methodology described in § 412.533. 

As noted above and in accordance 

with § 412.533(d), new LTCHs will not 

participate in the 5-year transition from 

reasonable cost-based reimbursement to 

prospective payment. As we discussed 

in the August 30, 2002 final rule (67 FR 

56040), the transition period is intended 

to provide existing LTCHs time to adjust 

to payment under the new system. Since 

these new LTCHs with their first cost 

reporting periods as LTCHs beginning 

on or after October 1, 2002, would not 

have received payment under 

reasonable cost-based reimbursement 

for the delivery of LTCH services prior 

to the effective date of the LTCH PPS, 

we do not believe that those new LTCHs 

require a transition period in order to 

make adjustments to their operations 

and capital financing, as will LTCHs 

that have been paid under the 

reasonable cost-based methodology.

VIII. Method of Payment 

Under § 412.513, a Medicare LTCH 

patient is classified into a LTC–DRG 

based on the principal diagnosis, up to 

eight additional (secondary) diagnoses, 

and up to six procedures performed 

during the stay, as well as age, sex, and 

discharge status of the patient. The 

LTC–DRG is used to determine the 

Federal prospective payment that the 

LTCH will receive for the Medicarecovered Part A services the LTCH 

furnished during the Medicare patient’s 

stay. Under § 412.541(a), the payment is 

based on the submission of the 

discharge bill. The discharge bill also 

provides data to allow for reclassifying 

the stay from payment at the full LTC–

DRG rate to payment for a case as a 

short-stay outlier (under § 412.529) or as 

an interrupted stay (under § 412.531), or 

to determine if the case will qualify for 

a high-cost outlier payment (under 

§ 412.525(a)). 

Accordingly, the ICD–9–CM codes 

and other information used to determine 

if an adjustment to the full LTC–DRG 

payment is necessary (for example, 

length of stay or interrupted stay status) 

are recorded by the LTCH on the 

Medicare patient’s discharge bill and 

submitted to the Medicare fiscal 

intermediary for processing. The 

payment represents payment in full, 

under § 412.521(b), for inpatient 

operating and capital-related costs, but 

not for the costs of an approved medical 

education program, bad debts, blood 

clotting factors, anesthesia services by 

hospital-employed nonphysician 

anesthetists or obtained under 

arrangement, or the costs of 

photocopying and mailing medical 

records requested by a Quality 

Improvement Organization (QIO), which 

are costs paid outside the LTCH PPS. 

As under the previous reasonable 

cost-based payment system, under 

§ 412.541(b), a LTCH may elect to be 

paid using the periodic interim payment 

(PIP) method described in § 413.64(h) 

and may be eligible to receive 

accelerated payments as described in 

§ 413.64(g). 

For those LTCHs that are paid during 

the 5-year transition based on the 

blended transition methodology in 

§ 412.533(a) for cost reporting periods 

that began on or after October 1, 2002, 

and before October 1, 2006, the PIP 

amount is based on the transition blend. 

For those LTCHs that are paid based on 

100 percent of the standard Federal rate, 

the PIP amount is based on the 

estimated prospective payment for the 

year rather than on the estimated 

reasonable cost-based reimbursement. 

We exclude high-cost outlier payments 

that are paid upon submission of a 

discharge bill from the PIP amounts. In 

addition, Part A costs that are not paid 

for under the LTCH PPS, including 

Medicare costs of an approved medical 

education program, bad debts, blood 

clotting factors, anesthesia services by 

hospital-employed nonphysician 

anesthetists or obtained under 

arrangement, and the costs of 

photocopying and mailing medical 

records requested by a QIO, are subject 

to the interim payment provisions 

(§ 412.541(c)). 

Under § 412.541(d), LTCHs with 

unusually long lengths of stay that are 

not receiving payment under the PIP 

method may bill on an interim basis (60 

days after an admission and at intervals 

of at least 60 days after the date of the 

first interim bill) and should include 

any high-cost outlier payment 

determined as of the last day for which 

the services have been billed. 

IX. MedPAC Recommendations/

Monitoring 

The Medicare Payment Advisory 

Commission’s (MedPAC’s) June 2004 

Report to the Congress: Variation and 

Innovation in Medicare, contained a 

chapter on ‘‘Defining Long-Term Care 

Hospitals.’’ In this chapter, the 

Commission focused on a broad range of 

issues central to understanding LTCHs 

which, although rapidly increasing in 

number, is still the smallest of all 

provider categories, but the most costly 

to the Medicare program per beneficiary 

episode of care. 

The Commission identified particular 

problems such as growth of the LTCH 

industry, and high payment rates that 

appear to result from current payment 

incentives. Specifically the report states, 

‘‘[F]irst, the financial incentive of the 

acute and long-term care hospital PPSs 

are likely to encourage facilities to 

selectively retain and admit certain 

types of patients to minimize their costs. 

Acute hospitals have a financial 

incentive to transfer patients as quickly 

as possible if they are likely to become 

high-cost outliers (to avoid losses on 

those patients). LTCHs have an 

incentive to admit patients with a given 

diagnosis who are likely to require 

fewer resources. Second, as the number 

of LTCHs grows, facilities may find it 

increasingly difficult to find patients 

who truly require LTCH-level care; this 

would lead to an increase in lower 

severity patients being cared for in 

LTCHs and higher Medicare spending. 

Finally, LTCH care is costly. The per 

case base rate in $37,000 and payments 

can be as high as $115,000 per case for 

the most complex patients.’’ (pp. 127–8) 

The Commission also examined 

LTCHs in the June 2003 Report to the 

Congress, entitled, ‘‘Monitoring postacute care.’’ Citing that Report, the 

Commission compared beneficiaries 

treated in LTCHs and other settings and 

determined that based on ‘‘the 11 most 

common diagnoses in LTCHs, using 

descriptive analysis and controlling for 

diagnosis related group (DRG) and 

severity of illness * * * that patients in 

market areas with LTCHs had similar 

acute hospital lengths of stay [preceding 

the LTCH stay] whether they used these 

facilities or not.’’ Further, ‘‘[p]atients 

who used LTCHs were three to five 

times less likely to use skilled nursing 

facility (SNF) care, suggesting that SNFs 

5758 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

and long-term care hospitals may be 

substitutes.’’ The June 2004 Report had 

also noted that ‘‘* * * Medicare pays 

more for patients treated in LTCHs, 

compared with patients not treated in 

them’’, but also concluded that this 

study, as well as the rapid and 

continuing growth in the number of 

LTCHs, the corresponding increases in 

Medicare spending, combined with the 

markedly uneven distribution of LTCHs 

throughout the country, raised 

additional issues for further research. (p. 

122) 

In its June 2004 Report to the 

Congress, the Commission reported the 

results of this subsequent research, both 

qualitative and quantitative, which 

focused on the following questions: 

What role do long-term care hospitals 

play in providing care?; Where are 

clinically similar patients treated in 

areas without long-term care hospitals?; 

and How do Medicare payments and 

outcomes compare for LTCH patients 

versus those in other settings? (p. 122). 

The Commission’s research utilized 

structured interviews with health care 

providers and hospital administrators; 

site visits and clinical presentations; 

and quantitative analyses of markets 

with and without LTCHs and patientlevel analyses to examine outcomes and 

per-episode impact on Medicare costs. 

Responses to these questions included 

the following assertions: 

• LTCHs provide post-acute care to a 

small number of medically complex 

patients who are more stable than 

patients in an intensive care unit (ICU) 

but may still have unresolved 

underlying complex medical conditions. 

• The use of LTCHs is associated with 

certain diagnoses, severity levels and 

the proximity of the facility. 

• In areas without LTCHs, acute 

hospitals and SNFs are the principal 

substitutes of LTCHs. 

• When LTCH care is not targeted to 

patients most likely to need this level of 

care, care for patients at a LTCH is more 

costly to Medicare than for similar 

patients in alternative settings. 

Conversely, when LTCH care is targeted 

to patients most likely to need this level 

of care, costs for those patients appear 

to be comparable to costs for those who 

use other settings (and costs for LTCH 

patients with tracheostomies save 

Medicare money) in large part because 

of fewer acute hospital readmissions for 

those patients. (pp 121–134) 

The Commission’s interpretations of 

its qualitative and quantitative research 

findings led to two specific 

recommendations:

‘‘5A—The Congress and the Secretary 

should define long-term care hospitals 

by facility and patient criteria that 

ensure that patients admitted to these 

facilities are medically complex and 

have a good chance at improvement. 

• Facility-level criteria should 

characterize this level of care by features 

such as staffing, patient evaluation and 

review processes, and mix of patients. 

• Patient-level criteria should identify 

specific clinical characteristics and 

treatment modalities. 

5B—The Secretary should require the 

Quality Improvement Organizations to 

review long-term care hospital 

admissions for medical necessity and 

monitor that these facilities are in 

compliance with defining criteria.’’ (p. 

120). 

Since the publication of MedPAC’s 

recommendations, we have discussed 

the implications of the Report with 

several trade associations that represent 

different facets of the LTCH industry 

(for example, older non-profit LTCHs; a 

for-profit chain that specializes in a 

particular case-mix; another for-profit 

chain which functions mainly in the 

HwH model). 

In response to the recommendation in 

MedPAC’s June 2004 Report that the 

Secretary examine defining LTCHs by 

facility and patient criteria, we have 

awarded a contract to Research Triangle 

Institute (RTI), International for a 

thorough examination of the 

Commission’s recommendations based 

on the performance of a wide variety of 

analytic tasks using CMS data files, and 

also utilizing information collected from 

physicians, providers, and LTCH trade 

associations. This contract, ‘‘Long Term 

Care Hospital (LTCH) Payment System 

Refinement/Evaluation,’’ will assist 

(CMS) in researching MedPAC’s 

recommendations regarding the 

appropriate and cost-effective use of 

LTCHs in the Medicare program. With 

the recommendations of MedPAC’s June 

2004 Report to Congress as a point of 

departure, RTI, International will 

evaluate patient or facility level 

characteristics for LTCHs in order to 

identify and distinguish the role of these 

hospitals as a Medicare provider. This 

effort will be multi-faceted. Claims 

analysis of patients treated by LTCHs, as 

well as outlier patients treated at acute 

care hospitals will provide information 

to help direct this work, and several 

additional types of data sources will be 

used to evaluate these two issues, 

including administrative data such as 

Medicare claims as well as primary data 

collected through interviews, and a 

secondary analysis of existing regulatory 

requirements. As they gather 

information for the purposes of 

determining the feasibility of 

establishing LTCH patient and facilitylevel criteria, our contractor has been 

directed to include information from 

representatives, along with other stakeholders in the LTCH industry. 

Additionally, the contractor will 

examine the present role of QIOs in the 

Medicare program, focusing on their 

responsibilities regarding the LTCH 

PPS, as well as the potential for an 

expanded QIO role as suggested by 

MedPAC’s recommendations. The goals 

of this research will be to document 

current practices related to the MedPAC 

recommendations, both in terms of 

provider certification, quality reviews, 

and hospital practice patterns. 

Specifically, the project itself will be 

completed in two phases. Phase I, 

which is presently being undertaken by 

the contractor, focuses on an analysis of 

LTCHs within the current Medicare 

system, their history as participating 

providers, their case-mix, the criteria 

used by QIOs to determine the 

appropriateness of treatment in LTCHs, 

and where similar patients are treated in 

areas that lack LTCHs. Prior analyses of 

these issues by other contractors will be 

utilized as well as preliminary 

discussions with MedPAC, other 

researchers, and the QIOs. Building on 

the work of Phase I, Phase II will 

continue to address the feasibility of 

MedPAC’s proposed criteria by first 

investigating the appropriateness of 

patient level criteria to determine 

whether there are distinctions between 

patients treated in LTCHs and other 

types of potential substitute providers 

(with particular attention to varying 

outcomes). Medicare claims data will be 

utilized for comparisons of LTCH 

patients and long-stay patients who are 

treated in acute care hospitals that have 

attained high cost outlier status. A 

separate analysis will be made for a 

subset of LTCH patients with diagnoses 

that are typically treated in IRFs. The 

contractor is then planning interviews 

with QIOs for the purpose of gathering 

information on assessment measures for 

each setting. Comparisons of these 

instruments will be made across regions 

for their usefulness as standardized 

patient screening or assessment tools. 

The contractors then plan to evaluate 

the outcomes of their research in the 

context of MedPAC’s recommendation 

for the development of facility-level 

criteria, using claims, interviews, and 

document reviews. To the extent the 

analyses suggest that changes should be 

made that may affect LTCH payments, 

LTCH discharges, or the definition of 

LTCH, such proposed changes could 

necessitate some statutory or regulatory 

changes. 

In the August 30, 2002 final rule (67 

FR 56014), we described an on-going 

monitoring component of the new LTCH 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5759

PPS that would enable us to evaluate 

the impact of the new payment policies. 

Specifically, we discussed on-going 

analysis of the various policies that we 

believe would provide equitable 

payment for stays that reflect less than 

the full course of treatment and reduce 

the incentives for inappropriate 

admissions, transfers, or premature 

discharges of patients that are present in 

a discharge-based PPS. To this end, we 

have designed system features utilizing 

MedPAR data that will enable us and 

the fiscal intermediary to track 

beneficiary movement to and from a 

LTCH and track LTCH patients to and 

from another Medicare provider. We 

also stated our intent to collect and 

interpret data on changes in average 

lengths of stay under the LTCH PPS for 

specific LTC–DRGs and the impact of 

these changes on the Medicare program. 

As part of our data analysis, we have 

revisited a number of our original and 

even pre-LTCH PPS policies in order to 

address what we believed were 

behaviors by certain LTCHs that have 

led to inappropriate Medicare 

payments. In recent Federal Register

publications, for example, we have 

proposed and subsequently finalized 

revisions to the interruption of stay 

policy (69 FR 25692, May, 2004), and 

we established a payment adjustment 

for LTCH HwHs and satellites (69 FR 

49191, August 11, 2004).

Also, in the June 6, 2003 final rule (68 

FR 34157), we explained that, given that 

the only requirement that distinguishes 

a LTCH from other acute care hospitals 

is an average inpatient length of stay of 

greater than 25 days, we continue to be 

concerned about the extent to which 

LTCH services and patients differ from 

those services and patients treated in 

other Medicare covered settings (for 

example, SNFs and IRFs) and how the 

LTCH PPS will affect the access, quality, 

and costs across the health care 

continuum. Thus, we will be monitoring 

trends in the supply and utilization of 

LTCHs and Medicare’s costs in LTCHs 

relative to other Medicare providers. For 

example, we intend to conduct medical 

record reviews of Medicare patients to 

monitor changes in service use 

(ventilator use, for example) over a 

LTCH episode of care and to assess 

patterns in the average length of stay at 

the facility level. 

We also are collecting data on patients 

staying for periods of 6 months or longer 

in LTCHs and believe that QIOs will be 

evaluating whether or not such 

extensive stays may be indicative of 

LTCH patients who could be more 

appropriately served at a SNF. 

As we discussed in the June 6, 2003 

final rule (68 FR 34157), the MedPAC 

endorsed this monitoring activity as a 

primary aspect of the design and ongoing functioning of the LTCH PPS. 

Furthermore, as discussed earlier, the 

Commission, in its June, 2004 Report to 

the Congress, recommended that we 

develop facility and patient criteria for 

LTCH admission and treatment and 

require a review by QIOs to evaluate 

whether LTCH admissions meet criteria 

for medical necessity once the 

recommended facility and patient 

criteria are established. 

The involvement of QIOs in the LTCH 

PPS was established at the outset of the 

system at § 412.508, and was described 

in the August 30, 2002 final rule (67 FR 

55975). Specific activities for QIOs 

regarding LTCHs are included in 

contracts awarded by our Office of 

Clinical Standards and Quality (OCSQ) 

detailing their scope(s) of work among 

which are reviewing random samples of 

LTCH records for medical necessity and 

coding for generating national payment 

error estimates; proposing projects to 

reduce improper payments utilizing the 

national payment error cause analysis or 

their own data collection. One direction 

that is being explored by OCSQ for this 

type of project is the identification of 

LTCHs that have specific diagnoses 

codes related to medically unnecessary 

admissions, or perhaps high levels of 

short-stay outliers. 

In January 2004, QIOs began 

reviewing medical records for LTCH 

claims for the specific purpose of 

estimating a national payment error rate. 

Presently, QIOs review 116 LTCH cases 

each month for admission necessity, for 

acute care admission, and coding. A 

cause analysis will be done after the 

first year’s sampling to discern patterns 

of improper payments for admission 

necessity and coding. The payment 

error estimates and some of these 

analyses will be included in the annual 

fee-for-service error report. 

We continue to be concerned that our 

policies must assure that LTCHs only 

treat patients for whom the LTCH level 

of care is appropriate in order to ensure 

that Medicare is a prudent purchaser of 

these very costly services. In addressing 

one aspect of the issue of whether 

patients in LTCHs truly need hospitallevel of care, beginning in October 2004 

and slated to end in July 2005 OCSQ has 

undertaken a study of LTCH short-stay 

outliers. Under the short-stay outlier 

policy at § 412.529, when a LTCH 

patient stay is considered a short-stay 

outlier for Medicare payment purposes, 

the LTCH receives an adjusted 

(generally lower) payment when the 

covered days of care do not exceed 5⁄6

of the (geometric) average length of stay 

for the particular LTC–DRG assigned to 

the case. The study evaluates the extent 

of short-stay outliers and the possibility 

of retention of patients by the LTCH 

when the LTCH patient no longer 

requires hospital-level of care and could 

be effectively served in a SNF. Due to 

possible reductions in payment 

combined with a need to maintain an 

average length of stay of greater than 25 

days to remain an LTCH, we believe that 

LTCHs may be retaining these patients 

beyond the short-stay outlier threshold 

in order to increase Medicare payments. 

The three QIOs located in States which 

house the majority of LTCHs are 

conducting reviews on six months of 

records from the monthly random 

sample for this study in order to assess 

this situation and to determine whether 

and to what extent patients are being 

retained at the LTCH beyond their need 

for hospital-level care and whether 

retention can be linked to the increased 

payment for patients exceeding the 

short-stay outlier threshold. If it is 

determined that retaining LTCH patients 

unnecessarily beyond the short-stay 

outlier threshold is a significant 

payment issue, OCSQ plans to add this 

review type to the standard QIO LTCH 

review. 

In addition to existing tasks and the 

above research study on short-stay 

outliers, in accordance with the goals of 

our on-going monitoring program as 

well as MedPAC’s June 2003 

recommendations, we believe the QIO’s 

findings will be invaluable in both 

identifying the most appropriate type of 

patients for treatment at a LTCH as well 

as to begin to explore measures of costeffectiveness for LTCH services. 

Currently, we do not require LTCHs to 

submit any clinical or other quality 

data, thus, any measurement activity 

must be based solely on claims. General 

concerns that we have raised since the 

establishment of the LTCH PPS, 

however, and the analysis and very 

specific recommendations in the 

MedPAC’s June 2004 Report have led us 

to question what level of additional data 

beyond current claims would be 

required for the creation of clinical 

quality measures for LTCHs. 

Furthermore, we are presently 

evaluating whether CMS’s Quality 

Measurement and Health Assessment 

Group (QMHAG) will need to build a 

quality measurement program for the 

LTCH setting. (A quality measurement 

program would generally establish 

processes or a group of tasks or 

processes which, if completed 

satisfactorily, would indicate a level of 

compliance with program goals. Clinical 

quality measures for acute care hospitals 

based on voluntary data submission and 

for nursing homes and home health 

5760 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

agencies based on a mandatory 

standardized data submission are 

currently being generated.)

As in the acute care hospital, in order 

to establish a robust set of clinical 

quality measures for LTCHs, the 

domains would have to reach a broad 

population, be based on medical 

evidence, be scientifically valid, and be 

actionable. We are also considering 

measures that cut across other care 

delivery sites and are broadly focused 

around areas such as medication 

management or patient safety. We 

anticipate a mix of process and 

outcomes measures that would reflect 

expected care for each setting, but we 

also believe that the measures should 

not ultimately be limited to clinical 

measures, but should include measures 

of institutional procedures related to 

delivery of care systems and patients’ 

actual experience of care. Moreover, if 

these measures are to be used to relate 

payment to outcome or performance, it 

is essential that the measures be 

adequately risk adjusted. 

Therefore, in addition to pursuing our 

on-going monitoring program under the 

direction of our Office of Research, 

Development, and Information (ORDI), 

existing QIO monitoring and studies, 

and our considerations of expanding the 

QIO role in the LTCH PPS, as noted 

above, we have awarded a contract to 

RTI International for a thorough 

examination of the feasibility of 

implementing MedPAC’s 

recommendations that are contained in 

the June 2004 Report to the Congress. 

The research contract was funded for FY 

2005 and we anticipate that we will be 

able to include some preliminary 

findings in the FY 2006 final rule. 

X. Collection of Information 

Requirements 

The collection requirements 

associated with this proposed rule are 

exempt from the PRA as stipulated 

under P.L. 100–203, Section 4201. 

XI. Regulatory Impact Analysis 

[If you choose to comment on issues 

in this section, please include the 

caption ‘‘PROPOSED ADJUSTED 

FEDERAL PROSPECTIVE PAYMENTS’’ 

at the beginning of your comments.] 

A. Introduction 

We have examined the impact of this 

proposed rule as required by Executive 

Order 12866 (September 1993, 

Regulatory Planning and Review), the 

Regulatory Flexibility Act (RFA) 

(September 16, 1980, Pub. L. 96–354), 

section 1102(b) of the Social Security 

Act (the Act), the Unfunded Mandates 

Reform Act of 1995 (UMRA) (Pub. L. 

104–4), and Executive Order 13132. 

1. Executive Order 12866

Executive Order 12866 (as amended 

by Executive Order 13258, which 

merely assigns responsibility of duties) 

directs agencies to assess all costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects, distributive impacts, and 

equity). A regulatory impact analysis 

(RIA) must be prepared for major rules 

with economically significant effects 

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

In this proposed rule, we are using the 

most recent estimate of the LTCH PPS 

market basket, updated claims data, and 

updated wage index values to estimate 

proposed payments for the 2006 LTCH 

PPS rate year. Based on the best 

available data for 261 LTCHs, we 

estimate that the proposed 3.1 percent 

increase to the standard Federal rate for 

the 2006 LTCH PPS rate year, in 

conjunction with the proposed decrease 

in fixed-loss amount (discussed in 

section IV.C.3. of this proposed rule) 

and the proposed slight decrease in the 

transition period budget neutrality offset 

(discussed in section IV.C.7. of this 

proposed rule), would result in an 

increase in payments from the 2005 

LTCH PPS rate year of $159 million for 

the 261 LTCHs. (Section IV.C.7. of this 

proposed rule includes an estimate of 

Medicare program payments for LTCH 

services.) Because the combined 

distributional effects and costs to the 

Medicare program are estimated to be 

greater than $100 million, this proposed 

rule is considered a major economic 

rule, as defined above. 

2. Regulatory Flexibility Act (RFA) 

The RFA requires agencies to analyze 

options for regulatory relief of small 

businesses. For purposes of the RFA, 

small entities include small businesses, 

nonprofit organizations, and 

government agencies. Most hospitals 

and most other providers and suppliers 

are small entities, either by nonprofit 

status or by having revenues of $26 

million or less in any 1 year. For 

purposes of the RFA, all hospitals are 

considered small entities according to 

the Small Business Administration’s 

latest size standards with total revenues 

of $26 million or less in any 1 year (for 

further information, see the Small 

Business Administration’s regulation at 

65 FR 69432, November 17, 2000). 

Because we lack data on individual 

hospital receipts, we cannot determine 

the number of small proprietary LTCHs. 

Therefore, we assume that all LTCHs are 

considered small entities for the 

purpose of the analysis that follows. 

Medicare fiscal intermediaries are not 

considered to be small entities. 

Individuals and States are not included 

in the definition of a small entity.

Currently, our database of 261 LTCHs 

includes the data for 62 non-profit 

(voluntary ownership control) LTCHs 

and 191 proprietary LTCHs. The 

remaining 8 LTCHs are Government 

owned and operated. (See Table II.) The 

impact of the proposed changes for the 

2006 LTCH PPS rate year are discussed 

below in section XII.B.4.c of this 

proposed rule. The provisions of this 

proposed rule represent a 5.5 percent 

increase in estimated proposed 

payments in the 2006 LTCH PPS rate 

year for all LTCHs (as shown in Table 

II below). We do not expect the 

proposed incremental increase of 5.5 

percent to the LTCH PPS Medicare 

payment rates, including the 0.1 percent 

incremental increase due to the 

proposed wage index changes 

(discussed in section IV.C.1. of this 

proposed rule), to have a significant 

adverse effect on the overall revenues of 

most LTCHs. In addition, LTCHs also 

provide services to (and generate 

revenue from) patients other than 

Medicare beneficiaries. Accordingly, we 

certify that this proposed rule would not 

have a significant impact on a 

substantial number of small entities, in 

accordance with RFA. 

3. Impact on Rural Hospitals 

Section 1102(b) of the Social Security 

Act requires us to prepare a regulatory 

impact analysis if a proposed or final 

rule may have a significant impact on 

the operations of a substantial number 

of small rural hospitals. This analysis 

must conform to the provisions of 

section 604 of the RFA. For purposes of 

section 1102(b) of the Act, we define a 

small rural hospital as a hospital that is 

located outside of a Metropolitan 

Statistical Area and has fewer than 100 

beds. As discussed in detail below, the 

rates and policies set forth in this 

proposed rule would not have a adverse 

impact on rural hospitals based on the 

data of the 16 rural hospitals in our 

database of the 261 LTCHs for which 

data were available. 

4. Unfunded Mandates 

Section 202 of the UMRA requires 

that agencies assess anticipated costs 

and benefits before issuing any rule that 

may result in expenditure in any one 

year by State, local, or tribal 

governments, in the aggregate, or by the 

private sector, of $110 million or more. 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5761

This proposed rule would not mandate 

any requirements for State, local, or 

tribal governments, nor would it result 

in expenditures by the private sector of 

$110 million or more in any one year. 

5. Federalism 

Executive Order 13132 establishes 

certain requirements that an agency 

must meet when it promulgates a 

proposed rule (and subsequent final 

rule) that imposes substantial direct 

requirement costs on State and local 

governments, preempts State law, or 

otherwise has Federalism implications. 

We have examined this proposed rule 

under the criteria set forth in Executive 

Order 13132 and have determined that 

this proposed rule would not have any 

significant impact on the rights, roles, 

and responsibilities of State, local, or 

tribal governments or preempt State 

law, based on the 8 State and local 

LTCHs in our database of 261 LTCHs for 

which data were available. 

B. Anticipated Effects of Proposed 

Payment Rate Changes 

We discuss the impact of the 

proposed payment rate changes in this 

proposed rule below in terms of their 

fiscal impact on the Medicare budget 

and on LTCHs. 

1. Budgetary Impact 

Section 123(a)(1) of Medicare, 

Medicaid and State Child Health 

Insurance Program (SCHIP) Balanced 

Budget Refinement Act of 1999 (BBRA) 

(Pub. L. 106–113) requires that the PPS 

developed for LTCHs ‘‘maintain budget 

neutrality.’’ Therefore, in calculating the 

standard Federal rate under 

§ 412.523(d)(2), we set total payments 

for FY 2003 under the LTCH PPS so that 

aggregate payments under the LTCH 

PPS are estimated to equal to the 

amount that would have been paid if 

this PPS had not been implemented. 

However, as discussed in greater detail 

in the August 30, 2002 final rule (67 FR 

56033–56036), the FY 2003 LTCH PPS 

standard Federal rate ($34,956.15) was 

calculated as though all LTCHs would 

be paid based on 100 percent of the 

standard Federal rate in FY 2003. As 

discussed in section IV.C.7. of this 

proposed rule, we apply a proposed 

budget neutrality offset to payments to 

account for the monetary effect of the 5-

year transition to full prospective 

payment under the LTCH PPS and the 

policy to permit LTCHs to elect, during 

the transition, to be paid based on 100 

percent of the proposed standard 

Federal rate rather than a blend of 

proposed Federal prospective payments 

and reasonable cost-based payments. 

The amount of the proposed offset is 

equal to 1 minus the ratio of the 

estimated payments based on 100 

percent of the LTCH PPS Federal rate to 

the projected total Medicare program 

payments that would be made under the 

transition methodology and the option 

to elect payment based on 100 percent 

of the Federal prospective payment rate. 

2. Impact on Providers 

The basic methodology for 

determining a LTCH PPS payment is set 

forth in the regulations at § 412.515 

through § 412.525. In addition to the 

basic LTC–DRG payment (standard 

Federal rate × LTC–DRG relative 

weight), we make adjustments for 

differences in area wage levels, cost-ofliving adjustment for Alaska and 

Hawaii, and short-stay outliers. 

Furthermore, LTCHs may also receive 

high-cost outlier payments for those 

cases that qualify based on the threshold 

established each rate year. Section 

412.533 provides for a 5-year transition 

to fully prospective payments from 

payment based on reasonable cost-based 

methodology. During the 5-year 

transition period, payments to LTCHs 

are based on an increasing percentage of 

the LTCH PPS Federal rate and a 

decreasing percentage of payment based 

on reasonable cost-based methodology. 

Section 412.533(c) provides for a onetime opportunity for LTCHs to elect 

payments based on 100 percent of the 

LTCH PPS Federal rate. 

In order to understand the impact of 

the proposed changes to the LTCH PPS 

discussed in this proposed rule on 

different categories of LTCHs for the 

2006 LTCH PPS rate year, it is necessary 

to estimate payments per discharge 

under the LTCH PPS rates and factors 

for the 2005 LTCH PPS rate year (see the 

May 7, 2005 final rule; 68 FR 25674) 

and to estimate payments per discharge 

that would be made under the proposed 

LTCH PPS rates and factors for the 2006 

LTCH PPS rate year, as discussed in the 

preamble of this proposed rule. To this 

end, we determined the percent change 

in payments per discharge of estimated 

2005 LTCH PPS rate year payments to 

estimated 2006 LTCH PPS rate year 

payments for each category of LTCHs. In 

addition, for each category of LTCHs, 

we have included the estimated percent 

change in payments per discharge 

resulting from the proposed LTCH PPS 

wage index changes (described in 

section IV.C.1. of this proposed rule). 

The proposed wage index changes for 

the 2006 LTCH PPS rate year include 

the proposed changes to the LTCH PPS 

wage index for the 2006 LTCH PPS rate 

year include the proposed change in the 

labor market area definitions, the 

proposed update in the wage index data, 

and the established phase-in of the 

LTCH PPS wage index adjustment, from 

2005 LTCH PPS rate year (LTCHs’ FYs 

2004 and 2005 cost reporting periods) to 

the 2006 LTCH PPS rate year (LTCHs’ 

FYs 2005 and 2006 LTCH cost reporting 

periods). 

Hospital groups were based on 

characteristics provided in the Online 

Survey Certification and Reporting 

(System) (OSCAR) data, FYs 2000 

through 2003 cost report data, and 

Provider Specific File data. Hospitals 

with incomplete characteristics were 

grouped into the ‘‘unknown’’ category. 

Hospital groups include:

—Location: Large Urban/Other Urban/

Rural 

—Participation Date 

—Ownership Control

—Census Region 

—Bed Size

To estimate the impacts among the 

various categories of providers during 

the LTCH PPS transition period, it is 

imperative that reasonable cost-based 

methodology payments and prospective 

payments contain similar inputs. More 

specifically, in the impact analysis 

showing the impact reflecting the 

applicable transition blend percentages 

of prospective payments and reasonable 

cost-based methodology payments and 

the option to elect payment based on 

100 percent of the proposed Federal rate 

(Table III below), we estimated 

payments only for those providers for 

whom we are able to calculate payments 

based on reasonable cost-based 

methodology. For example, if we did 

not have at least 2 years of historical 

cost data for a LTCH, we were unable to 

determine an update to the LTCH’s 

target amount to estimate payment 

under reasonable cost-based 

methodology. 

Using LTCH cases from the FY 2003 

MedPAR file and cost data from FYs 

1999 through 2002 to estimate payments 

under the current reasonable cost-based 

principles, we have obtained both casemix and cost data for 261 LTCHs. Thus, 

for the impact analyses reflecting the 

applicable transition blend percentages 

and the option to elect payment based 

on 100 percent of the Federal rate (see 

Table II below), we used data from 261 

LTCHs. While currently there are more 

than 300 LTCHs, the most recent growth 

is predominantly in for-profit LTCHs 

that provide respiratory and ventilatordependent patient care. We believe that 

the discharges from the FY 2003 

MedPAR data for the 261 LTCHs in our 

database provide sufficient 

representation in the LTC-DRGs 

containing discharges for patients who 

received respiratory and ventilatorVerDate jul<14>2003 16:47 Feb 02, 2005 Jkt 205001 PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 E:\FR\FM\03FEP2.SGM 03FEP2
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dependent care based on the relatively 

large number of LTCH cases in LTC–

DRGs for these diagnoses. However, 

using cases from the FY 2003 MedPAR 

file we had case-mix data for 301 

LTCHs. Cost data to determine current 

payments under reasonable cost-based 

methodology payments are not needed 

to simulate payments based on 100 

percent of the proposed Federal rate. 

Therefore, for the impact analyses 

reflecting fully phased-in prospective 

payments (see Table III below), we used 

data from 301 LTCHs. 

These impacts reflect the estimated 

‘‘losses’’ or ‘‘gains’’ among the various 

classifications of LTCHs for the 2005 

LTCH PPS rate year (July 1, 2004 

through June 30, 2005) compared to the 

2006 LTCH PPS rate year (July 1, 2005 

through June 30, 2006). Prospective 

payments for the 2005 LTCH rate year 

were based on the standard Federal rate 

of $36,833.69 and the hospitals’ 

estimated case-mix based on FY 2003 

claims data. Estimated prospective 

payments for the 2006 LTCH PPS rate 

year are based on the proposed standard 

Federal rate of $37,975.53 and the same 

FY 2003 claims data. 

3. Calculation of Prospective Payments 

To estimate payments under the 

LTCH PPS, we simulated payments on 

a case-by-case basis by applying the 

payment policy for short-stay outliers 

(as described in section IV.C.4.b. of this 

proposed rule) and the proposed 

adjustments for area wage differences 

(as described in section IV.C.1. of this 

proposed rule) and for the cost-of-living 

for Alaska and Hawaii (as described in 

section IV.C.2. of this proposed rule). 

Additional payments would also be 

made for high-cost outlier cases (as 

described in section IV.C.3. of this 

proposed rule). As noted in section 

IV.C.6. of this proposed rule, we are not 

proposing to make adjustments for rural 

location, geographic reclassification, 

indirect medical education costs, or a 

disproportionate share of low-income 

patients because sufficient new data 

have not been generated that would 

enable us to conduct a comprehensive 

reevaluation of these payment 

adjustments. 

For estimated 2006 LTCH PPS rate 

year payments, we used the applicable 

proposed LTCH wage index values 

effective for discharges occurring on or 

after July 1, 2005 through June 30, 2006 

(as shown in Tables 1 and 2 of the 

Addendum to this proposed rule) based 

on the proposed CBSA-based labor 

market area designations (described in 

section IV.C.1.c.1. of this proposed 

rule). 

For estimated 2005 LTCH PPS rate 

year payments, we used the applicable 

LTCH wage index values effective for 

discharges occurring on or after July 1, 

2004 through June 30, 2005 based on the 

existing MSA-based labor market area 

designations (see May 7, 2004 (69 FR 

25685)). We adjusted for area wage 

differences for estimated 2005 LTCH 

PPS rate year payments by computing a 

weighted average of a LTCH’s applicable 

wage index during the period from July 

1, 2004, through June 30, 2005, because 

some providers may experience a 

change in the wage index phase-in 

percentage during that period. For cost 

reporting periods beginning on or after 

October 1, 2003 and before September 

30, 2004 (FY 2004), the labor portion of 

the Federal rate was adjusted by twofifths of the applicable ‘‘LTCH PPS wage 

index’’ (that is, the FY 2004 IPPS wage 

index data without taking into account 

geographic reclassification, under 

sections 1886(d)(8) and (d)(10)) of the 

Act). For cost reporting periods 

beginning on or after October 1, 2004 

and before September 30, 2005 (FY 

2005), the labor portion of the Federal 

rate was adjusted by three-fifths of the 

applicable LTCH PPS wage index. 

Therefore, during the 2005 LTCH PPS 

rate year (July 1, 2004 through June 30, 

2005), a provider with a cost reporting 

period that began October 1, 2003, had 

3 months of payments under the twofifths wage index value and 9 months of 

payment under the three-fifths wage 

index value. For this provider, for the 

purposes of estimating payments for the 

impact analyses, we computed a 

blended wage index of 25 percent (3 

months/12 months) of the two-fifths 

wage index value and 75 percent (9 

months/12 months) of the three-fifths 

wage index value. The applicable LTCH 

PPS wage index values for the 2005 

LTCH PPS rate year are shown in Tables 

1 and 2 of the Addendum to the May 7, 

2004 final rule (69 FR 25722–25741). 

For estimated 2006 LTCH PPS rate 

year payments, we used the applicable 

proposed LTCH wage index values 

effective for discharges occurring on or 

after July 1, 2005 through June 30, 2006 

(as shown in Tables 1 and 2 of the 

Addendum to this proposed rule) based 

on the proposed CBSA-based labor 

market area designations (described in 

section IV.C.1.c.1. of this proposed 

rule). Because some providers may 

experience a change in the wage index 

phase-in percentage during that period, 

we adjusted for area wage differences 

for estimated 2006 LTCH PPS rate year 

payments by computing a weighted 

average of a LTCH’s applicable wage 

index during the period from July 1, 

2005, through June 30, 2006. For cost 

reporting periods that began on or after 

October 1, 2004 and before September 

30, 2005, the labor portion of the 

Federal rate is adjusted by three-fifths of 

the applicable LTCH PPS wage index 

(that is, as discussed in section IV.C.1. 

of this proposed rule, the FY 2005 IPPS 

acute care hospital wage index data 

without taking into account geographic 

reclassification under sections 

1886(d)(8) and (d)(10) of the Act). For 

cost reporting periods beginning on or 

after October 1, 2005 and before 

September 30, 2006, the labor portion of 

the Federal rate will be adjusted by fourfifths of the applicable LTCH PPS wage 

index. The proposed applicable LTCH 

PPS wage index values for the 2006 

LTCH PPS rate year are shown in Tables 

1 and 2 of the Addendum to this 

proposed rule.

For estimated 2005 LTCH PPS rate 

year payments, for those LTCHs 

projected to receive payment under the 

transition blend methodology, we also 

calculated payments using the 

applicable transition blend percentages. 

During the 2005 LTCH PPS rate year, 

based on the transition blend 

percentages set forth in § 412.533(a), 

some providers may experience a 

change in the transition blend 

percentage during the period from July 

1, 2004 through June 30, 2005. For 

example, during the period from July 1, 

2004 through June 30, 2005, a provider 

with a cost reporting period beginning 

on October 1, 2003 (which is paid under 

the 60/40 transition blend (60 percent of 

payments based on reasonable costbased methodology and 40 percent of 

payments under the LTCH PPS) 

beginning October 1, 2003) has 3 

months (July 1, 2004 through September 

30, 2004) under the 60/40 blend and 9 

months (October 1, 2004 through June 

30, 2005) of payment under the 40/60-

transition blend (40 percent of payments 

based on reasonable cost-based 

methodology and 60 percent of 

payments under the LTCH PPS for cost 

reporting periods beginning during FY 

2005). (The 40 percent/60 percent blend 

will continue until the provider’s cost 

reporting period beginning on October 

1, 2005 (FY 2006).) 

Similarly, during the 2006 LTCH PPS 

rate year, based on the transition blend 

percentages set forth in § 412.533(a), 

some of the providers paid under the 

transition blend methodology may 

experience a change in the transition 

blend percentage during the period from 

July 1, 2005 through June 30, 2006. For 

example, during the period from July 1, 

2005 through June 30, 2006, a provider 

with a cost reporting period beginning 

on October 1, 2004 (which is paid under 

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the 40/60 transition blend would have 

3 months (July 1, 2005 through 

September 30, 2005) under the 40/60 

blend and 9 months (October 1, 2005 

through June 30, 2006) of payment 

under the 20/80-transition blend (20 

percent of payments based on 

reasonable cost-based methodology and 

80 percent of payments under the LTCH 

PPS for cost reporting periods beginning 

during FY 2006). (The 20 percent/80 

percent blend will continue until the 

provider’s cost reporting period 

beginning on October 1, 2006 (FY 

2007).) 

In estimating blended transition 

payments, we estimated payments based 

on the reasonable cost-based 

methodology, in accordance with the 

requirements at section 1886(b) of the 

Act. For those providers who have not 

already made the election (as 

determined from PSF data) to be paid 

based on 100 percent of the Federal rate, 

we compared the estimated blended 

transition payment to the LTCH’s 

estimated payment if it would elect 

payment based on 100 percent of the 

Federal rate. If we estimated that the 

LTCH would be paid more based on 100 

percent of the Federal rate, we assumed 

that it would elect to bypass the 

transition methodology and to receive 

payments based on 100 percent of 

prospective payment. 

Then we applied the budget neutrality 

offset to payments to account for the 

effect of the 5-year transition 

methodology and election of payment 

based on 100 percent of the Federal rate 

on Medicare program payments 

(established in the August 30, 2002 final 

rule (67 FR 56034)). In estimating 2005 

LTCH PPS rate year payments, we 

applied the 0.5 percent budget 

neutrality offset to payments to account 

for the effect of the 5-year transition 

methodology and election of payment 

based on 100 percent of the Federal rate 

on Medicare program payments (See the 

May 7, 2004 final rule (68 FR 25674)) to 

each LTCH’s estimated payments under 

the LTCH PPS for the 2005 LTCH PPS 

rate year. Similarly, in estimating 2006 

LTCH PPS rate year payments, we 

applied the proposed 0.2 percent budget 

neutrality offset to payments to account 

for the effect of the 5-year transition 

methodology and election of payment 

based on 100 percent of the Federal rate 

on Medicare program payments (see

section IV.C.7 of this proposed rule) to 

each LTCH’s estimated payments under 

the LTCH PPS for the 2006 LTCH PPS 

rate year. The impact shown below in 

Table II is based on our projection of 

using the best available data that 

approximately 6 percent of LTCHs 

would be paid based on the transition 

blend methodology or would elect 

payment based on 100 percent of the 

Federal rate. 

In Table III below, we also show the 

impact if the LTCH PPS were fully 

implemented; that is, as if there were an 

immediate transition to fully Federal 

prospective payments under the LTCH 

PPS for the 2005 LTCH PPS rate year 

and the 2006 LTCH PPS rate year. 

Accordingly, in the impact analysis 

shown in Table III., the respective 

budget neutrality adjustments to 

account for the 5-year transition 

methodology on LTCHs’ Medicare 

program payments for the 2005 and 

2006 LTCH PPS rate years (0.5 percent 

and the proposed 0.2 percent, 

respectively) were not applied to 

LTCHs’ estimated payments under the 

LTCH PPS. 

Tables II and III below illustrate the 

aggregate impact of the payment system 

among various classifications of LTCHs. 

• The first column, LTCH 

Classification, identifies the type of 

LTCH. 

• The second column lists the 

number of LTCHs of each classification 

type. 

• The third column identifies the 

number of long-term care cases. 

• The fourth column shows the 

estimated payment per discharge for the 

2005 LTCH PPS rate year. 

• The fifth column shows the 

estimated payment per discharge for the 

proposed 2006 LTCH PPS rate year. 

• The sixth column shows the 

percent change in estimated LTCH PPS 

payments based on the proposed wage 

index changes from the 2005 LTCH PPS 

rate year to the proposed 2006 LTCH 

PPS rate year (as discussed in section 

IV.C.1. of this proposed rule). 

• The seventh column shows the 

percent change of 2005 LTCH PPS rate 

year estimated payments compared to 

the proposed 2006 LTCH PPS rate year 

estimated payments for all proposed 

changes (as discussed in the preamble of 

this proposed rule).

BILLING CODE 4120–01–P

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BILLING CODE 4120–01–C

4. Results 

Based on the most recent available 

data (as described above for 261 

LTCHs), we have prepared the following 

summary of the impact (as shown in 

Table II) of the LTCH PPS set forth in 

this proposed rule. 

a. Location. We evaluated each 

LTCH’s location (urban or rural) based 

on the proposed CBSA-based labor 

market area definitions described in 

section IV.C.1.c.1. of this proposed rule. 

Based on the most recent available data, 

the vast majority of LTCHs are in urban 

areas. Approximately 6 percent of the 

LTCHs are identified as being located in 

a rural area, and approximately 4.5 

percent of all LTCH cases are treated in 

these rural hospitals. Impact analysis in 

Table II shows that for rural LTCHs the 

percent change in estimated payments 

per discharge for the 2006 LTCH PPS 

rate year would increase 2.6 percent in 

comparison to the 2005 LTCH PPS rate 

year from all of the proposed changes, 

which reflects the estimated 2.5 percent 

decrease in payments per discharge 

from the proposed wage index changes. 

The primary reason for the projected 

increase in payments per discharge for 

all proposed changes for rural LTCHs is 

a combination of the proposed 3.1 

percent increase in the standard Federal 

rate and a projected increase in outlier 

payments as a result of the proposed 

decrease in outlier fixed-loss amount 

(discussed in section IV.C.3. of this 

proposed rule), which results in more 

cases qualifying as outlier cases and 

receiving additional outlier payments. 

This projected increase in estimated 

payments per discharge for rural LTCHs 

is partially offset by a projected decrease 

in payments per discharge as a result of 

the proposed changes in the wage index. 

Rural LTCHs are projected to 

experience a relatively large decrease in 

payments due to the proposed wage 

index changes primarily because of the 

progression of the 5-year phase-in of the 

wage index adjustment. That is, because 

the wage index of most rural areas is 

less than 1.0, as rural LTCHs progress 

through the 5-year phase-in of the wage 

index adjustment (for example, the twofifths wage index for cost reporting 

periods beginning during FY 2004 to the 

three-fifths wage index for cost 

reporting periods beginning during FY 

2005), their wage index decreases, 

which results in a decrease in their 

payments. This would occur even if we 

had not proposed to revise the labor 

market area definitions based on OMB’s 

CBSA designations. For example (as 

shown in Table 2 of the Addendum to 

this proposed rule), the proposed threefifths wage index for rural Arizona of 

0.9362 is less than the proposed twofifths wage index for rural Arizona of 

0.9574. In addition, we identified three 

LTCHs that are currently urban under 

the existing MSA-based labor market 

area designations that would become 

rural under the proposed new CBSAbased labor market designations, and as 

a result, are projected to experience a 

relatively larger decrease in payments 

per discharge due to the proposed 

changes in the wage index. (See Table 

II.) 

For urban LTCHs, the percent change 

in estimated payments per discharge for 

the 2006 LTCH PPS rate year are 

projected to increase 5.6 percent in 

comparison to the 2005 LTCH PPS rate 

year from all proposed changes, which 

reflects a 0.2 percent increase from the 

proposed wage index changes. 

Payments per discharge for the 2006 

LTCH PPS rate year are projected to 

increase 4.6 percent for large urban 

LTCHs in comparison to the 2005 LTCH 

PPS rate year from all of the proposed 

changes, including a projected 0.6 

percent decrease from the proposed 

wage index changes. We project that 

2006 LTCH PPS rate year payments per 

discharge would increase 6.1 percent in 

comparison to the 2005 LTCH PPS rate 

year for urban LTCHs, including a 

projected 0.6 percent increase for the 

proposed wage index changes. 

As noted above and discussed in 

greater detail below, the projected 

increase in payments per discharge for 

all proposed changes for both large and 

other urban LTCHs is largely due to the 

proposed 3.1 percent increase to the 

standard Federal rate and a projected 

increase in outlier payments as a result 

of the proposed decrease in the outlier 

fixed amount. These projected increases 

in payments per discharge reflecting all 

proposed changes for LTCHs that are 

located in large urban areas are partially 

offset by a projected decrease in 


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payments per discharge for the 

proposed wage index changes. The 

projected decrease in payments per 

discharge based solely on the proposed 

wage index changes are largely due to 

the progression of the 5-year phase-in of 

the wage index adjustment, as explained 

above, since the majority of LTCHs are 

in large urban areas with wage index 

values that are slightly less than 1.0. 

Large urban LTCHs are projected to 

experience a decrease in payments per 

discharge for the proposed wage index 

changes because, in addition to the 

effect of the progression of the 5-year 

phase-in of the wage index adjustment, 

as explained above, the proposed wage 

index for a few large urban areas, such 

as Houston, Texas, would be slightly 

lower under the proposed CBSA-based 

labor market area designations than they 

would be under the existing MSA-based 

labor market area designations. (See

Table II.)

As noted above, in addition to the 

proposed update to the standard Federal 

rate, the estimated percent increase in 

payments per discharge for all proposed 

changes from the 2005 LTCH PPS rate 

year to the 2006 LTCH PPS rate year is 

largely attributable to the decrease in 

the outlier fixed-loss amount (discussed 

in section IV.C.3. of this proposed rule). 

For the 2005 LTCH PPS rate year, the 

outlier fixed loss amount is $17,864 (as 

established in the May 7, 2004 final 

rule). Therefore, currently a case 

qualifies for an additional LTCH PPS 

outlier payment if the estimated cost of 

the case exceeds the outlier threshold 

(the sum of the adjusted Federal LTCH 

payment for the LTC–DRG and the 

fixed-loss amount of $17,864). For the 

2006 LTCH PPS rate year, we are 

proposing an outlier fixed loss amount 

of $11,544. Therefore, a case would 

qualify for an additional LTCH PPS 

outlier payment if the estimated cost of 

the case exceeds the proposed outlier 

threshold (the sum of the adjusted 

proposed Federal LTCH payment for the 

LTC–DRG and the proposed fixed-loss 

amount of $11,544). Therefore, we 

estimate that more cases would qualify 

as outlier cases (the estimated cost of 

the case exceeds the proposed outlier 

threshold) and would receive outlier 

payments, thereby increasing total 

estimated payments per discharge. In 

the aggregate, LTCHs are not expected to 

experience a significant impact as a 

result of the proposed changes to the 

wage index. As discussed throughout 

this impact section, certain groups of 

hospitals are projected to benefit from 

the proposed changes to the wage index 

while other groups of LTCHs are 

projected to be negatively impacted by 

the proposed changes to the wage index. 

However, as a result of the aggregate 

effect of the proposed update to the 

standard Federal rate combined with the 

proposed decrease in the outlier fixedloss amount, we estimate that all LTCH 

categories would experience an increase 

in payments. 

b. Participation Date. LTCHs are 

grouped by participation date into three 

categories: (1) Before October 1983; (2) 

between October 1983 and September 

1993; and (3) between October 1993 and 

September 2002. At this time, we do not 

have sufficient cost report data for any 

of the LTCHs that began participating in 

the Medicare program after October 

2002 (the implementation of the LTCH 

PPS), and, therefore, they are not 

included in the impact analysis shown 

below in Table II. 

Based on the most recent available 

data, the majority, approximately 77 

percent, of the LTCH discharges are in 

LTCHs hospitals that began 

participating between October 1993 and 

September 2002, and we estimated that 

2006 LTCH PPS rate year payments per 

discharge would increase 5.3 percent in 

comparison to the 2005 LTCH PPS rate 

year due to all proposed changes, which 

includes the estimated 0.1 percent 

decrease in payments per discharge due 

to the proposed wage index changes. 

Approximately 22 percent of the 

discharges are in LTCHs that began 

participating in Medicare between 

October 1983 and September 1993, and 

2006 LTCH PPS rate year payments per 

discharge are projected to increase 5.7 

percent in comparison to the 2005 

LTCH PPS rate year from all proposed 

changes, which includes the estimated 

0.5 percent increase in payments per 

discharge from the proposed wage index 

changes. Payments per discharge for the 

2006 LTCH PPS rate year are estimated 

to increase 6.7 percent in comparison to 

the 2005 LTCH PPS rate year for LTCHs 

that began participating before October 

1983 from all proposed changes, 

including the estimated 1.3 percent 

increase in payments per discharge from 

the proposed wage index changes. This 

increase in projected payments per 

discharge from the proposed changes in 

the wage index for LTCHs that began 

participating before October 1983 is 

largely due to a combination of the 

proposed change to the CBSA-based 

labor market area definitions and the 

increase in the percentage of the wage 

index adjustment as required by the 5-

year phase-in of the wage index 

adjustment (for example, two-fifths of 

the wage index adjustment for cost 

reporting periods beginning during FY 

2004 increasing to three-fifths of the 

wage index adjustment for cost 

reporting periods beginning during FY 

2005). (See Table II.) 

In addition, as discussed above, these 

increases in payments for the 2006 

LTCH PPS rate year are also due to the 

proposed decrease in the outlier fixedloss amount (as discussed in section 

IV.C.3. of this proposed rule). As a 

result, more cases would qualify as 

outlier cases (the estimated cost of the 

case exceeds the proposed outlier 

threshold) and, therefore, would receive 

outlier payments, thereby increasing 

total estimated payments per discharge. 

As also noted above, in the aggregate 

LTCHs are not expected to experience a 

significant impact as a result of the 

proposed changes to the wage index. 

While certain groups of LTCHs are 

projected to benefit from the proposed 

changes to the wage index, other groups 

of LTCHs are projected to be negatively 

impacted by the proposed changes to 

the wage index. 

c. Ownership Control. LTCHs are 

grouped into three categories based on 

ownership control type—(1) voluntary; 

(2) proprietary; and (3) government. 

Based on the most recent available 

data, approximately 3 percent of LTCHs 

are government owned and operated. 

We project that for these government 

owned and operated LTCHs, 2006 LTCH 

PPS rate year payments per discharge 

would increase 2.8 percent in 

comparison to the 2005 LTCH PPS rate 

year from all proposed changes, 

including the estimated 1.5 percent 

decrease in payments per discharge 

from the proposed wage index changes. 

This estimated decrease in estimated 

payments per discharge for the 

proposed wage index changes is largely 

due to the current applicable percentage 

of the 5-year phase-in of the wage index 

adjustment, as explained above, since 

the majority of government run LTCHs 

are located in areas with wage index 

values that are less than 1.0. Because 

government owned and operated LTCHs 

are expected to experience a slight 

decrease in payments per discharge 

from the proposed changes to the wage 

index, we project that they would 

experience a slightly smaller increase in 

payments per discharge from all 

proposed changes as compared to other 

LTCHs.

We project that 2006 LTCH PPS rate 

year payments per discharge for 

voluntary and proprietary LTCHs would 

increase 5.7 percent and 5.5 percent, 

respectively, in comparison to the 2005 

LTCH PPS rate year for all proposed 

changes, including the estimated 0.3 

percent and 0.1 percent increase, 

respectively, in payments per discharge 

from the proposed wage index changes. 

As noted above, in addition to the 

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proposed update to the standard Federal 

rate, the estimated percent increase in 

payments per discharge for all proposed 

changes from the 2005 LTCH PPS rate 

year to the 2006 LTCH PPS rate year is 

largely attributable to the proposed 

decrease in outlier fixed loss amount 

(discussed in section IV.C.3. of this 

proposed rule), which would result in 

more cases qualifying as outlier cases 

(the estimated cost of the case exceeds 

the proposed outlier threshold) and, 

therefore, would receive additional 

outlier payments, thereby increasing 

total estimated payments per discharge. 

(See Table II.) 

d. Census Region. Payments per 

discharge for the 2006 LTCH PPS rate 

year are estimated to increase for LTCHs 

located in all regions in comparison to 

the 2005 LTCH PPS rate year from all 

proposed changes. Of the nine census 

regions, we project that the increase in 

2006 LTCH PPS rate year payments per 

discharge in comparison to the 2005 

LTCH PPS rate year would be the largest 

for LTCHs in the Pacific and New 

England regions. Specifically, 2006 

LTCH rate year payments per discharge 

for LTCHs in the Pacific and New 

England regions are projected to 

increase 7.5 percent and 7.2 percent, 

respectively, in comparison to the 2005 

LTCH PPS rate year, which includes the 

estimated 1.7 percent increase from the 

proposed wage index changes for both 

areas. As explained above, these 

relatively large increases in payments 

from all proposed changes for the 2006 

LTCH PPS rate year for LTCHs in the 

New England and Pacific regions are 

mostly attributable to the proposed 

decrease in the outlier fixed-loss 

amount (discussed in section IV.C.3. of 

this proposed rule), which results in 

more cases qualifying as outlier cases 

(the estimated cost of the case exceeds 

the proposed outlier threshold) and, 

therefore, would receive additional 

outlier payments, thereby increasing 

total estimated payments per discharge. 

Furthermore, in addition to the 

proposed update to the standard Federal 

rate, we believe that many LTCHs in the 

New England and Pacific regions would 

experience an increase in payments 

because of an the annual percentage 

increase of the phase-in of the wage 

index adjustment, (two-fifths of the 

applicable LTCH PPS wage index for 

cost reporting periods beginning on or 

after October 1, 2003; three-fifths of the 

applicable wage index for cost reporting 

periods beginning on or after October 1, 

2004; and four-fifths of the applicable 

wage index for cost reporting periods 

beginning on or after October 1, 2005) 

since most of the LTCHs in these 

regions are located in areas that have a 

wage index value of greater than 1.0. 

(See Table II.). 

We project that 2006 LTCH PPS rate 

year payments per discharge would 

increase the least for LTCHs in the 

MidAtlantic and South Atlantic regions 

in comparison to the 2005 LTCH PPS 

rate year for all changes (4.4 percent and 

4.5 percent, respectively). We project 

that for LTCHs located in the Middle 

Atlantic and South Atlantic regions, 

2006 LTCH PPS payments per discharge 

would decrease slightly in comparison 

to the 2005 LTCH PPS rate year from the 

proposed wage index changes (0.5 

percent and 0.3 percent, respectively). 

We are projecting a slight decrease in 

payments per discharge from the 

proposed wage index changes, which 

results in a slightly lower percent 

increase in payments per discharge from 

all proposed changes, for LTCHs located 

in these regions because of the 

progression of the 5-year phase-in of the 

wage index adjustment. Specifically, 

many LTCHs located in these areas 

would have a wage index value of less 

than 1.0. (See Table II.) 

e. Bed Size. LTCHs were grouped into 

six categories based on bed size—0–24 

beds, 25–49 beds, 50–74 beds, 75–124 

beds, 125–199 beds, and 200+ beds. 

For all bed size categories, we are 

projecting an increase in 2006 LTCH 

PPS rate year payments per discharge in 

comparison to the 2005 LTCH PPS rate 

year from all proposed changes. Most 

LTCHs are in bed size categories where 

2006 LTCH PPS rate year payments per 

discharge are projected to increase 

approximately 5 percent in comparison 

to the 2005 LTCH PPS rate year from all 

proposed changes. 

We project that LTCHs with greater 

than 200 beds would have the largest 

increase in estimated 2006 LTCH PPS 

rate year payments per discharge in 

comparison to the 2005 LTCH PPS rate 

year from all proposed changes (7.2 

percent), including the estimated 

increase from the proposed wage index 

changes of 1.2 percent. This increase in 

projected payments per discharge for all 

proposed changes for LTCHs with 

greater than 200 beds is largely due to 

a combination of the proposed 3.1 

percent increase in the standard Federal 

rate, a projected increase in outlier 

payments resulting from the proposed 

decrease in outlier fixed amount, as 

explained above, and the increase in 

projected payment per discharge from 

the proposed wage index changes. This 

increase in projected payments per 

discharge from the proposed changes in 

the wage index for LTCHs with greater 

than 200 beds is largely due to a 

combination of the proposed change to 

the CBSA-based labor market area 

definitions and the increase in the 

percentage of the wage index 

adjustment as required by the 5-year 

phase-in of the wage index adjustment 

because most LTCHs with greater than 

200 beds are located in an area with a 

wage index value of greater than 1.0. 

(See Table II.)

Payments per discharge for the 2006 

LTCH PPS rate year for LTCHs with 0–

24 beds and 25–49 beds are projected to 

increase in comparison to the 2005 

LTCH PPS rate year from all proposed 

changes (5.3 percent and 5.0 percent, 

respectively), which includes the 

estimated decrease in payments per 

discharge from the proposed wage 

indexes changes (¥0.5 percent and 

¥0.3 percent, respectively). This slight 

decrease in estimated payments per 

discharge from the proposed wage index 

changes is largely due to the progression 

of the 5-year phase-in of the wage index 

adjustment (as explained above) since 

the majority of LTCHs with fewer than 

50 beds are located in areas with a wage 

index value of less than 1.0. (See Table 

II.) 

5. Effect on the Medicare Program 

Based on actuarial projections, we 

estimate that Medicare spending (total 

Medicare program payments) for LTCH 

services over the next 5 years would be 

as follows:

LTCH PPS rate year 

Estimated payments

($ in billions) 

2006 ................................ $2.94 

2007 ................................ 2.90 

2008 ................................ 2.96 

2009 ................................ 3.08 

2010 ................................ 3.24 

These estimates are based on the 

current estimate of the increase in the 

excluded hospital with capital market 

basket of 3.1 percent for the 2006 LTCH 

PPS rate year, 2.9 percent for the 2007, 

2.7 for the 2008 LTCH PPS rate year, 2.9 

percent for the 2009 LTCH PPS rate year 

and 2010 LTCH PPS rate years. We 

estimate that there would be a change in 

Medicare beneficiary enrollment of 

¥4.9 percent in the 2006 LTCH PPS rate 

year, ¥6.5 percent in the 2007 LTCH 

PPS rate year, ¥1.1 percent in 2008 

LTCH PPS rate year, 0.2 percent in the 

2009 LTCH PPS rate year, 0.8 percent in 

the 2010 LTCH PPS rate year, and an 

estimated increase in the total number 

of LTCHs. (We note that, based on the 

most recent available data, our Office of 

the Actuary is projecting a decrease in 

Medicare fee-for-service Part A 

enrollment, in part, because of a 

projected increase in Medicare managed 

5770 Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 

care enrollment as a result of the 

implementation of several provisions of 

the Medicare Prescription Drug, 

Improvement, and Modernization Act of 

2003.) 

Consistent with the statutory 

requirement for budget neutrality, as we 

discussed in the August 30, 2002 final 

rule that implemented the LTCH PPS, in 

developing the LTCH PPS, we intended 

for estimated aggregate payments under 

the LTCH PPS in FY 2003 would equal 

the estimated aggregate payments that 

would have been made if the LTCH PPS 

were not implemented. Our 

methodology for estimating payments 

for purposes of the budget neutrality 

calculations used the best available data 

and necessarily reflected assumptions. 

As we collect data from LTCHs, we 

continue to monitor payments and 

evaluate the ultimate accuracy of the 

assumptions used to calculate the 

budget neutrality calculations (that is, 

inflation factors, intensity of services 

provided, or behavioral response to the 

implementation of the LTCH PPS). As 

discussed above in section IV.C.7. of the 

preamble of this proposed rule, because 

the LTCH PPS has only been 

implemented for about 2.5 years, due to 

the lag time in the availability of data, 

at this time, we still do not have 

sufficient new cost report and claims 

data generated under the LTCH PPS to 

enable us to conduct a comprehensive 

reevaluation of our FY 2003 budget 

neutrality calculations. 

Section 123 of BBRA and section 307 

of BIPA provide the Secretary with 

extremely broad authority in developing 

the LTCH PPS, including the authority 

for appropriate adjustments. In 

accordance with this broad authority, 

we may discuss in a future proposed 

rule a possible one-time prospective 

adjustment to the LTCH PPS rates to 

maintain budget neutrality so that the 

effect of the difference between actual 

payments and estimated payments for 

the first year of LTCH PPS is not 

perpetuated in the PPS rates for future 

years. As discussed above in section 

IV.C.7. of this proposed rule, because 

the LTCH PPS was only recently 

implemented, we do not yet have 

sufficient complete data to determine 

whether such an adjustment is 

warranted. 

6. Effect on Medicare Beneficiaries 

Under the LTCH PPS, hospitals 

receive payment based on the average 

resources consumed by patients for each 

diagnosis. We do not expect any 

changes in the quality of care or access 

to services for Medicare beneficiaries 

under the LTCH PPS, but we expect that 

paying prospectively for LTCH services 

will enhance the efficiency of the 

Medicare program. 

C. Accounting Statement 

As required by OMB Circular A–4 

(available at http://

www.whitehouse.gov/omb/circulars/

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

have prepared an accounting statement 

showing the classification of the 

expenditures associated with the 

provisions of this proposed rule. This 

table provides our best estimate of the 

increase in Medicare payments under 

the LTCH PPS as a result of the 

proposals presented in this proposed 

rule based on the data for 261 LTCHs in 

our database. All expenditures are 

classified as transfers to Medicare 

providers (that is, LTCHs).

TABLE IV.—ACCOUNTING STATEMENT: 

CLASSIFICATION OF ESTIMATED EXPENDITURES, FROM THE 2005 LTCH 

PPS RATE YEAR TO THE 2006 

LTCH PPS RATE YEAR

[In millions] 

Category .................... TRANSFERS. 

Annualized Monetized 

Transfers.

$158. 

From Whom To 

Whom? 

Federal Government 

To LTCH Medicare 

Providers. 

In accordance with the provisions of 

Executive Order 12866, this final rule 

was reviewed by the Office of 

Management and Budget.

List of Subjects in 42 CFR Part 412

Administrative practice and 

procedure, Health facilities, Medicare, 

Puerto Rico, Reporting and 

recordkeeping requirements.

In accordance with the discussion in 

this preamble, the Centers for Medicare 

& Medicaid Services amends 42 CFR 

Chapter IV, part 412 as set forth below:

PART 412—PROSPECTIVE PAYMENT 

SYSTEMS FOR INPATIENT HOSPITAL 

SERVICES 

1. The authority citation for part 412 

continues to read as follows:

Authority: Secs. 1102 and 1871 of the 

Social Security Act (42 U.S.C. 1302 and 

1395hh).

2. Section 412.22 is amended by 

revising paragraphs (e)(3) and (h)(5) to 

read as follows:

§ 412.22 Excluded hospitals and hospital 

units: General rules.

* * * * *

(e) * * *

* * * * *

(3) Notification of co-located status. A 

long-term care hospital that occupies 

space in a building used by another 

hospital, or in one or more entire 

buildings located on the same campus 

as buildings used by another hospital 

and that meets the criteria of paragraphs 

(e)(1) or (e)(2) of this section must notify 

its fiscal intermediary and CMS in 

writing of its co-location and identify by 

name, address, and Medicare provider 

number those hospital(s) with which it 

is co-located.

* * * * *

(h) * * *

* * * * *

(5) Notification of co-located status. A 

satellite of a long-term care hospital that 

occupies space in a building used by 

another hospital, or in one or more 

entire buildings located on the same 

campus as buildings used by another 

hospital and that meets the criteria of 

paragraphs (h)(1) through (h)(4) of this 

section must notify its fiscal 

intermediary and CMS in writing of its 

co-location and identify by name, 

address, and Medicare provider number, 

those hospital(s) with which it is colocated. 

3. Section 412.525 is amended by 

revising paragraph (c) to read as follows:

§ 412.525 Adjustments to the Federal 

prospective Payments

* * * * *

(c) Adjustments for area levels. The 

labor portion of a long-term care 

hospital’s Federal prospective payment 

is adjusted to account for geographical 

differences in the area wage levels using 

an appropriate wage index (established 

by CMS), which reflects the relative 

level of hospital wages and wage-related 

costs in the geographic area (that is, 

urban or rural area as determined in 

accordance with paragraph (c)(1) or 

(c)(2) of this section) of the hospital 

compared to the national average level 

of hospital wages and wage-related 

costs. The appropriate wage index 

(established by CMS) is updated 

annually. 

(1) For discharges occurring in cost 

reporting periods beginning on or after 

October 1, 2002 and occurring before 

July 1, 2005, the application of the wage 

index under the long-term care hospital 

prospective payment system is made on 

the basis of the location of the facility 

in an urban or rural area as defined in 

§ 412.62(f)(1)(ii) and (f)(1)(iii), 

respectively. 

(2) For discharges occurring on or 

after July 1, 2005, the application of the 

wage index under the long-term care 

hospital prospective payment system 

made on the basis of the location of the 

facility in an urban or rural area as 

Federal Register / Vol. 70, No. 22 / Thursday, February 3, 2005 / Proposed Rules 5771

defined in § 412.64(b)(1)(ii)(A) through 

(C).

* * * * *

4. Section 412.531 is amended by 

revising paragraphs (b)(1)(i)(C) and 

(b)(1)(ii)(A)(1) to read as follows:

§ 412.531 Special payment provisions 

when an interruption of a stay occurs in a 

long-term care hospital.

* * * * *

(b) * * *

(1) * * *

(i) * * *

(C) The number of days that a 

beneficiary spends away from a longterm care hospital during a 3-day or less 

interruption of stay under paragraph 

(a)(1) of this section during which the 

beneficiary receives a procedure that is 

grouped to a surgical DRG under the 

inpatient prospective payment system 

in an acute care hospital during the 

2005 and 2006 long-term care hospital 

prospective payment system rate year is 

not included in determining the length 

of stay of the patient at the long-term 

care hospital.

* * * * *

(ii) * * *

(A) * * *

(1) For a 3-day or less interruption of 

stay under paragraph (a)(1) of this 

section in which a long-term care 

hospital discharges a patient to an acute 

care hospital and the patient’s treatment 

during the interruption is grouped into 

a surgical DRG under the acute care 

inpatient hospital prospective payment 

system, for the LTCH 2005 and 2006 

rate years, CMS also makes a separate 

payment to the acute care hospital for 

the surgical DRG discharge in 

accordance with paragraph (b)(1)(i)(C) of 

this section.

* * * * *

5. Section 412.532 is amended by 

revising paragraph (i) to read as follows:

§ 412.532 Special payment provisions for 

patients who are transferred to onsite 

providers and readmitted to a long-term 

care hospital.

* * * * *

(i) A long-term care hospital or a 

satellite of a long-term care hospital that 

occupies space in a building used by 

another hospital, or SNF, or in one or 

more entire buildings located on the 

same campus as buildings used by 

another hospital or SNF and that meets 

the criteria of § 412.22(e)(1) or (e)(2) or 

412.22(h)(1) through (h)(4) must notify 

its fiscal intermediary and CMS in 

writing of its co-location and identify by 

name, address, and Medicare provider 

number, those providers specified at 

paragraph (a) of this section with which 

it is co-located.

(Catalog of Federal Domestic Assistance 

Program No. 93.773, Medicare—Hospital 

Insurance)

Dated: January 14, 2005. 

Mark McClellan, 

Administrator, Centers for Medicare & 

Medicaid Services. 

Dated: January 28, 2005. 

Michael O. Leavitt, 

Secretary.

The following addendum will not 

appear in the Code of Federal 

Regulations. 

Addendum 

This addendum contains the tables 

referred to throughout the preamble to 

this proposed rule. The tables presented 

below are as follows:

Table 1.—Proposed Long-Term Care 

Hospital Proposed Wage Index for 

Urban Areas (based on Proposed 

CBSA-based Labor Market Area 

Designations) for Discharges 

Occurring from July 1, 2005 through 

June 30, 2006

Table 2.—Proposed Long-Term Care 

Hospital Proposed Wage Index for 

Rural Areas (based on Proposed 

CBSA-based Labor Market Area 

Designations) for Discharges 

Occurring from July 1, 2005 through 

June 30, 2006

Table 3.—FY 2005 LTC–DRG Relative 

Weights, Geometric Mean Length of 

Stay, and Short-Stay Five-Sixths 

Average Length of Stay for Discharges 

Occurring from July 1, 2005 through 

September 30, 2006. (Note: This is the 

same information provided in Table 

11 of the August 11, 2004 IPPS final 

rule (69 FR 49738–49754, as revised 

in the October 7, 2004 IPPS correction 

notice, 69 FR 60266–60271), which 

has been reprinted here for 

convenience.) 

Table 4.—A Listing of Long-Term Care 

Hospitals’ State and County Location; 

Current Labor Market Area 

Designation; and Proposed New 

CBSA-based Labor Market Area 

Designation

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[FR Doc. 05–1901 Filed 1–28–05; 12:43 pm] 

BILLING CODE 4120–01–C


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