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[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Proposed Rules]
[Pages 4998-5051]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1507]

[[Page 4997]]

Vol. 76

Thursday,

No. 18

January 27, 2011

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Inpatient Psychiatric Facilities Prospective Payment 
System--Update for Rate Year Beginning July 1, 2011 (RY 2012); Proposed 
Rule

Federal Register / Vol. 76 , No. 18 / Thursday, January 27, 2011 / 
Proposed Rules

[[Page 4998]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1346-P]
RIN 0938-AQ23

Medicare Program; Inpatient Psychiatric Facilities Prospective 
Payment System--Update for Rate Year Beginning July 1, 2011 (RY 2012)

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the prospective payment rates 
for Medicare inpatient hospital services provided by inpatient 
psychiatric facilities (IPFs) for discharges occurring during the rate 
year beginning July 1, 2011 through September 30, 2012. The proposed 
rule would also change the IPF prospective payment system (PPS) payment 
rate update period to a rate year (RY) that coincides with a fiscal 
year (FY). In addition, the rule proposes policy changes affecting the 
IPF PPS teaching adjustment. It would also rebase and revise the 
Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket, 
and make some clarifications and corrections to terminology and 
regulations text.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided in the ADDRESSES section no later than 5 p.m. 
EST on March 22, 2011.

ADDRESSES: In commenting, please refer to file code CMS-1346-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions under 
the ``More Search Options'' tab.
    2. By regular 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-1346-P, P.O. Box 8010, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments to 
the following address ONLY: Centers for Medicare & Medicaid Services, 
Department of Health and Human Services, Attention: CMS-1346-P, Mail 
Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments before the close of the comment period 
to either of the following addresses:
    a. For delivery in Washington, DC--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, Room 445-G, Hubert 
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 
20201.
    (Because access to the interior of the Hubert H. Humphrey Building 
is not readily available to persons without Federal government 
identification, commenters are encouraged to leave their comments in 
the CMS drop slots located in the main lobby of the building. A stamp-
in clock is available for persons wishing to retain a proof of filing 
by stamping in and retaining an extra copy of the comments being 
filed.)
    b. For delivery in Baltimore, MD--Centers for Medicare & Medicaid 
Services, Department of Health and Human Services, 7500 Security 
Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-9994 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Dorothy Myrick or Jana Lindquist, 
(410) 786-4533 (for general information). Mary Carol Barron, (410) 786-
7943, or Bridget Dickensheets, (410) 786-8670, (for information 
regarding the market basket and labor-related share). Theresa Bean, 
(410) 786-2287 (for information regarding the regulatory impact 
analysis).

SUPPLEMENTARY INFORMATION: 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. We 
post all comments received before the close of the comment period on 
the following Web site as soon as possible after they have been 
received: http://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments.
    Comments received timely will also 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 1-800-743-3951.

Table of Contents

    To assist readers in referencing sections contained in this 
document, we are providing the following table of contents.

I. Background
    A. Annual Requirements for Updating the IPF PPS
    B. Overview of the Legislative Requirements of the IPF PPS
    C. IPF PPS-General Overview
    D. Transition Period for Implementation of the IPF PPS
II. Proposal to Revise the IPF PPS Payment Rate Update Period from a 
Rate Year to a Fiscal Year
III. Proposed Rebasing and Revising of the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) Market Basket for Inpatient 
Psychiatric Facilities
    A. Background
    B. Overview of the Proposed FY 2008-Based RPL Market Basket
    C. Proposed Rebasing and Revising of the RPL Market Basket
    1. Development of Cost Categories and Weights
    a. Medicare Cost Reports
    b. Other Data Sources
    2. Final Cost Category Computation
    3. Selection of Price Proxies
    a. Wages and Salaries
    b. Employee Benefits
    c. Electricity
    d. Fuel, Oil, and Gasoline
    e. Water and Sewage
    f. Professional Liability Insurance
    g. Pharmaceuticals
    h. Food: Direct Purchases
    i. Food: Contract Services
    j. Chemicals
    k. Medical Instruments
    l. Photographic Supplies
    m. Rubber and Plastics
    n. Paper and Printing Products
    o. Apparel
    p. Machinery and Equipment
    q. Miscellaneous Products
    r. Professional Fees: Labor-Related
    s. Administrative and Business Support Services
    t. All Other: Labor-Related Services
    u. Professional Fees: Nonlabor-Related
    v. Financial Services
    w. Telephone Services
    x. Postage
    y. All Other: Nonlabor-Related Services

[[Page 4999]]

    4. Proposed Methodology for Capital Portion of the RPL Market 
Basket
    5. Proposed RY 2012 Market Basket Update
    6. Proposed Labor-Related Share
IV. Updates to the IPF PPS for RY Beginning July 1, 2011
    A. Determining the Standardized Budget-Neutral Federal Per Diem 
Base Rate
    1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy (ECT) Rate
    2. Calculation of the Budget Neutrality Adjustment
    a. Outlier Adjustment
    b. Stop-Loss Provision Adjustment
    c. Behavioral Offset
    B. Proposed Update of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
V. Proposed Update of the IPF PPS Adjustment Factors
    A. Overview of the IPF PPS Adjustment Factors
    B. Proposed Patient-Level Adjustments
    1. Proposed Adjustment for MS-IPF-DRG Assignment
    2. Proposed Payment for Comorbid Conditions
    3. Proposed Patient Age Adjustments
    4. Proposed Variable Per Diem Adjustments
    C. Facility-Level Adjustments
    1. Proposed Wage Index Adjustment
    a. Background
    b. Proposed Wage Index for RY 2012
    c. OMB Bulletins
    2. Proposed Adjustment for Rural Location
    3. Proposed Teaching Adjustment
    a. Proposed Temporary Adjustment to FTE Cap to Reflect Residents 
Affected by Hospital Closure
    b. Proposed Temporary Adjustment to FTE Cap to Reflect Residents 
Affected By Residency Program Closure
    4. Proposed Cost of Living Adjustment for IPFs Located in Alaska 
and Hawaii
    5. Proposed Adjustment for IPFs with a Qualifying Emergency 
Department (ED)
    D. Other Payment Adjustments and Policies
    1. Proposed Outlier Payments
    a. Proposed Update to the Outlier Fixed Dollar Loss Threshold 
Amount
    b. Proposed Statistical Accuracy of Cost-to-Charge Ratios
    2. Expiration of the Stop-Loss Provision
    3. Future Refinements
VI. Proposed Regulations Text Corrections
VII. Provisions of the Proposed Regulations
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
Regulations Text
Addenda

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 
meanings in alphabetical order below:

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
CBSA Core-Based Statistical Area
CCR Cost-to-charge ratio
CAH Critical access hospital
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders 
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year (October 1 through September 30)
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
RPL Rehabilitation, Psychiatric, and Long-Term Care
RY Rate Year (July 1 through June 30)
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. Annual Requirements for Updating the IPF PPS

    In November 2004, we implemented the inpatient psychiatric 
facilities (IPF) prospective payment system (PPS) in a final rule that 
appeared in the November 15, 2004 Federal Register (69 FR 66922). In 
developing the IPF PPS, in order to ensure that the IPF PPS is able to 
account adequately for each IPF's case-mix, we performed an extensive 
regression analysis of the relationship between the per diem costs and 
certain patient and facility characteristics to determine those 
characteristics associated with statistically significant cost 
differences on a per diem basis. For characteristics with statistically 
significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments.
    In that final rule, we explained that we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. Therefore, we indicated that we did 
not intend to update the regression analysis and recalculate the 
Federal per diem base rate and the patient- and facility-level 
adjustments until we complete that analysis. Until that analysis is 
complete, we stated our intention to publish a notice in the Federal 
Register each spring to update the IPF PPS (71 FR 27041). We are 
proposing to change the payment rate update period to a RY that 
coincides with a FY. If we finalize this proposal, future update 
notices would be published in the Federal Register in the summer. See 
section II. of this proposed rule.
    Updates to the IPF PPS as specified in 42 CFR 412.428 include the 
following:
     A description of the methodology and data used to 
calculate the updated Federal per diem base payment amount.
     The rate of increase factor as described in Sec.  
412.424(a)(2)(iii), which is based on the Excluded Hospital With 
Capital market basket under the update methodology of section 
1886(b)(3)(B)(ii) of the Social Security Act (the Act) for each year 
(effective from the implementation period until June 30, 2006).
     For discharges occurring on or after July 1, 2006, the 
rate of increase factor for the Federal portion of the IPF's payment, 
which is based on the Rehabilitation, Psychiatric, and Long-Term Care 
(RPL) market basket.
     The best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate is 
needed to maintain budget neutrality.
     Updates to the fixed dollar loss threshold amount in order 
to maintain the appropriate outlier percentage.
     Description of the International Classification of 
Diseases, 9th Revision, Clinical Modification (ICD-9-CM) coding and 
diagnosis-related groups (DRGs) classification changes discussed in the 
annual update to the hospital inpatient prospective payment system 
(IPPS) regulations.
     Update to the electroconvulsive therapy (ECT) payment by a 
factor specified by CMS.
     Update to the national urban and rural cost-to-charge 
ratio medians and ceilings.
     Update to the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii, if appropriate.
    Our most recent IPF PPS annual update occurred in the April 30, 
2010 Federal Register notice (75 FR 23106) (hereinafter referred to as 
the April 2010 IPF PPS notice) that set forth updates to the IPF PPS 
payment rates for RY 2011. This notice updated the IPF PPS per diem 
payment rates that were published in the May 2009 IPF PPS notice in 
accordance with our established policies.
    Since implementation of the IPF PPS, we have explained that we 
believe it is important to delay updating the adjustment factors 
derived from the regression analysis until we have IPF PPS data that 
include as much information as possible regarding the patient-level 
characteristics of the population that each IPF serves. Now that we are 
approximately 5 years into the system, we believe that we have enough 
data to begin that process. Therefore, we have begun the necessary

[[Page 5000]]

analysis in order to make future refinements. While we are not 
proposing to make refinements in this rulemaking, as explained in 
section V.D.3 below, we believe that in the next rulemaking, for RY 
2013, we will be ready to propose potential refinements.

B. Overview of the Legislative Requirements of the IPF PPS

    Section 124 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999, (Pub. 
L. 106-113) (BBRA) required implementation of the IPF PPS. 
Specifically, section 124 of the BBRA mandated that the Secretary 
develop a per diem PPS for inpatient hospital services furnished in 
psychiatric hospitals and psychiatric units that includes an adequate 
patient classification system that reflects the differences in patient 
resource use and costs among psychiatric hospitals and psychiatric 
units.
    Section 405(g)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF 
PPS to distinct part psychiatric units of critical access hospitals 
(CAHs).
    To implement these provisions, we published various proposed and 
final rules in the Federal Register. For more information regarding 
these rules, see the CMS Web sites http://www.cms.hhs.gov/InpatientPsychFacilPPS/ and http://www.cms.hhs.gov/InpatientpsychfacilPPS/02_regulations.asp.
    Section 3401(f) of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) as amended by section 10319(e) of that Act and by 
section 1105(d) of the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) (hereafter referred to as ``The Affordable Care 
Act'') added subsection (s) to section 1886 of the Act.
    Section 1886(s)(1) is titled ``Reference to Establishment and 
Implementation of System'' and it refers to section 124 of the 
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, 
which relates to the establishment of the IPF PPS.
    Section 1886(s)(2)(A)(i) of the Act requires the application of the 
productivity adjustment described in Sec.  1886(b)(3)(B)(xi)(II) of the 
Act to the IPF PPS for the rate year beginning in 2012 and each 
subsequent rate year. Section 1886(s)(2)(A)(ii) of the Act requires the 
application of an ``other adjustment'' that reduces any update to an 
IPF PPS base rate by percentages specified in section 1886(s)(3) of the 
Act for rate years beginning in 2010 through the rate year beginning in 
2019. For the rate year beginning in 2011, the reduction is 0.25 
percentage point. We are proposing to implement that provision for RY 
2012 in this proposed rule.
    Section 1886(s)(4) of the Act requires the establishment of a 
quality data reporting program for the IPF PPS beginning in RY 2014.

C. IPF PPS-General Overview

    The November 2004 IPF PPS final rule (69 FR 66922) established the 
IPF PPS, as authorized under section 124 of the BBRA and codified at 
subpart N of part 412 of the Medicare regulations. The November 2004 
IPF PPS final rule set forth the per diem Federal rates for the 
implementation year (the 18-month period from January 1, 2005 through 
June 30, 2006), and it provided payment for the inpatient operating and 
capital costs to IPFs for covered psychiatric services they furnish 
(that is, routine, ancillary, and capital costs, but not costs of 
approved educational activities, bad debts, and other services or items 
that are outside the scope of the IPF PPS). Covered psychiatric 
services include services for which benefits are provided under the 
fee-for-service Part A (Hospital Insurance Program) Medicare program.
    The IPF PPS established the Federal per diem base rate for each 
patient day in an IPF derived from the national average daily routine 
operating, ancillary, and capital costs in IPFs in FY 2002. The average 
per diem cost was updated to the midpoint of the first year under the 
IPF PPS, standardized to account for the overall positive effects of 
the IPF PPS payment adjustments, and adjusted for budget neutrality.
    The Federal per diem payment under the IPF PPS is comprised of the 
Federal per diem base rate described above and certain patient- and 
facility-level payment adjustments that were found in the regression 
analysis to be associated with statistically significant per diem cost 
differences.
    The patient-level adjustments include age, DRG assignment, 
comorbidities, and variable per diem adjustments to reflect higher per 
diem costs in the early days of an IPF stay. Facility-level adjustments 
include adjustments for the IPF's wage index, rural location, teaching 
status, a cost of living adjustment for IPFs located in Alaska and 
Hawaii, and presence of a qualifying emergency department (ED).
    The IPF PPS provides additional payment policies for: outlier 
cases; stop-loss protection (which was applicable only during the IPF 
PPS transition period); interrupted stays; and a per treatment 
adjustment for patients who undergo ECT.
    A complete discussion of the regression analysis appears in the 
November 2004 IPF PPS final rule (69 FR 66933 through 66936).
    Section 124 of BBRA does not specify an annual update rate strategy 
for the IPF PPS and is broadly written to give the Secretary discretion 
in establishing an update methodology. Therefore, in the November 2004 
IPF PPS final rule, we implemented the IPF PPS using the following 
update strategy:
     Calculate the final Federal per diem base rate to be 
budget neutral for the 18-month period of January 1, 2005 through June 
30, 2006.
     Use a July 1 through June 30 annual update cycle.
     Allow the IPF PPS first update to be effective for 
discharges on or after July 1, 2006 through June 30, 2007.

D. Transition Period for Implementation of the IPF PPS

    In the November 2004 IPF PPS final rule, we provided for a 3-year 
transition period. During this 3-year transition period, an IPF's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decreasing percentage of the IPF PPS 
payment that is based on reasonable cost concepts. However, effective 
for cost reporting periods beginning on or after January 1, 2008, IPF 
PPS payments are based on 100 percent of the Federal rate.

II. Proposal To Revise the IPF PPS Payment Rate Update Period From a 
Rate Year to a Fiscal Year

    In this proposed rule, we are proposing a change to the current 
period for the annual updates of the IPF PPS Federal payment rates. We 
propose to revise the IPF PPS payment rate update period by switching 
from a RY that begins on July 1 and goes through June 30 to a period 
that coincides with a fiscal year (FY), that is, October 1 through 
September 30. We would also refer to the update period as a FY 
beginning with the update period that begins in 2012, that is, FY 2013. 
This change in the annual update period would allow us to consolidate 
Medicare publications by aligning the IPF PPS update with the annual 
update of the ICD-9-CM codes, which are effective on October 1 of each 
year. Currently, in addition to our annual proposed and final 
rulemaking documents, we publish a change request transmittal every 
August updating the ICD-9-CM codes related to the DRG and comorbidity 
adjustments. By aligning the IPF PPS

[[Page 5001]]

with the same update period as the ICD-9-CM codes, we will eliminate 
the need to publish a transmittal off-cycle.
    We maintain the same diagnostic coding and DRG classification for 
IPFs that are used under the IPPS for providing the psychiatric care. 
When the IPF PPS was implemented, we adopted the same diagnostic code 
set and DRG patient classification systems (that is, the CMS DRGs) that 
were utilized at the time under the hospital IPPS. Every year, changes 
to the ICD-9-CM coding system are addressed in the IPPS proposed and 
final rules. These changes are effective October 1 of each year and 
must be used by acute care hospitals as well as other providers to 
report diagnostic and procedure information. The IPF PPS has always 
incorporated ICD-9-CM coding changes made in the annual IPPS update. 
This proposed change to the annual payment rate update period would 
allow the annual update to the rates and the ICD-9-CM coding update to 
occur on the same schedule and appear in the same Federal Register 
document.
    Our intent in making the change in the payment rate update schedule 
is to place the IPF PPS on the same update cycle as other PPSs, making 
it administratively efficient. In order to smoothly transition to a 
payment update period that runs from October 1 through September 30, we 
propose that the RY 2012 period run from July 1, 2011 to September 30, 
2012 such that RY 2012 would be 15 months. Under this proposal, after 
RY 2012, the rate update period for the IPF PPS payment rates and other 
policy changes would begin on October 1 and go through September 30. 
The next update to the IPF PPS rates after RY 2012 would be the FY 2013 
update cycle, which would begin on October 1, 2012 and go through 
September 30, 2013. In addition, we are proposing to make a change to 
the regulations at Sec.  412.402 to add the term ``IPF Prospective 
Payment System Rate Year'' which would mean October 1 through September 
30. We are proposing that the RY would be referred to as a FY. The 
discussion of the proposed 15-month market basket update for the 
proposed 2012 rate year can be found in section III.C.5. of this 
proposed rule.

III. Proposed Rebasing and Revising of the Rehabilitation, Psychiatric, 
and Long-Term Care (RPL) Market Basket for Inpatient Psychiatric 
Facilities

A. Background

    The input price index (that is, the market basket) that was used to 
develop the IPF PPS was the Excluded Hospital with Capital market 
basket. This market basket was based on 1997 Medicare cost report data 
and included data for Medicare participating IPFs, inpatient 
rehabilitation facilities (IRFs), long-term care hospitals (LTCHs), 
cancer hospitals, and children's hospitals. Although ``market basket'' 
technically describes the mix of goods and services used in providing 
hospital care, this term is also commonly used to denote the input 
price index (that is, cost category weights and price proxies combined) 
derived from that market basket. Accordingly, the term ``market 
basket'' as used in this document refers to a hospital input price 
index.
    Beginning with the May 2006 IPF PPS final rule (71 FR 27046 through 
27054), IPF PPS payments were updated using a FY 2002-based market 
basket reflecting the operating and capital cost structures for IRFs, 
IPFs, and LTCHs (hereafter referred to as the Rehabilitation, 
Psychiatric, and Long-Term Care (RPL) market basket).
    We excluded cancer and children's hospitals from the RPL market 
basket because their payments are based entirely on reasonable costs 
subject to rate-of-increase limits established under the authority of 
section 1886(b) of the Act, which are implemented in regulations at 
Sec.  413.40. They are not reimbursed through a PPS. Also, the FY 2002 
cost structures for cancer and children's hospitals are noticeably 
different than the cost structures of the IRFs, IPFs, and LTCHs. A 
complete discussion of the FY 2002-based RPL market basket appears in 
the May 2006 IPF PPS final rule (71 FR 27046 through 27054).
    In the May 1, 2009 IPF PPS notice (74 FR 20362), we expressed our 
interest in exploring the possibility of creating a stand-alone IPF 
market basket that reflects the cost structures of only IPF providers. 
We note that, of the available options, one would be to join the 
Medicare cost report data from freestanding IPF providers (presently 
incorporated into the FY 2002-based RPL market basket) with data from 
hospital-based IPF providers. We indicated that an examination of the 
Medicare cost report data comparing freestanding and hospital-based 
IPFs revealed considerable differences between the two with respect to 
cost levels and cost structures. At that time, we were unable to fully 
understand the differences between these two types of IPF providers. As 
a result, we felt that further research was required and we solicited 
public comment for additional information that might help us to better 
understand the reasons for the variations in costs and cost structures, 
as indicated by the cost report data, between freestanding and 
hospital-based IPFs (74 FR 20376).
    We summarized the public comments we received and our responses in 
the April 2010 IPF PPS notice (75 FR 23111 through 23113). Despite 
receiving comments from the public on this issue, we remain unable to 
sufficiently understand the observed differences in costs and cost 
structures between hospital-based and freestanding IPFs, and therefore 
we do not feel it is appropriate at this time to incorporate data from 
hospital-based IPFs with those of freestanding IPFs to create a stand-
alone IPF market basket.
    Although we do not feel it would be appropriate to propose a stand-
alone IPF market basket, we are currently exploring the viability of 
creating two separate market baskets from the current RPL, one of which 
would include freestanding IPFs and freestanding IRFs and would be used 
to update payments under both the IPF and IRF payment systems. The 
other would be a stand-alone LTCH market basket. Depending on the 
outcome of our research, we anticipate the possibility of proposing a 
rehabilitation and psychiatric (RP) market basket in the next update 
cycle. We welcome public comment on the possibility of using this type 
of market basket to update IPF payments in the future.
    For this update cycle, we are proposing to rebase and revise the FY 
2002-based RPL market basket by creating a proposed FY 2008-based RPL 
market basket as described below. In the following discussion, we 
provide an overview of the market basket and describe the methodologies 
we propose to use for purposes of determining the operating and capital 
portions of the proposed FY 2008-based RPL market basket.

B. Overview of the Proposed FY 2008-Based RPL Market Basket

    The proposed FY 2008-based RPL market basket is a fixed weight, 
Laspeyres-type price index. A Laspeyres price index measures the change 
in price, over time, of the same mix of goods and services purchased in 
the base period. Any changes in the quantity or mix of goods and 
services (that is, intensity) purchased over time are not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this proposed rule, the base period is FY 2008) 
and total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive spending categories with the proportion of 
total costs that each category

[[Page 5002]]

represents being calculated. These proportions are called cost or 
expenditure weights. Second, each expenditure category is matched to an 
appropriate price or wage variable, referred to as a price proxy. In 
nearly every instance, these price proxies are derived from publicly 
available statistical series that are published on a consistent 
schedule (preferably at least on a quarterly basis). Finally, the 
expenditure weight for each cost category is multiplied by the level of 
its respective price proxy. The sum of these products (that is, the 
expenditure weights multiplied by their price levels) for all cost 
categories yields the composite index level of the market basket in a 
given period. Repeating this step for other periods produces a series 
of market basket levels over time. Dividing an index level for a given 
period by an index level for an earlier period produces a rate of 
growth in the input price index over that timeframe.
    As noted above, the market basket is described as a fixed-weight 
index because it represents the change in price over time of a constant 
mix (quantity and intensity) of goods and services needed to furnish 
hospital services. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, a hospital hiring more 
nurses to accommodate the needs of patients would increase the volume 
of goods and services purchased by the hospital, but would not be 
factored into the price change measured by a fixed-weight hospital 
market basket. Only when the index is rebased would changes in the 
quantity and intensity be captured, with those changes being reflected 
in the cost weights. Therefore, we rebase the market basket 
periodically so the cost weights reflect recent changes in the mix of 
goods and services that hospitals purchase (hospital inputs) to furnish 
inpatient care between base periods.

C. Proposed Rebasing and Revising of the RPL Market Basket

    We are inviting public comments on our proposed methodological 
changes to the RPL market basket. The terms ``rebasing'' and 
``revising,'' while often used interchangeably, actually denote 
different activities. ``Rebasing'' means moving the base year for the 
structure of costs of an input price index (for example, in this 
proposed rule, we are proposing to shift the base year cost structure 
for the RPL market basket from FY 2002 to FY 2008). ``Revising'' means 
changing data sources, price proxies, or methods, used to derive the 
input price index. We propose to rebase and revise the market basket 
used to update the IPF PPS.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    The proposed FY 2008-based RPL market basket consists of several 
major cost categories derived from the FY 2008 Medicare cost reports 
for freestanding IRFs, freestanding IPFs, and LTCHs including wages and 
salaries, pharmaceuticals, professional liability insurance, capital, 
and a residual. These FY 2008 cost reports include providers whose cost 
report begin date is on or between October 1, 2007 and September 30, 
2008. We choose to use FY 2008 as the base year because we believe that 
the Medicare cost reports for this year represent the most recent, 
complete set of Medicare cost report data available for IRFs, IPFs, and 
LTCHs. However, there is an issue with obtaining data specifically for 
benefits and contract labor from this set of FY 2008 Medicare cost 
reports since IRFs, IPFs, and LTCHs were not required to complete the 
Medicare cost report worksheet from which these data were collected 
(Worksheet S-3, part II). As a result, only a small number of providers 
(less than 30 percent) reported data for these categories, and we do 
not expect these FY 2008 data to improve over time. Furthermore, since 
IRFs, IPFs, and LTCHs were not required to submit data for Worksheet S-
3, part II in previous cost reporting years, we have always had this 
issue of incomplete Medicare cost report data for benefits and contract 
labor (including when we finalized the FY 2002-based RPL market 
basket). Due to the incomplete benefits and contract labor data for 
IRFs, IPFs, and LTCHs, we propose to develop these cost weights using 
FY 2008 Medicare cost report data for IPPS hospitals (similar to the 
method that was used for the FY 2002-based RPL market basket). 
Additional detail is provided later in this section.
    Since our goal is to measure cost shares that are reflective of 
case mix and practice patterns associated with providing services to 
Medicare beneficiaries, we are proposing to limit our selection of 
Medicare cost reports to those from hospitals that have a Medicare 
average length of stay (LOS) that is within a comparable range of their 
total facility average LOS. We believe this provides a more accurate 
reflection of the structure of costs for Medicare covered days. We 
propose to use the cost reports of IRFs and LTCHs with Medicare average 
LOS within 15 percent (that is, 15 percent higher or lower) of the 
total facility average LOS for the hospital. This is the same edit 
applied to derive the FY 2002-based RPL market basket and generally 
includes those LTCHs and IRFs with Medicare LOS within approximately 5 
days of the facility average LOS of the hospital.
    We are proposing to use a less stringent measure of Medicare LOS 
for IPFs. For this provider-type, and in order to produce a robust 
sample size, we propose to use those facilities' Medicare cost reports 
whose average LOS is within 30 or 50 percent (depending on the total 
facility average LOS) of the total facility average LOS. This is the 
same edit applied to derive the FY 2002-based RPL market basket.
    We applied these LOS edits to first obtain a set of cost reports 
for facilities that have a Medicare LOS within a comparable range of 
their total facility LOS. Using this set of Medicare cost reports, we 
then calculated cost weights for four cost categories directly from the 
FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs, 
and LTCHs (found in Table 1 below). These Medicare cost report cost 
weights were then supplemented with information obtained from other 
data sources (explained in more detail below) to derive the proposed FY 
2008-based RPL market basket cost weights.

   Table 1--Major Cost Categories and Their Respective Cost Weights as
         Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
                                                            Proposed FY
                                                          2008-based RPL
                  Major cost categories                    market basket
                                                             (percent)
------------------------------------------------------------------------
Wages and salaries......................................          47.371
Professional liability insurance (Malpractice)..........           0.764
Pharmaceuticals.........................................           6.514
Capital.................................................           8.392
All other...............................................          36.959
------------------------------------------------------------------------

b. Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs and freestanding IPFs, and LTCHs, the other data 
sources we used to develop the proposed FY 2008-based RPL market basket 
cost weights were the FY 2008 IPPS Medicare cost reports and the 
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic 
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost 
reports include providers whose cost report begin date is on or

[[Page 5003]]

between October 1st, 2007 and September 30, 2008.
    As noted above, the proposed FY 2008-based RPL cost weights for 
benefits and contract labor were derived using FY 2008-based IPPS 
Medicare cost reports. We used these Medicare cost reports to calculate 
cost weights for Wages and Salaries, Benefits, and Contract Labor for 
IPPS hospitals for FY 2008. For the proposed Benefits cost weight for 
the FY 2008-based RPL market basket, the ratio of the FY 2008 IPPS 
Benefits cost weight to the FY 2008 IPPS Wages and Salaries cost weight 
was applied to the RPL Wages and Salaries cost weight. Similarly, the 
ratio of the FY 2008 IPPS Contract Labor cost weight to the FY 2008 
IPPS Wages and Salaries cost weight was applied to the RPL Wages and 
Salaries cost weight to derive a Contract Labor cost weight for the 
proposed FY 2008-based RPL market basket.
    The All Other cost category is divided into other hospital 
expenditure category shares using the 2002 BEA Benchmark I-O data 
following the removal of the portions of the All Other cost category 
provided in Table 1 that are attributable to Benefits and Contract 
Labor. The BEA Benchmark I-O data are scheduled for publication every 5 
years. The most recent data available are for 2002. BEA also produces 
Annual I-O estimates; however, the 2002 Benchmark I-O data represent a 
much more comprehensive and complete set of data that are derived from 
the 2002 Economic Census. The Annual I-O is simply an update of the 
Benchmark I-O tables. For the FY 2002-based RPL market basket, we used 
the 1997 Benchmark I-O data. We are proposing to use the 2002 Benchmark 
I-O data in the FY 2008-based RPL market basket. Instead of using the 
less detailed Annual I-O data, we aged the 2002 Benchmark I-O data 
forward to 2008. The methodology we used to age the data forward 
involves applying the annual price changes from the respective price 
proxies to the appropriate cost categories. We repeat this practice for 
each year.
    The All Other cost category expenditure shares are determined as 
being equal to each category's proportion to total ``all other'' in the 
aged 2002 Benchmark I-O data. For instance, if the cost for telephone 
services represented 10 percent of the sum of the ``all other'' 
Benchmark I-O hospital expenditures, then telephone services would 
represent 10 percent of the RPL market basket's All Other cost 
category.
2. Final Cost Category Computation
    As stated previously, for this rebasing we are proposing to use the 
FY 2008 Medicare cost reports for IRFs, IPFs, and LTCHs to derive four 
major cost categories. The proposed FY 2008-based RPL market basket 
includes two additional cost categories that were not broken out 
separately in the FY 2002-based RPL market basket: ``Administrative and 
Business Support Services'' and ``Financial Services''. The inclusion 
of these two additional cost categories, which are derived using the 
Benchmark I-O data, is consistent with the addition of these two cost 
categories to the FY 2006-based IPPS market basket (74 FR 43845). We 
are proposing to break out both categories so we can better match their 
respective expenses with more appropriate price proxies. A thorough 
discussion of our rationale for each of these cost categories is 
provided in the section III.C.3.s. of this proposed rule. Also, the 
proposed FY 2008-based RPL market basket excludes one cost category: 
Photo Supplies. The 2002 Benchmark I-O weight for this category is 
considerably smaller than the 1997 Benchmark I-O weight, presently 
accounting for less than one-tenth of one percentage point of the RPL 
market basket. Therefore, we are proposing to include the photo 
supplies costs in the Chemical cost category weight with other similar 
chemical products.
    We are not proposing to change our definition of the labor-related 
share. However, we are proposing to rename our aggregate cost 
categories from ``labor-intensive'' and ``nonlabor-intensive'' services 
to ``labor-related'' and ``nonlabor-related'' services. This is 
consistent with the FY 2006-based IPPS market basket (74 FR 43845). As 
discussed in more detail below and similar to the FY 2002-based RPL 
market basket, we classify a cost category as labor-related and include 
it in the labor-related share if the cost category is defined as being 
labor-intensive and its cost varies with the local labor market. In 
previous regulations, we grouped cost categories that met both of these 
criteria into labor-intensive services. We believe the proposed new 
labels more accurately reflect the concepts that they are intended to 
convey. We are not proposing to change our definition of the labor-
related share because we continue to classify a cost category as labor-
related if the costs are labor-intensive and vary with the local labor 
market.
3. Selection of Price Proxies
    After computing the FY 2008 cost weights for the proposed rebased 
RPL market basket, it was necessary to select appropriate wage and 
price proxies to reflect the rate of price change for each expenditure 
category. With the exception of the proxy for Professional Liability 
Insurance, all of the proxies for the operating portion of the proposed 
FY 2008-based RPL market basket are based on Bureau of Labor Statistics 
(BLS) data and are grouped into one of the following BLS categories:
    Producer Price Indexes--Producer Price Indexes (PPIs) measure price 
changes for goods sold in markets other than the retail market. PPIs 
are preferable price proxies for goods and services that hospitals 
purchase as inputs because these PPIs better reflect the actual price 
changes faced by hospitals. For example, we use a special PPI for 
prescription drugs, rather than the Consumer Price Index (CPI) for 
prescription drugs, because hospitals generally purchase drugs directly 
from a wholesaler. The PPIs that we use measure price changes at the 
final stage of production.
    Consumer Price Indexes--Consumer Price Indexes (CPIs) measure 
change in the prices of final goods and services bought by the typical 
consumer. Because they may not represent the price faced by a producer, 
we used CPIs only if an appropriate PPI was not available, or if the 
expenditures were more similar to those faced by retail consumers in 
general rather than by purchasers of goods at the wholesale level. For 
example, the CPI for food purchased away from home is used as a proxy 
for contracted food services.
    Employment Cost Indexes--Employment Cost Indexes (ECIs) measure the 
rate of change in employee wage rates and employer costs for employee 
benefits per hour worked. These indexes are fixed-weight indexes and 
strictly measure the change in wage rates and employee benefits per 
hour. Appropriately, they are not affected by shifts in employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The

[[Page 5004]]

proposed CPIs, PPIs, and ECIs selected meet these criteria.
    Table 2 sets forth the proposed FY 2008-based RPL market basket 
including cost categories, and their respective weights and price 
proxies. For comparison purposes, the corresponding FY 2002-based RPL 
market basket cost weights are listed, as well. For example, Wages and 
Salaries are 49.447 percent of total costs in the proposed FY 2008-
based RPL market basket compared to 52.895 percent for the FY 2002-
based RPL market basket. Employee Benefits are 12.831 percent in the 
proposed FY 2008-based RPL market basket compared to 12.982 percent for 
the FY 2002-based RPL market basket. As a result, compensation costs 
(Wages and Salaries plus Employee Benefits) for the proposed FY 2008-
based RPL market basket are 62.278 percent of total costs compared to 
65.877 percent for the FY 2002-based RPL market basket.
    Following Table 2 is a summary outlining the choice of the proxies 
we propose to use for the operating portion of the FY 2008-based RPL 
market basket. The price proxies proposed for the capital portion are 
described in more detail in the capital methodology section (see 
section III.C.4. of this proposed rule).
    We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our 
criteria of reliability, timeliness, availability, and relevance, we 
believe they are the best measures of price changes for the cost 
categories. For further discussion on the FY 2006-based IPPS market 
basket, see the IPPS final rule published in the Federal Register on 
August 27, 2009 (74 FR 43843).

Table 2--Proposed FY 2008-Based RPL Market Basket Cost Categories, Weights, and Price Proxies With FY 2002-Based
                             RPL Market Basket Cost Weights Included for Comparison
----------------------------------------------------------------------------------------------------------------
                                                      FY          Proposed FY
                                               2002[dash]based  2008[dash]based
               Cost categories                    RPL market       RPL market       Proposed FY 2008-based RPL
                                                 basket cost      basket cost      market basket price proxies
                                                   weights          weights
----------------------------------------------------------------------------------------------------------------
1. Compensation..............................           65.877           62.278
    A. Wages and Salaries \1\................           52.895           49.447  ECI for Wages and Salaries,
                                                                                  Civilian Hospital Workers.
    B. Employee Benefits \1\.................           12.982           12.831  ECI for Benefits, Civilian
                                                                                  Hospital Workers.
2. Utilities.................................            0.656            1.578
    A. Electricity...........................            0.351            1.125  PPI for Commercial Electric
                                                                                  Power.
    B. Fuel, Oil, and Gasoline...............            0.108            0.371  PPI for Petroleum Refineries.
    C. Water and Sewage......................            0.197            0.082  CPI-U for Water & Sewerage
                                                                                  Maintenance.
3. Professional Liability Insurance..........            1.161            0.764  CMS Hospital Professional
                                                                                  Liability Insurance
                                                                                 Premium Index.
4. All Other Products and Services...........           22.158           26.988
    A. All Other Products....................           13.325           15.574
    (1.) Pharmaceuticals.....................            5.103            6.514  PPI for Pharmaceutical
                                                                                  Preparations for Human Use
                                                                                  (Prescriptions).
    (2.) Food: Direct Purchases..............            0.873            2.959  PPI for Processed Foods &
                                                                                  Feeds.
    (3.) Food: Contract Services.............            0.620            0.392  CPI-U for Food Away From Home.
    (4.) Chemicals \2\.......................            1.100            1.100  Blend of Chemical PPIs.
    (5.) Medical Instruments.................            1.014            1.795  PPI for Medical, Surgical, and
                                                                                  Personal Aid Devices.
    (6.) Photographic Supplies...............            0.096
    (7.) Rubber and Plastics.................            1.052            1.131  PPI for Rubber & Plastic
                                                                                  Products.
    (8.) Paper and Printing Products.........            1.000            1.021  PPI for Converted Paper &
                                                                                  Paperboard Products.
    (9.) Apparel.............................            0.207            0.210  PPI for Apparel.
    (10.) Machinery and Equipment............            0.297            0.106  PPI for Machinery & Equipment.
    (11.) Miscellaneous Products.............            1.963            0.346  PPI for Finished Goods less
                                                                                  Food and Energy.
    B. All Other Services....................            8.833           11.414
    (1.) Labor-related Services..............            5.111            4.681
    (a.) Professional Fees: Labor-related \3\            2.892            2.114  ECI for Compensation for
                                                                                  Professional and Related
                                                                                  Occupations.
    (b.) Administrative and Business Support               n/a            0.422  ECI for Compensation for Office
     Services \4\.                                                                and Administrative Services.
    (c.) All Other: Labor-Related Services               2.219            2.145  ECI for Compensation for
     \5\.                                                                         Private Service Occupations.
    (2.) Nonlabor-Related Services...........            3.722            6.733
    (a.) Professional Fees: Nonlabor-Related               n/a            4.211  ECI for Compensation for
     \3\.                                                                         Professional and Related
                                                                                  Occupations.
    (b.) Financial Services \5\..............              n/a            0.853  ECI for Compensation for
                                                                                  Financial Activities.
    (c.) Telephone Services..................            0.240            0.416  CPI-U for Telephone Services.
    (d.) Postage.............................            0.682            0.630  CPI-U for Postage.
    (e.) All Other: Nonlabor-Related Services            2.800            0.623  CPI-U for All Items less Food
     \6\.                                                                         and Energy.
5. Capital-Related Costs.....................           10.149            8.392
    A. Depreciation..........................            6.187            5.519
    (1.) Fixed Assets........................            4.250            3.286  BEA chained price index for
                                                                                  nonresidential construction
                                                                                  for hospitals and special care
                                                                                  facilities--vintage weighted
                                                                                  (26 years).
    (2.) Movable Equipment...................            1.937            2.233  PPI for Machinery and
                                                                                  Equipment--vintage weighted
                                                                                  (11 years).
    B. Interest Costs........................            2.775            1.954
    (1.) Government/Nonprofit................            2.081            0.653  Average yield on domestic
                                                                                  municipal bonds (Bond Buyer 20
                                                                                  bonds)--vintage-weighted (26
                                                                                  years).

[[Page 5005]]

 
    (2.) For Profit..........................            0.694            1.301  Average yield on Moody's Aaa
                                                                                  bonds--vintage-weighted (26
                                                                                  years).
    C. Other Capital-Related Costs...........            1.187            0.919  CPI-U for Residential Rent.
                                              ----------------------------------
        Total................................          100.000          100.000
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
\1\ Contract Labor is distributed to Wages and Salaries and Employee Benefits based on the share of total
  compensation that each category represents.
\2\ To proxy the Chemicals cost category, we used a blended PPI composed of the PPI for Industrial Gases, the
  PPI for Other Basic Inorganic Chemical Manufacturing, the PPI for Other Basic Organic Chemical Manufacturing,
  and the PPI for Soap and Cleaning Compound Manufacturing. For more detail about this proxy, see section
  III.C.3.j. of the preamble of this proposed rule.
\3\ The Professional Fees: Labor-related and Professional Fees: Nonlabor-related cost categories were included
  in one cost category called Professional Fees in the FY 2002-based RPL market basket. For more detail about
  how these new categories were derived, we refer readers to sections III.C.6. of the preamble of this proposed
  rule, on the labor-related share.
\4\ The Administrative and Business Support Services cost category was contained within All Other: Labor-
  intensive Services cost category in the FY 2002-based RPL market basket. The All Other: Labor-intensive
  Services cost category is renamed the All Other: Labor-related Services cost category for the FY 2008-based
  RPL market basket.
\5\ The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost
  category in the FY 2002-based RPL market basket. The All Other: Non-labor Intensive Services cost category is
  renamed the All Other: Nonlabor-related Services cost category for the FY 2008-based RPL market basket.

a. Wages and Salaries
    We are proposing to use the ECI for Wages and Salaries for Hospital 
Workers (All Civilian) (BLS series code CIU1026220000000I) to measure 
the price growth of this cost category. This same proxy was used in the 
FY 2002-based RPL market basket.
b. Employee Benefits
    We are proposing to use the ECI for Employee Benefits for Hospital 
Workers (All Civilian) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based RPL market 
basket.
c. Electricity
    We are proposing to use the PPI for Commercial Electric Power (BLS 
series code WPU0542). This same proxy was used in the FY 2002-based RPL 
market basket.
d. Fuel, Oil, and Gasoline
    For the FY 2002-based RPL market basket, this category only 
included expenses classified under North American Industry 
Classification System (NAICS) 21 (Mining). We proxied this category 
using the PPI for Commercial Natural Gas (BLS series code WPU0552). For 
the proposed FY 2008-based market basket, we are proposing to add costs 
to this category that had previously been grouped in other categories. 
The added costs include petroleum-related expenses under NAICS 324110 
(previously captured in the miscellaneous category), as well as 
petrochemical manufacturing classified under NAICS 325110 (previously 
captured in the chemicals category). These added costs represent 80 
percent of the hospital industry's fuel, oil, and gasoline expenses (or 
80 percent of this category). Because the majority of the industry's 
fuel, oil, and gasoline expenses originate from petroleum refineries 
(NAICS 324110), we are proposing to use the PPI for Petroleum 
Refineries (BLS series code PCU324110324110) as the proxy for this cost 
category.
e. Water and Sewage
    We are proposing to use the CPI for Water and Sewerage Maintenance 
(All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the 
price growth of this cost category. This same proxy was used in the FY 
2002-based RPL market basket.
f. Professional Liability Insurance
    We are proposing to proxy price changes in hospital professional 
liability insurance premiums (PLI) using percentage changes as 
estimated by the CMS Hospital Professional Liability Index. To generate 
these estimates, we collect commercial insurance premiums for a fixed 
level of coverage while holding nonprice factors constant (such as a 
change in the level of coverage). This method is also used to proxy PLI 
price changes in the Medicare Economic Index (75 FR 73268). This same 
proxy was used in the FY 2002-based RPL market basket.
g. Pharmaceuticals
    We are proposing to use the PPI for Pharmaceuticals for Human Use, 
Prescription (BLS series code WPUSI07003) to measure the price growth 
of this cost category. We note that we are not making a change to the 
PPI that is used to proxy this cost category. There was a recent change 
to the BLS naming convention for this series; however this is the same 
proxy that was used in the FY 2002-based RPL market basket.
h. Food: Direct Purchases
    We are proposing to use the PPI for Processed Foods and Feeds (BLS 
series code WPU02) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
i. Food: Contract Services
    We are proposing to use the CPI for Food Away From Home (All Urban 
Consumers) (BLS series code CUUR0000SEFV) to measure the price growth 
of this cost category. This same proxy was used in the FY 2002-based 
RPL market basket.
j. Chemicals
    We are proposing to use a blended PPI composed of the PPI for 
Industrial Gas Manufacturing (NAICS 325120) (BLS series code 
PCU325120325120P), the PPI for Other Basic Inorganic Chemical 
Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI 
for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS

[[Page 5006]]

series code PCU32519-32519-), and the PPI for Soap and Cleaning 
Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-
). Using the 2002 Benchmark I-O data, we found that these NAICS 
industries accounted for approximately 90 percent of the hospital 
industry's chemical expenses.
    Therefore, we are proposing to use this blended index because we 
believe its composition better reflects the composition of the 
purchasing patterns of hospitals than does the PPI for Industrial 
Chemicals (BLS series code WPU061), the proxy used in the FY 2002-based 
RPL market basket. Table 3 below shows the weights for each of the four 
PPIs used to create the blended PPI, which we determined using the 2002 
Benchmark I-O data.

                  Table 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                            Weights (in
                  Name                       percent)          NAICS
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing....              35          325120
PPI for Other Basic Inorganic Chemical                25          325180
 Manufacturing..........................
PPI for Other Basic Organic Chemical                  30          325190
 Manufacturing..........................
PPI for Soap and Cleaning Compound                    10          325610
 Manufacturing..........................
------------------------------------------------------------------------

k. Medical Instruments
    We are proposing to use the PPI for Medical, Surgical, and Personal 
Aid Devices (BLS series code WPU156) to measure the price growth of 
this cost category. In the 1997 Benchmark I-O data, approximately half 
of the expenses classified in this category were for surgical and 
medical instruments. Therefore, we used the PPI for Surgical and 
Medical Instruments and Equipment (BLS series code WPU1562) to proxy 
this category in the FY 2002-based RPL market basket. The 2002 
Benchmark I-O data show that surgical and medical instruments now 
represent only 33 percent of these expenses and that the largest 
expense category is surgical appliance and supplies manufacturing 
(corresponding to BLS series code WPU1563). Due to this reallocation of 
costs over time, we are proposing to change the price proxy for this 
cost category to the more aggregated PPI for Medical, Surgical, and 
Personal Aid Devices.
l. Photographic Supplies
    We are proposing to eliminate the cost category specific to 
photographic supplies for the proposed FY 2008-based RPL market basket. 
These costs would now be included in the Chemicals cost category 
because the costs are presently reported as all other chemical 
products. Notably, although we would be eliminating the specific cost 
category, these costs would still be accounted for within the RPL 
market basket.
m. Rubber and Plastics
    We are proposing to use the PPI for Rubber and Plastic Products 
(BLS series code WPU07) to measure price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
n. Paper and Printing Products
    We are proposing to use the PPI for Converted Paper and Paperboard 
Products (BLS series code WPU0915) to measure the price growth of this 
cost category. This same proxy was used in the FY 2002-based RPL market 
basket.
o. Apparel
    We are proposing to use the PPI for Apparel (BLS series code 
WPU0381) to measure the price growth of this cost category. This same 
proxy was used in the FY 2002-based RPL market basket.
p. Machinery and Equipment
    We are proposing to use the PPI for Machinery and Equipment (BLS 
series code WPU11) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
q. Miscellaneous Products
    We are proposing to use the PPI for Finished Goods Less Food and 
Energy (BLS series code WPUSOP3500) to measure the price growth of this 
cost category. Using this index would remove the double-counting of 
food and energy prices, which would already be captured elsewhere in 
the market basket. This same proxy was used in the FY 2002-based RPL 
market basket.
r. Professional Fees: Labor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. It 
includes occupations such as legal, accounting, and engineering 
services. This same proxy was used in the FY 2002-based RPL market 
basket.
s. Administrative and Business Support Services
    We are proposing to use the ECI for Compensation for Office and 
Administrative Support Services (Private Industry) (BLS series code 
CIU2010000220000I) to measure the price growth of this category. 
Previously these costs were included in the All Other: Labor-intensive 
category (now renamed the All Other: Labor-related Services category), 
and were proxied by the ECI for Compensation for Service Occupations. 
We believe that this compensation index better reflects the changing 
price of labor associated with the provision of administrative services 
and its incorporation represents a technical improvement to the market 
basket.
t. All Other: Labor-Related Services
    We are proposing to use the ECI for Compensation for Service 
Occupations (Private Industry) (BLS series code CIU2010000300000I) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based RPL market basket.
u. Professional Fees: Nonlabor-Related
    We are proposing to use the ECI for Compensation for Professional 
and Related Occupations (Private Industry) (BLS series code 
CIS2020000120000I) to measure the price growth of this category. This 
is the same price proxy that we are proposing to use for the 
Professional Fees: Labor-related cost category.
v. Financial Services
    We are proposing to use the ECI for Compensation for Financial 
Activities (Private Industry) (BLS series code CIU201520A000000I) to 
measure the price growth of this cost category. Previously these costs 
were included in the All Other: Nonlabor-intensive category (now 
renamed the All Other: Nonlabor-related Services category), and were 
proxied by the CPI for All Items. We believe that this compensation 
index better reflects the changing price of labor associated with the 
provision of

[[Page 5007]]

financial services and its incorporation represents a technical 
improvement to the market basket.
w. Telephone Services
    We are proposing to use the CPI for Telephone Services (BLS series 
code CUUR0000SEED) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based RPL market basket.
x. Postage
    We are proposing to use the CPI for Postage (BLS series code 
CUUR0000SEEC01) to measure the price growth of this cost category. This 
same proxy was used in the FY 2002-based RPL market basket.
y. All Other: Nonlabor-Related Services
    We are proposing to use the CPI for All Items Less Food and Energy 
(BLS series code CUUR0000SA0L1E) to measure the price growth of this 
cost category. Previously these costs were proxied by the CPI for All 
Items in the FY 2002-based RPL market basket. We believe that using the 
CPI for All Items Less Food and Energy would remove the double counting 
of changes in food and energy prices, as they are already captured 
elsewhere in the market basket. Consequently, we believe that the 
incorporation of this proxy would represent a technical improvement to 
the market basket.
4. Proposed Methodology for Capital Portion of the RPL Market Basket
    In the FY 2002-based RPL market basket, we did not have IRF, IPF, 
and LTCH 2002 Medicare cost report data for the capital cost weights, 
due to a change in the 2002 reporting requirements. Therefore, we used 
these hospitals' 2001 expenditure data for the capital cost categories 
of depreciation, interest, and other capital expenses, and aged the 
data to a 2002 base year using relevant price proxies.
    For the proposed FY 2008-based RPL market basket, we are proposing 
to calculate weights for the proposed RPL market basket capital costs 
using the same set of FY 2008 Medicare cost reports used to develop the 
operating share for IRFs, IPFs, and LTCHs. To calculate the proposed 
total capital cost weight, we first apply the same LOS edits as applied 
prior to calculating the operating cost weights as described above in 
section III.C.3. The resulting proposed capital weight for the FY 2008 
base year is 8.392 percent.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the RPL market basket, but rather are 
proportionally distributed amongst the cost categories of Depreciation, 
Interest, and Other, reflecting the assumption that the underlying cost 
structure of leases is similar to that of capital costs in general. As 
was done in the FY 2002-based RPL market basket, we first assumed 10 
percent of lease expenses represents overhead and assigned those costs 
to the Other Capital-Related Costs category accordingly. The remaining 
lease expenses were distributed across the three cost categories based 
on the respective weights of depreciation, interest, and other capital 
not including lease expenses.
    Depreciation contains two subcategories: (1) Building & Fixed 
Equipment; and (2) Movable Equipment. The apportionment between 
building & fixed equipment and movable equipment was determined using 
the FY 2008 Medicare cost reports for freestanding IRFs, IPFs, and 
LTCHs. This methodology was also used to compute the apportionment used 
in the FY 2002-based RPL market basket (70 FR 47912).
    The total Interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based RPL market basket allocated 75 percent of the total Interest cost 
weight to government/nonprofit interest and proxied that category by 
the average yield on domestic municipal bonds. The remaining 25 percent 
of the Interest cost weight was allocated to for-profit interest and 
was proxied by the average yield on Moody's Aaa bonds (70 FR 47912). 
This was based on the FY 2002-based IPPS capital input price index (70 
FR 23406) due to insufficient Medicare cost report data for IPFs, IRFs, 
and LTCHs. For the proposed FY 2008-based RPL market basket, we are 
proposing to derive the split using the relative FY 2008 Medicare cost 
report data on interest expenses for government/nonprofit and for-
profit IRFs, IPFs, and LTCHs. Based on these data, we calculated a 
proposed 33/67 split between government/nonprofit and for-profit 
interest. We believe it is important that this split reflects the 
latest relative cost structure of interest expenses for RPL providers. 
As stated above, we first apply the LOS edits (as described in section 
III.C.3.) prior to calculating this split. Therefore, we are using cost 
reports that are reflective of case mix and practice patterns 
associated with providing services to Medicare beneficiaries. Using 
data specific to government/nonprofit and for-profit IRFs, IPFs, and 
LTCHs as well as the application of these LOS edits are the primary 
reasons for the difference in this split relative to the FY 2002-based 
RPL market basket.
    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted 
capital portion of the FY 2008-based RPL market basket is intended to 
capture the long-term consumption of capital, using vintage weights for 
depreciation (physical capital) and interest (financial capital). These 
vintage weights reflect the proportion of capital purchases 
attributable to each year of the expected life of building & fixed 
equipment, movable equipment, and interest. We are proposing to use the 
vintage weights to compute vintage-weighted price changes associated 
with depreciation and interest expense.
    Vintage weights are an integral part of the proposed FY 2008-based 
RPL market basket. Capital costs are inherently complicated and are 
determined by complex capital purchasing decisions, over time, based on 
such factors as interest rates and debt financing. In addition, capital 
is depreciated over time instead of being consumed in the same period 
it is purchased. The capital portion of the proposed FY 2008-based RPL 
market basket would reflect the annual price changes associated with 
capital costs, and would be a useful simplification of the actual 
capital investment process. By accounting for the vintage nature of 
capital, we are able to provide an accurate and stable annual measure 
of price changes. Annual nonvintage price changes for capital are 
unstable due to the volatility of interest rate changes and, therefore, 
do not reflect the actual annual price changes for Medicare capital-
related costs. The capital component of the proposed FY 2008-based RPL 
market basket would reflect the underlying stability of the capital 
acquisition process and provides hospitals with the ability to plan for 
changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building & 
fixed equipment and movable equipment. We found no single source that 
provides a uniquely best time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, AHA does provide a 
consistent database back to 1963. We used data from the AHA Panel 
Survey and the AHA Annual Survey to obtain

[[Page 5008]]

a time series of total expenses for hospitals. We then used data from 
the AHA Panel Survey supplemented with the ratio of depreciation to 
total hospital expenses obtained from the Medicare cost reports to 
derive a trend of annual depreciation expenses for 1963 through 2008.
    In order to estimate capital purchases using data on depreciation 
expenses, the expected life for each cost category (building & fixed 
equipment, movable equipment, and interest) is needed to calculate 
vintage weights. For the FY 2002-based RPL market basket, due to 
insufficient Medicare cost report data for IRFs, IPFs, and LTCHs, we 
used 2001 Medicare Cost Reports for IPPS hospitals to determine the 
expected life of building & fixed equipment and movable equipment (70 
FR 47913). The FY 2002-based RPL market basket was based on an expected 
life of building & fixed equipment of 23 years. It used 11 years as the 
expected life for movable equipment. We believed that this data source 
reflected the latest relative cost structure of depreciation expenses 
for hospitals at the time and was analogous to IRFs, IPFs, and LTCHs.
    The expected life of any piece of equipment can be determined by 
dividing the value of the asset (excluding fully depreciated assets) by 
its current year depreciation amount. This calculation yields the 
estimated useful life of an asset if depreciation were to continue at 
current year levels, assuming straight-line depreciation. Following a 
similar method to what was applied for the FY 2002-based RPL market 
basket, we are proposing to use the expected life of building & fixed 
equipment to be equal to 26 years, and the expected life of movable 
equipment to be 11 years. These expected lives are calculated using FY 
2008 Medicare cost reports for IPPS hospitals since we are currently 
unable to obtain robust measures of the expected lives for building & 
fixed equipment and movable equipment using the Medicare cost reports 
from IRFs, IPFs, and LTCHs.
    We also propose to use the building & fixed equipment and movable 
equipment weights derived from FY 2008 Medicare cost reports for IRFs, 
IPFs, and LTCHs to separate the depreciation expenses into annual 
amounts of building & fixed equipment depreciation and movable 
equipment depreciation. Year-end asset costs for building & fixed 
equipment and movable equipment were determined by multiplying the 
annual depreciation amounts by the expected life calculations. We then 
calculated a time series, back to 1963, of annual capital purchases by 
subtracting the previous year asset costs from the current year asset 
costs. From this capital purchase time series, we were able to 
calculate the vintage weights for building & fixed equipment and for 
movable equipment. Each of these sets of vintage weights is explained 
in more detail below.
    For the proposed building & fixed equipment vintage weights, we 
used the real annual capital purchase amounts for building & fixed 
equipment to capture the actual amount of the physical acquisition, net 
of the effect of price inflation. This real annual purchase amount for 
building & fixed equipment was produced by deflating the nominal annual 
purchase amount by the building & fixed equipment price proxy, BEA's 
chained price index for nonresidential construction for hospitals and 
special care facilities. Because building & fixed equipment have an 
expected life of 26 years, the vintage weights for building & fixed 
equipment are deemed to represent the average purchase pattern of 
building & fixed equipment over 26-year periods. With real building & 
fixed equipment purchase estimates available from 2008 back to 1963, we 
averaged twenty 26-year periods to determine the average vintage 
weights for building & fixed equipment that are representative of 
average building & fixed equipment purchase patterns over time. Vintage 
weights for each 26-year period are calculated by dividing the real 
building & fixed capital purchase amount in any given year by the total 
amount of purchases in the 26-year period. This calculation is done for 
each year in the 26-year period, and for each of the twenty 26-year 
periods. We used the average of each year across the twenty 26-year 
periods to determine the average building & fixed equipment vintage 
weights for the FY 2008-based RPL market basket.
    For the proposed movable equipment vintage weights, the real annual 
capital purchase amounts for movable equipment were used to capture the 
actual amount of the physical acquisition, net of price inflation. This 
real annual purchase amount for movable equipment was calculated by 
deflating the nominal annual purchase amounts by the movable equipment 
price proxy, the PPI for Machinery and Equipment. This is the same 
proxy used for the FY 2002-based RPL market basket. Based on our 
determination that movable equipment has an expected life of 11 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over an 11-year period. With real 
movable equipment purchase estimates available from 2008 back to 1963, 
thirty-five 11-year periods were averaged to determine the average 
vintage weights for movable equipment that are representative of 
average movable equipment purchase patterns over time. Vintage weights 
for each 11-year period are calculated by dividing the real movable 
capital purchase amount for any given year by the total amount of 
purchases in the 11-year period. This calculation was done for each 
year in the 11-year period and for each of the thirty-five 11-year 
periods. We used the average of each year across the thirty-five 11-
year periods to determine the average movable equipment vintage weights 
for the FY 2008-based RPL market basket.
    For the proposed interest vintage weights, the nominal annual 
capital purchase amounts for total equipment (building & fixed, and 
movable) were used to capture the value of the debt instrument. Because 
we have determined that hospital debt instruments have an expected life 
of 26 years, the vintage weights for interest are deemed to represent 
the average purchase pattern of total equipment over 26-year periods. 
With nominal total equipment purchase estimates available from 2008 
back to 1963, twenty 26-year periods were averaged to determine the 
average vintage weights for interest that are representative of average 
capital purchase patterns over time. Vintage weights for each 26-year 
period are calculated by dividing the nominal total capital purchase 
amount for any given year by the total amount of purchases in the 26-
year period. This calculation is done for each year in the 26-year 
period and for each of the twenty 26-year periods. We used the average 
of each year across the twenty 26-year periods to determine the average 
interest vintage weights for the FY 2008-based RPL market basket. The 
vintage weights for the capital portion of the FY 2002-based RPL market 
basket and the FY 2008-based RPL market basket are presented in Table 
4.

[[Page 5009]]

                                     Table 4--FY 2002 and FY 2008 Vintage Weights for Capital-Related Price Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Building and fixed equipment          Movable equipment                   Interest
                                                         -----------------------------------------------------------------------------------------------
                          Year                              FY 2002 23      FY 2008 26      FY 2002 11      FY 2008 11      FY 2002 23      FY 2008 26
                                                               years           years           years           years           years           years
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................           0.021           0.021           0.065           0.071           0.010           0.010
2.......................................................           0.022           0.023           0.071           0.075           0.012           0.012
3.......................................................           0.025           0.025           0.077           0.080           0.014           0.014
4.......................................................           0.027           0.027           0.082           0.083           0.016           0.016
5.......................................................           0.029           0.028           0.086           0.085           0.019           0.018
6.......................................................           0.031           0.030           0.091           0.089           0.023           0.020
7.......................................................           0.033           0.031           0.095           0.092           0.026           0.021
8.......................................................           0.035           0.033           0.100           0.098           0.029           0.024
9.......................................................           0.038           0.035           0.106           0.103           0.033           0.026
10......................................................           0.040           0.037           0.112           0.109           0.036           0.029
11......................................................           0.042           0.039           0.117           0.116           0.039           0.033
12......................................................           0.045           0.041  ..............  ..............           0.043           0.035
13......................................................           0.047           0.042  ..............  ..............           0.048           0.038
14......................................................           0.049           0.043  ..............  ..............           0.053           0.041
15......................................................           0.051           0.044  ..............  ..............           0.056           0.043
16......................................................           0.053           0.045  ..............  ..............           0.059           0.046
17......................................................           0.056           0.046  ..............  ..............           0.062           0.049
18......................................................           0.057           0.047  ..............  ..............           0.064           0.052
19......................................................           0.058           0.047  ..............  ..............           0.066           0.053
20......................................................           0.060           0.045  ..............  ..............           0.070           0.053
21......................................................           0.060           0.045  ..............  ..............           0.071           0.055
22......................................................           0.061           0.045  ..............  ..............           0.074           0.056
23......................................................           0.061           0.046  ..............  ..............           0.076           0.060
24......................................................  ..............           0.046  ..............  ..............  ..............           0.063
25......................................................  ..............           0.045  ..............  ..............  ..............           0.064
26......................................................  ..............           0.046  ..............  ..............  ..............           0.068
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................           1.000           1.000           1.000           1.000           1.000           1.000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Numbers may not add to total due to rounding.

    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. We are proposing to use the 
same price proxies for the capital portion of the proposed FY 2008-
based RPL market basket that were used in the FY 2002-based RPL market 
basket with the exception of the Boeckh Construction Index. We replaced 
the Boeckh Construction Index with BEA's chained price index for 
nonresidential construction for hospitals and special care facilities. 
The BEA index represents construction of facilities such as hospitals, 
nursing homes, hospices, and rehabilitation centers. Although these 
price indices move similarly over time, we believe that it is more 
technically appropriate to use an index that is more specific to the 
hospital industry. We believe these are the most appropriate proxies 
for hospital capital costs that meet our selection criteria of 
relevance, timeliness, availability, and reliability.
    The price proxies (prior to any vintage weighting) for each of the 
capital cost categories are the same as those used for the FY 2006-
based CIPI as described in the IPPS FY 2010 final rule (74 FR at 
43857).
5. Proposed RY 2012 Market Basket Update
    For the proposed RY 2012 (that is, beginning July 1, 2011 and 
ending September 30, 2012), we are proposing to use a 15-month (that is 
July 1, 2011 through September 30, 2012) estimate of the proposed FY 
2008-based RPL market basket based on the best available data. 
Consistent with historical practice, we estimate the RPL market basket 
update for the IPF PPS based on IHS Global Insight's forecast using the 
most recent available data. IHS Global Insight, Inc. is a nationally 
recognized economic and financial forecasting firm that contracts with 
CMS to forecast the components of the market baskets.
    To determine a 15-month market basket update for RY 2012, we 
calculate the 5-quarter moving average index level for July 1, 2011 
through September 30, 2012 and the 4-quarter moving average index level 
for July 1, 2010 through June 30, 2011. The percent change in these two 
values represents the proposed 15-month market basket update.
    Based on IHS Global Insight's 4th quarter 2010 forecast with 
history through the 3rd quarter of 2010, the projected 15-month market 
basket update for the proposed 15-month RY 2012 (July 1, 2011 through 
September 30, 2012) is 3.0 percent. Therefore, consistent with our 
historical practice of estimating market basket increases based on the 
best available data, we are proposing a market basket update of 3.0 
percent for the proposed 15-month RY 2012. Furthermore, because the 
proposed RY 2012 update is based on the most recent market basket 
estimate for the 15-month period (currently 3.0 percent), we are also 
proposing that if more recent data are subsequently available (for 
example, a more recent estimate of the market basket), we would use 
such data, if appropriate, to determine the RY 2012 update in the final 
rule.
    We note that the most recent estimate of the FY 2008-based RPL 
market basket update for July 1, 2011 through June 30, 2012, based on 
IHS Global Insight's 4th quarter 2010 forecast with history through the 
3rd quarter of 2010, is 2.6 percent. We determine this 12-month market 
basket update by calculating the 4-quarter moving average index level 
for July 1, 2011 through June 30, 2012 and the 4-quarter moving average 
index level for July 1, 2010 through June 30, 2011. The percent change 
in these two values represents the proposed 12-month market basket 
update. Consistent with our historical practice of using

[[Page 5010]]

market basket estimates based on the most recent available data, if we 
were not proposing to extend the 2012 IPF PPS rate year by 3 months, we 
would have proposed a market basket update for a 12-month RY 2012 of 
2.6 percent, based on the most recent estimate of the 12-month RPL 
market basket update for July 1, 2011 through June 30, 2012.
    Using the current FY 2002-based RPL market basket and IHS Global 
Insight's 4th quarter 2010 forecast for the market basket components, 
the 15-month RY 2012 update would also be 3.0 percent. The 12-month RY 
2012 update would be 2.6 percent. Table 5 below compares the proposed 
FY 2008-based RPL market basket and the FY 2002-based RPL market basket 
percent changes.

   Table 5--FY 2002-Based and Proposed FY 2008-Based RPL Market Basket
                 Percent Change, RY 2006 Through FY 2014
------------------------------------------------------------------------
                                                         FY 2008-Based
                                    FY 2002-Based RPL     Proposed RPL
Rate Year (RY) or Fiscal Year (FY)    Market  Basket     Market Basket
                                      Index  Percent     Index Percent
                                          Change             Change
------------------------------------------------------------------------
Historical data:
    RY 2006 \1\...................                3.8                3.7
    RY 2007 \1\...................                3.5                3.5
    RY 2008 \1\...................                3.5                3.6
    RY 2009 \1\...................                3.2                3.3
    RY 2010 \1\...................                2.2                2.1
    Average 2006-2010.............                3.2                3.2
Forecast:
    RY 2011 \1\...................                2.2                2.3
    RY 2012 \2\...................                3.0                3.0
    FY 2013 \3\...................                3.0                2.9
    FY 2014 \3\...................                3.0                3.0
    Average 2011-2014.............                2.8                2.8
------------------------------------------------------------------------
\1\ RY 2006 through RY 2011 represent 12-month updates, which include
  July 1 through June 30.
\2\ RY 2012 represents a 15-month update, which includes July 1, 2011
  through September 30, 2012.
\3\ FY 2013 through FY 2014 represent 12-month updates, which include
  October 1 through September 30.
Note that these market basket percent changes do not include any further
  adjustments as may be statutorily required.
Source: IHS Global Insight, Inc. 4th quarter 2010 forecast.

    For the RY 2012 proposed market basket update, there is no 
difference between the 15-month top-line FY 2002-based and the proposed 
FY 2008-based RPL market basket increases due to offsetting factors. 
The lower total compensation weight in the proposed FY 2008-based RPL 
market basket (62.278 percent) relative to the FY 2002-based RPL market 
basket (65.877 percent), absent other factors, would have resulted in a 
slightly lower market basket update using the FY 2008-based RPL market 
basket. This impact, however, is offset by the larger weight associated 
with the Professional Fees category. In both market baskets, these 
expenditures are proxied by the ECI for Compensation for Professional 
and Related Services. The weight for Professional Fees in the FY 2002-
based RPL market basket is 2.892 percent compared to 6.325 percent in 
the proposed FY 2008-based RPL market basket.
6. Proposed Labor-Related Share
    As described in section V.C.1. of this proposed rule, due to the 
variations in costs and geographic wage levels, we are proposing that 
payment rates under the IPF PPS continue to be adjusted by a geographic 
wage index. This wage index would apply to the labor-related portion of 
the proposed Federal per diem base rate, hereafter referred to as the 
labor-related share.
    The labor-related share is determined by identifying the national 
average proportion of total costs that are related to, influenced by, 
or vary with the local labor market. We continue to classify a cost 
category as labor-related if the costs are labor-intensive and vary 
with the local labor market. Given this, based on our definition of the 
labor-related share, we are proposing to include in the labor-related 
share the sum of the relative importance of Wages and Salaries, 
Employee Benefits, Professional Fees: Labor-related, Administrative and 
Business Support Services, All Other: Labor-related Services 
(previously referred to in the FY 2002-based RPL market basket as 
labor-intensive), and a portion of the Capital-Related cost weight.
    Consistent with previous rebasings, the All Other: Labor-related 
Services cost category is mostly comprised of building maintenance and 
security services (including, but not limited to, commercial and 
industrial machinery and equipment repair, nonresidential maintenance 
and repair, and investigation and security services). Because these 
services tend to be labor-intensive and are mostly performed at the 
hospital facility (and, therefore, unlikely to be purchased in the 
national market), we believe that they meet our definition of labor-
related services.
    As stated in the April 2010 IPF PPS notice (75 FR 23110), the 
labor-related share was defined as the sum of the relative importance 
of Wages and Salaries, Fringe Benefits, Professional Fees, Labor-
intensive Services, and a portion of the capital share from an 
appropriate market basket. Therefore, to determine the labor-related 
share for the IPF PPS for RY 2011, we used the FY 2002-based RPL market 
basket cost weights relative importance to determine the labor-related 
share for the IPF PPS.
    For the proposed FY 2008-based RPL market basket rebasing, the 
proposed inclusion of the Administrative and Business Support Services 
cost category into the labor-related share remains consistent with the 
current labor-related share because this cost category was previously 
included in the Labor-intensive cost category. As previously stated, we 
are proposing to establish a separate Administrative and Business 
Support Service cost category so that we can use the ECI for 
Compensation for Office and Administrative Support Services to more 
precisely proxy these specific expenses.

[[Page 5011]]

    For the FY 2002-based RPL market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services, engineering services, legal services, and management and 
consulting services) were purchased in the local labor market and, 
therefore, all of their associated fees varied with the local labor 
market. As a result, we previously included 100 percent of these costs 
in the labor-related share. In an effort to more accurately determine 
the share of professional fees that should be included in the labor-
related share, we surveyed hospitals regarding the proportion of those 
fees that go to companies that are located beyond their own local labor 
market (the results are discussed below).
    We continue to look for ways to refine our market basket approach 
to more accurately account for the proportion of costs influenced by 
the local labor market. To that end, we conducted a survey of hospitals 
to empirically determine the proportion of contracted professional 
services purchased by the industry that are attributable to local firms 
and the proportion that are purchased from national firms. We notified 
the public of our intent to conduct this survey on December 9, 2005 (70 
FR 73250) and received no comments (71 FR 8588).
    With approval from the Office of Management and Budget (OMB), we 
contacted a sample of IPPS hospitals and received responses to our 
survey from 108 hospitals. We believe that these data serve as an 
appropriate proxy for the purchasing patterns of professional services 
for IPFs as they are also institutional providers of health care 
services. Using data on FTEs to allocate responding hospitals across 
strata (region of the country and urban/rural status), we calculated 
poststratification weights. Based on these weighted results, we 
determined that hospitals purchase, on average, the following portions 
of contracted professional services outside of their local labor 
market:
     34 percent of accounting and auditing services.
     30 percent of engineering services.
     33 percent of legal services.
     42 percent of management consulting services.
    We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional fees cost category. This is 
the methodology that we used to separate the FY 2008-based RPL market 
basket professional fees category into Professional Fees: Labor-related 
and Professional Fees: Nonlabor-related cost categories. In addition to 
the professional services listed above, we also classified expenses 
under NAICS 55, Management of Companies and Enterprises, into the 
Professional Fees cost category as was done in previous rebasings. The 
NAICS 55 data are mostly comprised of corporate, subsidiary, and 
regional managing offices, or otherwise referred to as home offices. 
Formerly, all of the expenses within this category were considered to 
vary with, or be influenced by, the local labor market and were thus 
included in the labor-related share. Because many hospitals are not 
located in the same geographic area as their home office, we analyzed 
data from a variety of sources in order to determine what proportion of 
these costs should be appropriately included in the labor-related 
share.
    Using data primarily from the Medicare cost reports and a CMS 
database of Home Office Medicare Records (HOMER) (a database that 
provides city and state information (addresses) for home offices), we 
were able to determine that 19 percent of the total number of 
freestanding IRFs, IPFs, and LTCHs that had home offices had those home 
offices located in their respective local labor markets--defined as 
being in the same Metropolitan Statistical Area (MSA).
    The Medicare cost report requires hospitals to report their home 
office provider numbers. Using the HOMER database to determine the home 
office location for each home office provider number, we compared the 
location of the provider with the location of the hospital's home 
office. We then placed providers into one of the following three 
groups:
     Group 1--Provider and home office are located in different 
States.
     Group 2--Provider and home office are located in the same 
State and same city.
     Group 3--Provider and home office are located in the same 
State and different city.
    We found that 63 percent of the providers with home offices were 
classified into Group 1 (that is, different State) and, thus, these 
providers were determined to not be located in the same local labor 
market as their home office. Although there were a very limited number 
of exceptions (that is, providers located in different States but the 
same MSA as their home office), the 63 percent estimate was unchanged.
    We found that 9 percent of all providers with home offices were 
classified into Group 2 (that is, same State and same city and, 
therefore, the same MSA). Consequently, these providers were determined 
to be located in the same local labor market as their home offices.
    We found that 27 percent of all providers with home offices were 
classified into Group 3 (that is, same State and different city). Using 
data from the Census Bureau to determine the specific MSA for both the 
provider and its home office, we found that 10 percent of all providers 
with home offices were identified as being in the same State, a 
different city, but the same MSA.
    Pooling these results, we were able to determine that approximately 
19 percent of providers with home offices had home offices located 
within their local labor market (that is, 9 percent of providers with 
home offices had their home offices in the same State and city (and, 
thus, the same MSA), and 10 percent of providers with home offices had 
their home offices in the same State, a different city, but the same 
MSA). We are proposing to apportion the NAICS 55 expense data by this 
percentage. Thus, we are proposing to classify 19 percent of these 
costs into the Professional Fees: Labor-related cost category and the 
remaining 81 percent into the Professional Fees: Nonlabor-related 
Services cost category.
    Table 6 below shows the proposed RY 2012 relative importance labor-
related share using the proposed FY 2008-based RPL market basket and 
the FY 2002-based RPL market basket.

[[Page 5012]]

Table 6--Comparison of the RY 2011 (12-Month) Relative Importance Labor-
   Related Share Based on the FY 2002-Based RPL Market Basket and the
   Proposed RY 2012 (15-Month) Relative Importance Labor-Related Share
          based on the Proposed FY 2008-Based RPL Market Basket
------------------------------------------------------------------------
                                                        Proposed RY 2012
                                     RY 2011 Relative       relative
                                    importance labor-  importance labor-
                                      related share      related share
------------------------------------------------------------------------
Wages and Salaries................             52.600             49.248
Employee Benefits.................             13.935             12.988
Professional Fees: Labor-Related..              2.853              2.085
Administrative and Business         .................              0.417
 Support Services.................
All Other: Labor-Related Services.              2.118              2.104
Subtotal..........................             71.506             66.842
Labor-Related Portion of Capital                3.894              3.657
 Costs (46%)......................
                                   -------------------------------------
    Total Labor-Related Share.....             75.400             70.499
------------------------------------------------------------------------

    The proposed labor-related share for RY 2012 is the sum of the 
proposed RY 2012 relative importance of each labor-related cost 
category, and would reflect the different rates of price change for 
these cost categories between the base year (FY 2008) and RY 2012. The 
sum of the proposed relative importance for RY 2012 for operating costs 
(Wages and Salaries, Employee Benefits, Professional Fees: Labor-
Related, Administrative and Business Support Services, and All Other: 
Labor-related Services) would be 66.842 percent, as shown in Table 6 
above. We are proposing that the portion of Capital that is influenced 
by the local labor market is estimated to be 46 percent, which is the 
same percentage applied to the FY 2002-based RPL market basket. Since 
the relative importance for Capital-Related Costs would be 7.950 
percent of the proposed FY 2008-based RPL market basket in RY 2012, we 
are proposing to take 46 percent of 7.950 percent to determine the 
proposed labor-related share of Capital for RY 2012. The result would 
be 3.657 percent, which we propose to add to 66.842 percent for the 
operating cost amount to determine the total proposed labor-related 
share for RY 2012. Therefore, the labor-related share that we propose 
to use for IPF PPS in RY 2012 would be 70.499 percent. This proposed 
labor-related share is determined using the same methodology as 
employed in calculating all previous IPF labor-related shares (69 FR 
66952). The wage index and the labor-related share are adjusted for 
budget neutrality.

IV. Updates to the IPF PPS for RY Beginning July 1, 2011

    The IPF PPS is based on a standardized Federal per diem base rate 
calculated from IPF average per diem costs and adjusted for budget-
neutrality in the implementation year. The Federal per diem base rate 
is used as the standard payment per day under the IPF PPS and is 
adjusted by the patient- and facility-level adjustments that are 
applicable to the IPF stay. A detailed explanation of how we calculated 
the average per diem cost appears in the November 2004 IPF PPS final 
rule (69 FR 66926).

A. Determining the Standardized Budget-Neutral Federal Per Diem Base 
Rate

    Section 124(a)(1) of the BBRA requires that we implement the IPF 
PPS in a budget neutral manner. In other words, the amount of total 
payments under the IPF PPS, including any payment adjustments, must be 
projected to be equal to the amount of total payments that would have 
been made if the IPF PPS were not implemented. Therefore, we calculated 
the budget-neutrality factor by setting the total estimated IPF PPS 
payments to be equal to the total estimated payments that would have 
been made under the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) (Pub. L. 97-248) methodology had the IPF PPS not been 
implemented.
    Under the IPF PPS methodology, we calculated the final Federal per 
diem base rate to be budget neutral during the IPF PPS implementation 
period (that is, the 18-month period from January 1, 2005 through June 
30, 2006) using a July 1 update cycle. We updated the average cost per 
day to the midpoint of the IPF PPS implementation period (that is, 
October 1, 2005), and this amount was used in the payment model to 
establish the budget-neutrality adjustment.
    A step-by-step description of the methodology used to estimate 
payments under the TEFRA payment system appears in the November 2004 
IPF PPS final rule (69 FR 66926).
1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy (ECT) Rate
    In the November 2004 IPF PPS final rule, we describe how we 
standardized the IPF PPS Federal per diem base rate in order to account 
for the overall positive effects of the IPF PPS payment adjustment 
factors. To standardize the IPF PPS payments, we compared the IPF PPS 
payment amounts calculated from the FY 2002 Medicare Provider Analysis 
and Review (MedPAR) file to the projected TEFRA payments from the FY 
2002 cost report file updated to the midpoint of the IPF PPS 
implementation period (that is, October 2005). The standardization 
factor was calculated by dividing total estimated payments under the 
TEFRA payment system by estimated payments under the IPF PPS. The 
standardization factor was calculated to be 0.8367.
    As described in detail in the May 2006 IPF PPS final rule (71 FR 
27045), in reviewing the methodology used to simulate the IPF PPS 
payments used for the November 2004 IPF PPS final rule, we discovered 
that due to a computer code error, total IPF PPS payments were 
underestimated by about 1.36 percent. Since the IPF PPS payment total 
should have been larger than the estimated figure, the standardization 
factor should have been smaller (0.8254 vs. 0.8367). In turn, the 
Federal per diem base rate and the ECT rate should have been reduced by 
0.8254 instead of 0.8367.
    To resolve this issue, in RY 2007, we amended the Federal per diem 
base rate and the ECT payment rate prospectively. Using the 
standardization factor of 0.8254, the average cost per day was 
effectively reduced by 17.46 percent (100 percent minus 82.54 percent = 
17.46 percent).

[[Page 5013]]

2. Calculation of the Budget Neutrality Adjustment
    To compute the budget neutrality adjustment for the IPF PPS, we 
separately identified each component of the adjustment, that is, the 
outlier adjustment, stop-loss adjustment, and behavioral offset.
    A complete discussion of how we calculate each component of the 
budget neutrality adjustment appears in the November 2004 IPF PPS final 
rule (69 FR 66932 through 66933) and in the May 2006 IPF PPS final rule 
(71 FR 27044 through 27046).
a. Outlier Adjustment
    Since the IPF PPS payment amount for each IPF includes applicable 
outlier amounts, we reduced the standardized Federal per diem base rate 
to account for aggregate IPF PPS payments estimated to be made as 
outlier payments. The outlier adjustment was calculated to be 2 
percent. As a result, the standardized Federal per diem base rate was 
reduced by 2 percent to account for projected outlier payments.
b. Stop-Loss Provision Adjustment
    As explained in the November 2004 IPF PPS final rule, we provided a 
stop-loss payment during the transition from cost-based reimbursement 
to the per diem payment system to ensure that an IPF's total PPS 
payments were no less than a minimum percentage of their TEFRA payment, 
had the IPF PPS not been implemented. We reduced the standardized 
Federal per diem base rate by the percentage of aggregate IPF PPS 
payments estimated to be made for stop-loss payments. As a result, the 
standardized Federal per diem base rate was reduced by 0.39 percent to 
account for stop-loss payments. Since the transition was completed in 
RY 2009, the stop-loss provision is no longer applicable, and for cost 
reporting periods beginning on or after January 1, 2008, IPFs were paid 
100 percent PPS.
c. Behavioral Offset
    As explained in the November 2004 IPF PPS final rule, 
implementation of the IPF PPS may result in certain changes in IPF 
practices, especially with respect to coding for comorbid medical 
conditions. As a result, Medicare may make higher payments than assumed 
in our calculations. Accounting for these effects through an adjustment 
is commonly known as a behavioral offset.
    Based on accepted actuarial practices and consistent with the 
assumptions made in other PPSs, we assumed in determining the 
behavioral offset that IPFs would regain 15 percent of potential 
``losses'' and augment payment increases by 5 percent. We applied this 
actuarial assumption, which is based on our historical experience with 
new payment systems, to the estimated ``losses'' and ``gains'' among 
the IPFs. The behavioral offset for the IPF PPS was calculated to be 
2.66 percent. As a result, we reduced the standardized Federal per diem 
base rate by 2.66 percent to account for behavioral changes. As 
indicated in the November 2004 IPF PPS final rule, we do not plan to 
change adjustment factors or projections until we analyze IPF PPS data.
    If we find that an adjustment is warranted, the percent difference 
may be applied prospectively to the established PPS rates to ensure the 
rates accurately reflect the payment level intended by the statute. In 
conducting this analysis, we will be interested in the extent to which 
improved coding of patients' principal and other diagnoses, which may 
not reflect real increases in underlying resource demands, has occurred 
under the PPS.

B. Update of the Federal Per Diem Base Rate and Electroconvulsive 
Therapy Rate

    As described in the November 2004 IPF PPS final rule (69 FR 66931), 
the average per diem cost was updated to the midpoint of the 
implementation year. This updated average per diem cost of $724.43 was 
reduced by 17.46 percent to account for standardization to projected 
TEFRA payments for the implementation period, by 2 percent to account 
for outlier payments, by 0.39 percent to account for stop-loss 
payments, and by 2.66 percent to account for the behavioral offset. The 
Federal per diem base rate in the implementation year was $575.95. The 
increase in the per diem base rate for RY 2009 included the 0.39 
percent increase due to the removal of the stop-loss provision. We 
indicated in the November 2004 IPF PPS final rule (69 FR 66932) that we 
would remove this 0.39 percent reduction to the Federal per diem base 
rate after the transition. As discussed in section IV.D.2. of the May 
2008 IPF PPS notice, we increased the Federal per diem base rate and 
the ECT base rate by 0.39 percent in RY 2009. Therefore for RY 2009 and 
beyond, the stop-loss provision has ended and is no longer a part of 
budget neutrality.
    In accordance with section 1886(s)(2)(A)(ii) of the Act, which 
requires the application of an ``other adjustment,'' described in 
section 1886(s)(3) of the Act (specifically, section 1886(s)(3)(A) for 
RYs 2011 and 2012) that reduces the update to the IPF PPS base rate for 
the rate year beginning in Calendar Year (CY) 2011, we are proposing to 
adjust the IPF PPS update by 0.25 percentage point for rate year 2012. 
We are proposing to apply the 15-month 2008-based RPL market basket 
increase of 3.0 percent, as adjusted by the ``other adjustment'' of -
0.25 percentage point, and the wage index budget neutrality factor of 
0.9995 to the RY 2011 Federal per diem base rate of $665.71 yielding a 
proposed Federal per diem base rate of $683.68 for RY 2012. Similarly, 
we propose applying the market basket increase, as adjusted by the 
``other adjustment'', and the wage index budget neutrality factor to 
the RY 2011 ECT base rate, yielding a proposed ECT base rate of $294.33 
for RY 2012.

V. Proposed Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

    The IPF PPS payment adjustments were derived from a regression 
analysis of 100 percent of the FY 2002 MedPAR data file, which 
contained 483,038 cases. For this proposed rule, we used the same 
results of the regression analysis used to implement the November 2004 
IPF PPS final rule. For a more detailed description of the data file 
used for the regression analysis, see the November 2004 IPF PPS final 
rule (69 FR 66935 through 66936). While we have since used more recent 
claims data to set the fixed dollar loss threshold amount, we used the 
same results of this regression analysis to update the IPF PPS for RY 
2011 and we are proposing to use these same results for RY 2012. Now 
that we are approximately 5 years into the IPF PPS, we believe that we 
have enough data to begin looking at the process of refining the IPF 
PPS as appropriate. We believe that in the next rulemaking, for FY 
2013, we will be ready to propose potential refinements to the system.
    As we stated previously, we do not plan to update the regression 
analysis until we are able to analyze IPF PPS claims and cost report 
data. However, we continue to monitor claims and payment data 
independently from cost report data to assess issues, to determine 
whether changes in case-mix or payment shifts have occurred among 
freestanding governmental, non-profit and private psychiatric 
hospitals, and psychiatric units of general hospitals, and CAHs and 
other issues of importance to IPFs.

B. Proposed Patient-Level Adjustments

    In the April 2010 IPF PPS notice (75 FR 23113 through 23117), we

[[Page 5014]]

announced payment adjustments for the following patient-level 
characteristics: Medicare Severity diagnosis related groups (MS-DRGs) 
assignment of the patient's principal diagnosis, selected 
comorbidities, patient age, and the variable per diem adjustments.
1. Proposed Adjustment for MS-IPF-DRG Assignment
    The IPF PPS includes payment adjustments for the psychiatric DRG 
assigned to the claim based on each patient's principal diagnosis. The 
IPF PPS recognizes the MS-DRGs. The DRG adjustment factors were 
expressed relative to the most frequently reported psychiatric DRG in 
FY 2002, that is, DRG 430 (psychoses). The coefficient values and 
adjustment factors were derived from the regression analysis.
    In accordance with Sec.  412.27(a), payment under the IPF PPS is 
conditioned on IPFs admitting ``only patients whose admission to the 
unit is required for active treatment, of an intensity that can be 
provided appropriately only in an inpatient hospital setting, of a 
psychiatric principal diagnosis that is listed in Chapter Five 
(``Mental Disorders'') of the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM)'' or in the Fourth 
Edition, Text Revision of the American Psychiatric Association's 
Diagnostic and Statistical Manual, (DSM-IV-TR). IPF claims with a 
principal diagnosis included in Chapter Five of the ICD-9-CM or the 
DSM-IV-TR are paid the Federal per diem base rate under the IPF PPS and 
all other applicable adjustments, including any applicable DRG 
adjustment. Psychiatric principal diagnoses that do not group to one of 
the designated DRGs still receive the Federal per diem base rate and 
all other applicable adjustments, but the payment would not include a 
DRG adjustment.
    The Standards for Electronic Transaction final rule published in 
the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-
9-CM as the designated code set for reporting diseases, injuries, 
impairments, other health related problems, their manifestations, and 
causes of injury, disease, impairment, or other health related 
problems. Therefore, we use the ICD-9-CM as the designated code set for 
the IPF PPS.
    We believe that it is important to maintain the same diagnostic 
coding and DRG classification for IPFs that are used under the IPPS for 
providing psychiatric care. Therefore, when the IPF PPS was implemented 
for cost reporting periods beginning on or after January 1, 2005, we 
adopted the same diagnostic code set and DRG patient classification 
system (that is, the CMS DRGs) that were utilized at the time under the 
hospital inpatient prospective payment system (IPPS). Since the 
inception of the IPF PPS, the DRGs used as the patient classification 
system under the IPF PPS have corresponded exactly with the CMS DRGs 
applicable under the IPPS for acute care hospitals.
    Every year, changes to the ICD-9-CM coding system are addressed in 
the IPPS proposed and final rules. The changes to the codes are 
effective October 1 of each year and must be used by acute care 
hospitals as well as other providers to report diagnostic and procedure 
information. The IPF PPS has always incorporated ICD-9-CM coding 
changes made in the annual IPPS update. We publish coding changes in a 
Transmittal/Change Request, similar to how coding changes are announced 
by the IPPS and LTCH PPS. Those ICD-9-CM coding changes are also 
published in the following IPF PPS RY update, in either the IPF PPS 
proposed and final rules, or in an IPF PPS update notice.
    In the May 2008 IPF PPS notice (73 FR 25709), we discussed CMS' 
effort to better recognize resource use and the severity of illness 
among patients. CMS adopted the new MS-DRGs for the IPPS in the FY 2008 
IPPS final rule with comment period (72 FR 47130). We believe by better 
accounting for patients' severity of illness in Medicare payment rates, 
the MS-DRGs encourage hospitals to improve their coding and 
documentation of patient diagnoses. The MS-DRGs, which are based on the 
CMS DRGs, represent a significant increase in the number of DRGs (from 
538 to 745, an increase of 207). For a full description of the 
development and implementation of the MS-DRGs, see the FY 2008 IPPS 
final rule with comment period (72 FR 47141 through 47175).
    In the May 2008 IPF PPS notice, the IPF PPS recognized the MS-DRGs. 
A crosswalk, to reflect changes that were made to the DRGs under the 
IPF PPS to the new MS-DRGs was provided (73 FR 25716). Since then, we 
have referred to the IPF PPS DRGs as MS-DRGs. In this proposed rule, we 
are proposing that all references to the MS-DRGs used for the IPF PPS, 
would be to MS-IPF-DRGs. This would only be a change in terminology. We 
are proposing to revise Sec.  412.402 to add the definition of MS-IPF-
DRG.
    All of the ICD-9-CM coding changes are reflected in the FY 2011 
GROUPER, Version 28.0, effective for IPPS discharges occurring on or 
after October 1, 2010 through September 30, 2011. The GROUPER Version 
28.0 software package assigns each case to an MS-DRG on the basis of 
the diagnosis and procedure codes and demographic information (that is, 
age, sex, and discharge status). The Medicare Code Editor (MCE) 27.0 
uses the new ICD-9-CM codes to validate coding for IPPS discharges on 
or after October 1, 2010. For additional information on the GROUPER 
Version 28.0 and MCE 27.0, see Transmittal 2060 (Change Request 7134), 
dated October 1, 2010. The IPF PPS has always used the same GROUPER and 
Code Editor as the IPPS. Therefore, the ICD-9-CM changes, which were 
reflected in the GROUPER Version 28.0 and MCE 27.0 on October 1, 2010, 
also became effective for the IPF PPS for discharges occurring on or 
after October 1, 2010.
    The impact of the new MS-DRGs on the IPF PPS was negligible. 
Mapping to the MS-DRGs resulted in the current 17 MS-DRGs, instead of 
the original 15, for which the IPF PPS provides an adjustment. Although 
the code set is updated, the same associated adjustment factors apply 
now that have been in place since implementation of the IPF PPS, with 
one exception that is unrelated to the update to the codes. When DRGs 
521 and 522 were consolidated into MS-DRG 895, we carried over the 
adjustment factor of 1.02 from DRG 521 to the newly consolidated MS-
DRG. This was done to reflect the higher claims volume under DRG 521, 
with more than eight times the number of claims than billed under DRG 
522. The updates are reflected in Tables 7 and 8. For a detailed 
description of the mapping changes from the original DRG adjustment 
categories to the current MS-DRG adjustment categories we refer readers 
to the May 2008 IPF PPS notice (73 FR 25714).
    The official version of the ICD-9-CM is available on CD-ROM from 
the U.S. Government Printing Office. The FY 2009 version can be ordered 
by contacting the Superintendent of Documents, U.S. Government Printing 
Office, Department 50, Washington, DC 20402-9329, telephone number 
(202) 512-1800. Questions concerning the ICD-9-CM should be directed to 
Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and 
Maintenance Committee, CMS, Center for Medicare Management, Hospital 
and Ambulatory Policy Group, Division of Acute Care, Mailstop C4-08-06, 
7500 Security Boulevard, Baltimore, Maryland 21244-1850.
    Further information concerning the official version of the ICD-9-CM 
can be found in the IPPS final rule with

[[Page 5015]]

comment period, ``Changes to Hospital Inpatient Prospective Payment 
System and Fiscal Year 2011 Rates'' in the August 16, 2010 Federal 
Register (75 FR 50042) and at Tables 7 and 8 below list the FY 2011 new 
and revised ICD-9-CM diagnosis codes that group to one of the 17 MS-
DRGs for which the IPF PPS provides an adjustment. These tables are 
only a listing of FY 2011 changes and do not reflect all of the 
currently valid and applicable ICD-9-CM codes classified in the MS-
DRGs. When coded as a principal code or diagnosis, these codes receive 
the correlating MS-DRG adjustment.

                  Table 7--FY 2011 New Diagnosis Codes
------------------------------------------------------------------------
           Diagnosis code              MS-DRG descriptions      MS-DRG
------------------------------------------------------------------------
799.51.............................  Attention or                    886
                                      concentration deficit.
799.52.............................  Cognitive                       884
                                      communication deficit.
799.54.............................  Psychomotor deficit...          884
799.55.............................  Frontal lobe and                884
                                      executive function
                                      deficit.
799.59.............................  Other signs and                 884
                                      symptoms involving
                                      cognition.
------------------------------------------------------------------------

                 Table 8--FY 2011 Revised Diagnosis Code
------------------------------------------------------------------------
           Diagnosis code                  Description          MS-DRG
------------------------------------------------------------------------
307.0..............................  Adult onset fluency             887
                                      disorder.
------------------------------------------------------------------------

Because we do not plan to update the regression analysis until we are 
able to analyze IPF PPS data, we propose that the MS-IPF-DRG adjustment 
factors (as shown in Table 9) would continue to be paid for discharges 
occurring in RY 2012.

    Table 9--Proposed RY 2012 Current MS-IPF-DRGS Applicable for the
                     Principal Diagnosis Adjustment
------------------------------------------------------------------------
                                           MS-IPF-DRG         Adjustment
               MS-DRG                     Descriptions          Factor
------------------------------------------------------------------------
056................................  Degenerative nervous           1.05
                                      system disorders w
                                      MCC.
057................................  Degenerative nervous           1.05
                                      system disorders w/o
                                      MCC.
080................................  Nontraumatic stupor &          1.07
                                      coma w MCC.
081................................  Nontraumatic stupor &          1.07
                                      coma w/o MCC.
876................................  O.R. procedure w               1.22
                                      principal diagnoses
                                      of mental illness.
880................................  Acute adjustment               1.05
                                      reaction &
                                      psychosocial
                                      dysfunction.
881................................  Depressive neuroses...         0.99
882................................  Neuroses except                1.02
                                      depressive.
883................................  Disorders of                   1.02
                                      personality & impulse
                                      control.
884................................  Organic disturbances &         1.03
                                      mental retardation.
885................................  Psychoses.............         1.00
886................................  Behavioral &                   0.99
                                      developmental
                                      disorders.
887................................  Other mental disorder          0.92
                                      diagnoses.
894................................  Alcohol/drug abuse or          0.97
                                      dependence, left AMA.
895................................  Alcohol/drug abuse or          1.02
                                      dependence w
                                      rehabilitation
                                      therapy.
896................................  Alcohol/drug abuse or          0.88
                                      dependence w/o
                                      rehabilitation
                                      therapy w MCC.
897................................  Alcohol/drug abuse or          0.88
                                      dependence w/o
                                      rehabilitation
                                      therapy w/o MCC.
------------------------------------------------------------------------

2. Proposed Payment for Comorbid Conditions
    The intent of the comorbidity adjustments is to recognize the 
increased costs associated with comorbid conditions by providing 
additional payments for certain concurrent medical or psychiatric 
conditions that are expensive to treat. In the April 2010 IPF PPS 
notice (75 FR 23114), we explained that the IPF PPS includes 17 
comorbidity categories and identified the new, revised, and deleted 
ICD-9-CM diagnosis codes that generate a comorbid condition payment 
adjustment under the IPF PPS for RY 2011 (75 FR 23115).
    Comorbidities are specific patient conditions that are secondary to 
the patient's principal diagnosis and that require treatment during the 
stay. Diagnoses that relate to an earlier episode of care and have no 
bearing on the current hospital stay are excluded and must not be 
reported on IPF claims. Comorbid conditions must exist at the time of 
admission or develop subsequently, and affect the treatment received, 
length of stay (LOS), or both treatment and LOS.
    For each claim, an IPF may receive only one comorbidity adjustment 
per comorbidity category, but it may receive an adjustment for more 
than one comorbidity category. Billing instructions require that IPFs 
must enter the full ICD-9-CM codes for up to 8 additional diagnoses if 
they co-exist at the time of admission or develop subsequently and 
impact the treatment provided.
    The comorbidity adjustments were determined based on the regression 
analysis using the diagnoses reported by IPFs in FY 2002. The principal 
diagnoses were used to establish the DRG adjustments and were not 
accounted for in establishing the comorbidity category adjustments, 
except where ICD-9-CM ``code first'' instructions apply. As we 
explained in the April 2010 IPF PPS notice (75 FR 23115), the code 
first rule applies when

[[Page 5016]]

a condition has both an underlying etiology and a manifestation due to 
the underlying etiology. For these conditions, the ICD-9-CM has a 
coding convention that requires the underlying conditions to be 
sequenced first followed by the manifestation. Whenever a combination 
exists, there is a ``use additional code'' note at the etiology code 
and a code first note at the manifestation code.
    As discussed in the MS-IPF-DRG section (where we are proposing that 
all references to MS-DRGs used for the IPF PPS be to MS-IPF-DRGs, as 
detailed above), it is our policy to maintain the same diagnostic 
coding set for IPFs that is used under the IPPS for providing the same 
psychiatric care. Although the ICD-9-CM code set has been updated, the 
same adjustment factors have been in place since the implementation of 
the IPF PPS.
    Table 10 below lists the FY 2011 new ICD diagnosis codes that 
impact the comorbidity adjustments under the IPF PPS. Table 10 is not a 
list of all currently valid ICD codes applicable for the IPF PPS 
comorbidity adjustments.

     Table 10--FY 2011 New ICD Codes Applicable for the Comorbidity
                               Adjustment
------------------------------------------------------------------------
        Diagnosis code             Description     Comorbidity category
------------------------------------------------------------------------
237.73........................  Schwannomatosis.  Oncology.
237.79........................  Other             Oncology.
                                 neurofibromatos
                                 is.
------------------------------------------------------------------------

    For RY 2012, we are applying the seventeen comorbidity categories 
for which we are providing an adjustment, their respective codes, 
including the new FY 2011 ICD-9-CM codes, and their respective 
adjustment factors in Table 11 below.

Table 11--RY 2012 Diagnosis Codes and Adjustment Factors for Comorbidity
                               Categories
------------------------------------------------------------------------
                                                           Adjustment
  Description of comorbidity        Diagnoses codes          factor
------------------------------------------------------------------------
Developmental disabilities....  317, 3180, 3181, 3182,              1.04
                                 and 319.
Coagulation Factor Deficits...  2860 through 2864.....              1.13
Tracheostomy..................  51900 through 51909                 1.06
                                 and V440.
Renal Failure, Acute..........  5845 through 5849,                  1.11
                                 63630, 63631, 63632,
                                 63730, 63731, 63732,
                                 6383, 6393, 66932,
                                 66934, 9585.
Renal Failure, Chronic........  40301, 40311, 40391,                1.11
                                 40402, 40412, 40413,
                                 40492, 40493, 5853,
                                 5854, 5855, 5856,
                                 5859, 586, V451,
                                 V560, V561, and V562.
Oncology Treatment............  1400 through 2399 with              1.07
                                 a radiation therapy
                                 code 92.21-92.29 or
                                 chemotherapy code
                                 99.25.
Uncontrolled Diabetes-Mellitus  25002, 25003, 25012,                1.05
 with or without complications.  25013, 25022, 25023,
                                 25032, 25033, 25042,
                                 25043, 25052, 25053,
                                 25062, 25063, 25072,
                                 25073, 25082, 25083,
                                 25092, and 25093.
Severe Protein Calorie          260 through 262.......              1.13
 Malnutrition.
Eating and Conduct Disorders..  3071, 30750, 31203,                 1.12
                                 31233, and 31234.
Infectious Disease............  01000 through 04110,                1.07
                                 042, 04500 through
                                 05319, 05440 through
                                 05449, 0550 through
                                 0770, 0782 through
                                 07889, and 07950
                                 through 07959.
Drug and/or Alcohol Induced     2910, 2920, 29212,                  1.03
 Mental Disorders.               2922, 30300, and
                                 30400.
Cardiac Conditions............  3910, 3911, 3912,                   1.11
                                 40201, 40403, 4160,
                                 4210, 4211, and 4219.
Gangrene......................  44024 and 7854........              1.10
Chronic Obstructive Pulmonary   49121, 4941, 5100,                  1.12
 Disease.                        51883, 51884, V4611
                                 and V4612, V4613 and
                                 V4614.
Artificial Openings--Digestive  56960 through 56969,                1.08
 and Urinary.                    9975, and V441
                                 through V446.
Severe Musculoskeletal and      6960, 7100, 73000                   1.09
 Connective Tissue Diseases.     through 73009, 73010
                                 through 73019, and
                                 73020 through 73029.
Poisoning.....................  96500 through 96509,                1.11
                                 9654, 9670 through
                                 9699, 9770, 9800
                                 through 9809, 9830
                                 through 9839, 986,
                                 9890 through 9897.
------------------------------------------------------------------------

3. Proposed Patient Age Adjustments
    As explained in the November 2004 IPF PPS final rule (69 FR 66922), 
we analyzed the impact of age on per diem cost by examining the age 
variable (that is, the range of ages) for payment adjustments.
    In general, we found that the cost per day increases with age. The 
older age groups are more costly than the under 45 age group, the 
differences in per diem cost increase for each successive age group, 
and the differences are statistically significant.
    We do not plan to update the regression analysis until we are able 
to analyze IPF PPS data. Therefore, for RY 2012, we are proposing to 
continue to use the patient age adjustments currently in effect as 
shown in Table 12 below.

             Table 12--Age Groupings and Adjustment Factors
------------------------------------------------------------------------
                                                           Adjustment
                          Age                                factor
------------------------------------------------------------------------
Under 45..............................................              1.00
45 and under 50.......................................              1.01
50 and under 55.......................................              1.02
55 and under 60.......................................              1.04
60 and under 65.......................................              1.07
65 and under 70.......................................              1.10
70 and under 75.......................................              1.13
75 and under 80.......................................              1.15
80 and over...........................................              1.17
------------------------------------------------------------------------

[[Page 5017]]

4. Proposed Variable Per Diem Adjustments
    We explained in the November 2004 IPF PPS final rule (69 FR 66946) 
that the regression analysis indicated that per diem cost declines as 
the LOS increases. The variable per diem adjustments to the Federal per 
diem base rate account for ancillary and administrative costs that 
occur disproportionately in the first days after admission to an IPF.
    We used a regression analysis to estimate the average differences 
in per diem cost among stays of different lengths. As a result of this 
analysis, we established variable per diem adjustments that begin on 
day 1 and decline gradually until day 21 of a patient's stay. For day 
22 and thereafter, the variable per diem adjustment remains the same 
each day for the remainder of the stay. However, the adjustment applied 
to day 1 depends upon whether the IPF has a qualifying ED. If an IPF 
has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of 
each stay. If an IPF does not have a qualifying ED, it receives a 1.19 
adjustment factor for day 1 of the stay. The ED adjustment is explained 
in more detail in section IV.C.5 of this proposed rule.
    For RY 2012, we are proposing to continue to use the variable per 
diem adjustment factors currently in effect as shown in Table 13 below. 
A complete discussion of the variable per diem adjustments appears in 
the November 2004 IPF PPS final rule (69 FR 66946).

                 Table 13--Variable Per Diem Adjustments
------------------------------------------------------------------------
                                                           Adjustment
                      Day-of-Stay                            factor
------------------------------------------------------------------------
Day 1--IPF Without a Qualifying ED....................              1.19
Day 1--IPF With a Qualifying ED.......................              1.31
Day 2.................................................              1.12
Day 3.................................................              1.08
Day 4.................................................              1.05
Day 5.................................................              1.04
Day 6.................................................              1.02
Day 7.................................................              1.01
Day 8.................................................              1.01
Day 9.................................................              1.00
Day 10................................................              1.00
Day 11................................................              0.99
Day 12................................................              0.99
Day 13................................................              0.99
Day 14................................................              0.99
Day 15................................................              0.98
Day 16................................................              0.97
Day 17................................................              0.97
Day 18................................................              0.96
Day 19................................................              0.95
Day 20................................................              0.95
Day 21................................................              0.95
After Day 21..........................................              0.92
------------------------------------------------------------------------

C. Facility-Level Adjustments

    The IPF PPS includes facility-level adjustments for the wage index, 
IPFs located in rural areas, teaching IPFs, cost of living adjustments 
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
1. Proposed Wage Index Adjustment
a. Background
    As discussed in the May 2006 IPF PPS final rule and in the May 2008 
and May 2009 IPF PPS notices, in providing an adjustment for geographic 
wage levels, the labor-related portion of an IPF's payment is adjusted 
using an appropriate wage index. Currently, an IPF's geographic wage 
index value is determined based on the actual location of the IPF in an 
urban or rural area as defined in Sec.  412.64(b)(1)(ii)(A) through 
Sec.  412.64(C).
b. Proposed Wage Index for RY 2012
    Since the inception of the IPF PPS, we have used hospital wage data 
in developing a wage index to be applied to IPFs. We are continuing 
that practice for RY 2012. We apply the wage index adjustment to the 
labor-related portion of the Federal rate, which is 70.499 percent. 
This percentage reflects the labor-related relative importance of the 
proposed FY 2008-based RPL market basket for RY 2012 (see section 
III.C.6 of this proposed rule). The IPF PPS uses the pre-floor, pre-
reclassified hospital wage index. Changes to the wage index are made in 
a budget neutral manner so that updates do not increase expenditures.
    For RY 2012, we are proposing to apply the most recent hospital 
wage index (that is, the FY 2011 pre-floor, pre-reclassified hospital 
wage index because this is the most appropriate index as it best 
reflects the variation in local labor costs of IPFs in the various 
geographic areas) using the most recent hospital wage data (that is, 
data from hospital cost reports for the cost reporting period beginning 
during FY 2007), and applying an adjustment in accordance with our 
budget neutrality policy. This policy requires us to estimate the total 
amount of IPF PPS payments in RY 2011 using the applicable wage index 
value divided by the total estimated IPF PPS payments in RY 2012 using 
the most recent wage index. The estimated payments are based on FY 2009 
IPF claims, inflated to the appropriate RY. This quotient is the wage 
index budget neutrality factor, and it is applied in the update of the 
Federal per diem base rate for RY 2012 in addition to the market basket 
described in section III.C.5 of this proposed rule. The wage index 
budget neutrality factor for RY 2012 is 0.9995.
    The wage index applicable for RY 2012 appears in Table 1 and Table 
2 in Addendum B of this proposed rule. As explained in the May 2006 IPF 
PPS final rule for RY 2007 (71 FR 27061), the IPF PPS applies the 
hospital wage index without a hold-harmless policy, and without an out-
commuting adjustment or out-migration adjustment because the statutory 
authority for these policies applies only to the IPPS.
    Also in the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), 
we adopted the changes discussed in the Office of Management and Budget 
(OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, since the IPF PPS was already in a transition period from 
TEFRA payments to PPS payments, we did not provide a separate 
transition for the CBSA-based wage index.
    As was the case in RY 2011, for RY 2012 we are proposing to 
continue to use the CBSA-based wage index values as presented in Tables 
1 and 2 in Addendum B of this proposed rule. A complete discussion of 
the CBSA labor market definitions appears in the May 2006 IPF PPS final 
rule (71 FR 27061 through 27067).
    In summary, for RY 2012 we are proposing to use the FY 2011 wage 
index data (collected from cost reports submitted by hospitals for cost 
reporting periods beginning during FY 2007) to adjust IPF PPS payments 
beginning July 1, 2011.
c. OMB Bulletins
    The Office of Management and Budget (OMB) publishes bulletins 
regarding CBSA changes, including changes to CBSA numbers and titles. 
In the May 2008 IPF PPS notice, we incorporated the CBSA nomenclature 
changes published in the most recent OMB bulletin that applies to the 
hospital wage data used to determine the current IPF PPS wage index (73 
FR 25721). We will continue to do the same for all such OMB CBSA 
nomenclature changes in future IPF PPS rules and notices, as necessary. 
The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.

[[Page 5018]]

2. Proposed Adjustment for Rural Location
    In the November 2004 IPF PPS final rule, we provided a 17 percent 
payment adjustment for IPFs located in a rural area. This adjustment 
was based on the regression analysis, which indicated that the per diem 
cost of rural facilities was 17 percent higher than that of urban 
facilities after accounting for the influence of the other variables 
included in the regression. For RY 2012, we are proposing to apply a 17 
percent payment adjustment for IPFs located in a rural area as defined 
at Sec.  412.64(b)(1)(ii)(C). As stated in the November 2004 IPF PPS 
final rule, we do not intend to update the adjustment factors derived 
from the regression analysis until we are able to analyze IPF PPS data. 
A complete discussion of the adjustment for rural locations appears in 
the November 2004 IPF PPS final rule (69 FR 66954).
3. Proposed Teaching Adjustment
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(1)(iii) to establish a facility-level adjustment 
for IPFs that are, or are part of, teaching hospitals. The teaching 
adjustment accounts for the higher indirect operating costs experienced 
by hospitals that participate in graduate medical education (GME) 
programs. The payment adjustments are made based on the number of full-
time equivalent (FTE) interns and residents training in the IPF and the 
IPF's average daily census.
    Medicare makes direct GME payments (for direct costs such as 
resident and teaching physician salaries, and other direct teaching 
costs) to all teaching hospitals including those paid under a PPS, and 
those paid under the TEFRA rate-of-increase limits. These direct GME 
payments are made separately from payments for hospital operating costs 
and are not part of the PPSs. The direct GME payments do not address 
the estimated higher indirect operating costs teaching hospitals may 
face.
    For teaching hospitals paid under the TEFRA rate-of-increase 
limits, Medicare does not make separate payments for indirect medical 
education costs because payments to these hospitals are based on the 
hospitals' reasonable costs which already include these higher indirect 
costs that may be associated with teaching programs.
    The results of the regression analysis of FY 2002 IPF data 
established the basis for the payment adjustments included in the 
November 2004 IPF PPS final rule. The results showed that the indirect 
teaching cost variable is significant in explaining the higher costs of 
IPFs that have teaching programs. We calculated the teaching adjustment 
based on the IPF's ``teaching variable,'' which is one plus the ratio 
of the number of FTE residents training in the IPF (subject to 
limitations described below) to the IPF's average daily census (ADC).
    We established the teaching adjustment in a manner that limited the 
incentives for IPFs to add FTE residents for the purpose of increasing 
their teaching adjustment. We imposed a cap on the number of FTE 
residents that may be counted for purposes of calculating the teaching 
adjustment. The cap limits the number of FTE residents that teaching 
IPFs may count for the purpose of calculating the IPF PPS teaching 
adjustment, not the number of residents teaching institutions can hire 
or train. We calculated the number of FTE residents that trained in the 
IPF during a ``base year'' and used that FTE resident number as the 
cap. An IPF's FTE resident cap is ultimately determined based on the 
final settlement of the IPF's most recent cost report filed before 
November 15, 2004 (that is, the publication date of the IPF PPS final 
rule).
    In the regression analysis, the logarithm of the teaching variable 
had a coefficient value of 0.5150. We converted this cost effect to a 
teaching payment adjustment by treating the regression coefficient as 
an exponent and raising the teaching variable to a power equal to the 
coefficient value. We note that the coefficient value of 0.5150 was 
based on the regression analysis holding all other components of the 
payment system constant.
    As with other adjustment factors derived through the regression 
analysis, we do not plan to rerun the regression analysis until we 
analyze IPF PPS data. Therefore, for RY 2012, we are proposing to 
retain the coefficient value of 0.5150 for the teaching adjustment to 
the Federal per diem base rate.
    A complete discussion of how the teaching adjustment was calculated 
appears in the November 2004 IPF PPS final rule (69 FR 66954 through 
66957) and the May 2008 IPF PPS notice (73 FR 25721).
Proposed FTE Intern and Resident Cap Adjustment
    CMS has been asked to reconsider the current IPF teaching policy 
and permit a temporary increase in the FTE resident cap when the IPF 
increases the number of FTE residents it trains due to the acceptance 
of displaced residents (residents that are training in an IPF or a 
program before the IPF or program closed) when another IPF closes or 
closes its medical residency training program.
    To help us assess how many IPFs have been, or expect to be 
adversely affected by their inability to adjust their caps under Sec.  
412.424(d)(1) and under these situations, we specifically requested 
public comment from IPFs in the May 1, 2009 IPF PPS notice (74 FR 20376 
through 20377). A summary of the comments and our response can be 
reviewed in the April 30, 2010 IPF PPS notice (75 FR 23106, 23117). All 
of the commenters recommended that CMS modify the IPF PPS teaching 
adjustment policy, supporting a policy change that would permit the IPF 
PPS residency cap to be temporarily adjusted when that IPF trains 
displaced residents due to closure of an IPF or closure of an IPF's 
medical residency training program(s). The commenters recommended a 
temporary resident cap adjustment policy similar to such policies 
applied in similar contexts for acute care hospitals.
    We agree with the commenters that, when a hospital temporarily 
takes on residents because another hospital closes or discontinues its 
program, a temporary adjustment to the cap would be appropriate for 
rotation that occurs in an IPF setting (freestanding or units). In 
these situations, residents may have partially completed a medical 
residency training program at the hospital that has closed its training 
program and may be unable to complete their training at another 
hospital that is already training residents up to or in excess of its 
cap. We believe that it is appropriate to allow temporary adjustments 
to the FTE caps for an IPF that provides residency training to medical 
residents who have partially completed a residency training program at 
an IPF that closes or at an IPF that discontinues training residents in 
a residency training program(s) (also referred to as a ``closed'' 
program throughout this preamble). For this reason, we are proposing to 
adopt the following temporary resident cap adjustment policies, similar 
to the temporary adjustments to the FTE cap used for acute care 
hospitals. We are proposing that the cap adjustment would be temporary 
because it is resident specific and would only apply to the displaced 
resident(s) until the resident(s) completes training in that specialty. 
We propose that, as under the IPPS policy for displaced residents, the 
IPF PPS temporary cap adjustment would apply only to residents that 
were still training at the IPF at the time the IPF closed or at the 
time the IPF ceased training residents in the residency training 
program(s). Residents who leave the IPF, for whatever reason,

[[Page 5019]]

before the closure of the IPF hospital or medical residency training 
program would not be considered displaced residents for purposes of the 
IPF temporary cap adjustment policy. Similarly, as under the IPPS 
policy, we are proposing that medical students who match to a program 
at an IPF but the IPF or medical residency training program closes 
before the individual begins training at that IPF are also not 
considered displaced residents for purposes of the IPF temporary cap 
adjustments. For detailed information on these acute care hospital GME/
IME payment policies, see 66 FR 39899 (August 1, 2001), 64 FR 41522 
(July 30 1999), and 64 FR 24736 (May 7 1999). We note that although we 
are proposing to adopt a policy under the IPF PPS that is consistent 
with the policy applicable under the IPPS, the actual caps under the 
two payment systems may not be commingled.
a. Proposed Temporary Adjustment to the FTE Cap To Reflect Residents 
Added Due to Hospital Closure
    We are proposing to allow an IPF to receive a temporary adjustment 
to the FTE cap to reflect residents added because of another IPF's 
closure. This adjustment is intended to account for medical residents 
who would have partially completed a medical residency training program 
at the hospital that has closed and may be unable to complete their 
training at another hospital because that hospital is already training 
residents up to or in excess of its cap. We are proposing this change 
because IPFs have indicated a reluctance to accept additional residents 
from a closed IPF without a temporary adjustment to their caps. For 
purposes of this policy on IPF closure, we are proposing to adopt the 
IPPS definition of ``closure of a hospital'' in 42 CFR Sec.  413.79(h) 
to mean the IPF terminates its Medicare provider agreement as specified 
in 42 CFR Sec.  489.52. Therefore, we are proposing to add a new Sec.  
412.424(d)(1)(iii)(F)(1) to allow a temporary adjustment to an IPF's 
FTE cap to reflect residents added because of an IPF's closure on or 
after July 1, 2011 to be effective for cost reporting periods beginning 
on or after July 1, 2011. We would allow an adjustment to an IPF's FTE 
cap if the IPF meets the following criteria: (a) The IPF is training 
displaced residents from an IPF that closed on or after July 1, 2011; 
(and (b) the IPF that is training the displaced residents from the 
closed IPF submits a request for a temporary adjustment to its FTE cap 
to its Medicare contractor no later than 60 days after the hospital 
first begins training the displaced residents, and documents that the 
IPF is eligible for this temporary adjustment to its FTE cap by 
identifying the residents who have come from the closed IPF and have 
caused the IPF to exceed its cap, (or the IPF may already be over its 
cap), and specifies the length of time that the adjustment is needed. 
After the displaced residents leave the IPF's training program or 
complete their residency program, the IPF's cap would revert to its 
original level. This means that the temporary adjustment to the FTE cap 
would be available to the IPF only for the period of time necessary for 
the displaced residents to complete their training. Further, as under 
the IPPS policy, we are also proposing that the total amount of 
temporary cap adjustment that can be distributed to all receiving 
hospitals cannot exceed the cap amount of the IPF that closed.
    We also note that section 5506 of the Affordable Care Act, 
``Preservation of Resident Cap Positions from Closed Hospitals,'' does 
not apply to IPFs that closed. Section 5506 only amends sections 
1886(d) and (h) of the Act with respect to direct GME and IPPS IME 
payments. Therefore, the IME FTE cap redistributions under section 5506 
only apply to ``subsection (d)'' IPPS hospitals. Section 5506 has no 
applicability to the IME teaching adjustments under the IPF PPS (or the 
IRF PPS, for that matter).
b. Proposed Temporary Adjustment to FTE Cap To Reflect Residents 
Affected by Residency Program Closure
    We are proposing that if an IPF that ceases training residents in a 
residency training program(s) agrees to temporarily reduce its FTE cap, 
another IPF may receive a temporary adjustment to its FTE cap to 
reflect residents added because of the closure of another IPF's 
residency training program. For purposes of this policy on closed 
residency programs, we are proposing to adopt the IPPS definition of 
``closure of a hospital residency training program'' to mean that the 
hospital ceases to offer training for residents in a particular 
approved medical residency training program as specified in Sec.  
413.79(h). The methodology for adjusting the caps for the ``receiving 
IPF'' and the ``IPF that closed its program'' is described below.
i. Receiving IPF
    We are proposing that an IPF(s) may receive a temporary adjustment 
to its FTE cap to reflect residents added because of the closure of 
another IPF's residency training program for cost reporting periods 
beginning on or after July 1, 2011 if--
     The IPF is training additional residents from the 
residency training program of an IPF that closed its program on or 
after July 1, 2011; and
     No later than 60 days after the IPF begins to train the 
residents, the IPF submits to its Medicare Contractor a request for a 
temporary adjustment to its FTE cap, documents that the IPF is eligible 
for this temporary adjustment by identifying the residents who have 
come from another IPF's closed program and have caused the IPF to 
exceed its cap, (or the IPF may already be in excess of its cap), 
specifies the length of time the adjustment is needed, and, as 
explained in more detail below, submits to its Medicare contractor a 
copy of the FTE cap reduction statement by the IPF closing the 
residency training program.
    In general, the proposed temporary adjustment criteria established 
for closed medical residency training programs at IPFs is similar to 
the criteria established for closed IPFs. We are proposing that more 
than one IPF may be eligible to apply for the temporary adjustment 
because residents from one closed program may migrate to different 
IPFs, or they may complete their training at more than one IPF. Also, 
only to the extent to which an IPF would exceed its FTE cap by training 
displaced residents would it be eligible for the temporary adjustment.
    Finally, we are proposing that IPFs that meet the proposed criteria 
would be eligible to receive temporary adjustments to their FTE caps 
for cost reporting periods beginning on or after July 1, 2011.
ii. IPF That Closed Its Program(s)
    We are proposing that an IPF that agrees to train residents who 
have been displaced by the closure of another IPF's resident teaching 
program may receive a temporary FTE cap adjustment only if the IPF with 
the closed program meets the following criteria--
     Temporarily reduces its FTE cap by the number of FTE 
residents in each program year training in the program at the time of 
the program's closure. The yearly reduction would be determined by 
deducting the number of those residents who would have been training in 
the program during the year of the closure, had the program not closed; 
and
     No later than 60 days after the residents who were in the 
closed program begin training at another IPF, submits to its Medicare 
contractor a statement signed and dated by its representative that 
specifies that it agrees to the temporary reduction in its FTE cap to 
allow the IPF training the displaced residents to obtain a

[[Page 5020]]

temporary adjustment to its cap; identifies the residents who were 
training at the time of the program's closure; identifies the IPFs to 
which the residents are transferring once the program closes; and 
specifies the reduction for the applicable program years.
    Unlike the proposed closed IPF policy at Sec.  
412.424(d)(1)(iii)(F)(1), we propose under this closed program policy 
that in order for the receiving IPF(s) to qualify for a temporary 
adjustment to their FTE cap, the IPFs that are closing their programs 
would need to reduce their FTE cap for the duration of time the 
displaced residents would need to finish their training. We are 
proposing this because the IPF that closes the program still retains 
the FTE slots in its cap, even if the IPF chooses not to fill the slots 
with residents. We believe it is inappropriate to allow an increase to 
the receiving IPF's cap without an attendant decrease to the cap of the 
IPF with the closed program, because the IPF that closed a program(s) 
could fill these slots with residents from other programs even if the 
increase and related decrease is only temporary.
    We are proposing that the cap reduction for the IPF with the closed 
program would be based on the number of FTE residents in each program 
year who were in the program at the IPF at the time of the program's 
closure, and who begin training at another IPF.
    In summary we are proposing to revise Sec.  412.424(d)(1)(iii) and 
to establish Sec.  412.424(d)(1)(iii)(F)(2) to implement policies 
related to temporary adjustments to FTE caps to reflect residents added 
due to closure of an IPF or an IPFs medical residency training program.
4. Proposed Cost of Living Adjustment for IPFs Located in Alaska and 
Hawaii
    The IPF PPS includes a payment adjustment for IPFs located in 
Alaska and Hawaii based upon the county in which the IPF is located. As 
we explained in the November 2004 IPF PPS final rule, the FY 2002 data 
demonstrated that IPFs in Alaska and Hawaii had per diem costs that 
were disproportionately higher than other IPFs. Other Medicare PPSs 
(for example, the IPPS and LTCH PPS) have adopted a cost of living 
adjustment (COLA) to account for the cost differential of care 
furnished in Alaska and Hawaii.
    We analyzed the effect of applying a COLA to payments for IPFs 
located in Alaska and Hawaii. The results of our analysis demonstrated 
that a COLA for IPFs located in Alaska and Hawaii would improve payment 
equity for these facilities. As a result of this analysis, we provided 
a COLA in the November 2004 IPF PPS final rule.
    A COLA adjustment for IPFs located in Alaska and Hawaii is made by 
multiplying the nonlabor-related portion of the Federal per diem base 
rate by the applicable COLA factor based on the COLA area in which the 
IPF is located.
    As previously stated in the November 2004 IPF PPS final rule, we 
will update the COLA factors according to updates established by the 
U.S. Office of Personnel Management (OPM), which issued a final rule, 
May 28, 2008 to change COLA rates.
    The COLA factors are published on the OPM Web site at (http://www.opm.gov/oca/cola/rates.asp).
    We note that the COLA areas for Alaska are not defined by county as 
are the COLA areas for Hawaii. In 5 CFR 591.207, the OPM established 
the following COLA areas:
    (a) City of Anchorage, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (b) City of Fairbanks, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (c) City of Juneau, and 80-kilometer (50-mile) radius by road, as 
measured from the Federal courthouse;
    (d) Rest of the State of Alaska.
    For RY 2012, we are proposing that IPFs located in Alaska and 
Hawaii will continue to receive the updated COLA factors based on the 
COLA area in which the IPF is located as shown in Table 14 below.

       Table 14--Proposed COLA Factors for Alaska and Hawaii IPFs
------------------------------------------------------------------------
                                               Location            COLA
------------------------------------------------------------------------
Alaska...............................  Anchorage...............     1.19
                                       Fairbanks...............     1.19
                                       Juneau..................     1.19
                                       Rest of Alaska..........     1.21
Hawaii...............................  Honolulu County.........     1.21
                                       Hawaii County...........     1.14
                                       Kauai County............     1.21
                                       Maui County.............     1.21
                                       Kalawao County..........     1.21
------------------------------------------------------------------------

5. Proposed Adjustment for IPFs With a Qualifying Emergency Department 
(ED)
    Currently, the IPF PPS includes a facility-level adjustment for 
IPFs with qualifying EDs. We provide an adjustment to the Federal per 
diem base rate to account for the costs associated with maintaining a 
full-service ED. The adjustment is intended to account for ED costs 
incurred by a freestanding psychiatric hospital with a qualifying ED or 
a distinct part psychiatric unit of an acute hospital or a CAH for 
preadmission services otherwise payable under the Medicare Outpatient 
Prospective Payment System (OPPS) furnished to a beneficiary during the 
day immediately preceding the date of admission to the IPF (see Sec.  
413.40(c)(2)) and the overhead cost of maintaining the ED. This payment 
is a facility-level adjustment that applies to all IPF admissions (with 
one exception described below), regardless of whether a particular 
patient receives preadmission services in the hospital's ED.
    The ED adjustment is incorporated into the variable per diem 
adjustment for the first day of each stay for IPFs with a qualifying 
ED. That is, IPFs with a qualifying ED receive an adjustment factor of 
1.31 as the variable per diem adjustment for day 1 of each stay. If an 
IPF does not have a qualifying ED, it receives an adjustment factor of 
1.19 as the variable per diem adjustment for day 1 of each patient 
stay.
    The ED adjustment is made on every qualifying claim except as 
described below. As specified in Sec.  412.424(d)(1)(v)(B), the ED 
adjustment is not made where a patient is discharged from an acute care 
hospital or critical access hospital (CAH) and admitted to the same 
hospital's or CAH's psychiatric unit. An ED adjustment is not made in 
this case because the costs associated with ED services are reflected 
in the DRG payment to the acute care hospital or through the reasonable 
cost payment made to the CAH. If we provided the ED adjustment in these 
cases, the hospital would be paid twice for the overhead costs of the 
ED, as stated in the November 2004 IPF PPS final rule (69 FR 66960).
    Therefore, when patients are discharged from an acute care hospital 
or CAH and admitted to the same hospital's or CAH's psychiatric unit, 
the IPF receives the 1.19 adjustment factor as the variable per diem 
adjustment for the first day of the patient's stay in the IPF.
    For RY 2012, we are proposing to retain the 1.31 adjustment factor 
for IPFs with qualifying EDs. A complete discussion of the steps 
involved in the calculation of the ED adjustment factor appears in the 
November 2004 IPF PPS final rule (69 FR 66959 through 66960) and the 
May 2006 IPF PPS final rule (71 FR 27070 through 27072).

D. Other Payment Adjustments and Policies

    For RY 2012, the IPF PPS includes an outlier adjustment to promote 
access to IPF care for those patients who require expensive care and to 
limit the financial

[[Page 5021]]

risk of IPFs treating unusually costly patients. In this section, we 
also explain the reason for ending the stop-loss provision that was 
applicable during the transition period.
1. Proposed Outlier Payments
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(3)(i) to provide a per-case payment for IPF stays 
that are extraordinarily costly. Providing additional payments to IPFs 
for extremely costly cases strongly improves the accuracy of the IPF 
PPS in determining resource costs at the patient and facility level. 
These additional payments reduce the financial losses that would 
otherwise be incurred in treating patients who require more costly care 
and, therefore, reduce the incentives for IPFs to under-serve these 
patients.
    We make outlier payments for discharges in which an IPF's estimated 
total cost for a case exceeds a fixed dollar loss threshold amount 
(multiplied by the IPF's facility-level adjustments) plus the Federal 
per diem payment amount for the case.
    In instances when the case qualifies for an outlier payment, we pay 
80 percent of the difference between the estimated cost for the case 
and the adjusted threshold amount for days 1 through 9 of the stay 
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of 
the difference for day 10 and thereafter. We established the 80 percent 
and 60 percent loss sharing ratios because we were concerned that a 
single ratio established at 80 percent (like other Medicare PPSs) might 
provide an incentive under the IPF per diem payment system to increase 
LOS in order to receive additional payments. After establishing the 
loss sharing ratios, we determined the current fixed dollar loss 
threshold amount of $6,372 through payment simulations designed to 
compute a dollar loss beyond which payments are estimated to meet the 2 
percent outlier spending target.
a. Proposed Update to the Outlier Fixed Dollar Loss Threshold Amount
    In accordance with the update methodology described in Sec.  
412.428(d), we are proposing to update the fixed dollar loss threshold 
amount used under the IPF PPS outlier policy. Based on the regression 
analysis and payment simulations used to develop the IPF PPS, we 
established a 2 percent outlier policy which strikes an appropriate 
balance between protecting IPFs from extraordinarily costly cases while 
ensuring the adequacy of the Federal per diem base rate for all other 
cases that are not outlier cases.
    We believe it is necessary to update the fixed dollar loss 
threshold amount because an analysis of the latest available data (that 
is, FY 2009 IPF claims) and rate increases indicates that adjusting the 
fixed dollar loss amount is necessary in order to maintain an outlier 
percentage that equals 2 percent of total estimated IPF PPS payments.
    In the May 2006 IPF PPS final rule (71 FR 27072), we describe the 
process by which we calculate the outlier fixed dollar loss threshold 
amount. We are proposing to continue to use this process for RY 2012. 
We begin by simulating aggregate payments with and without an outlier 
policy, and applying an iterative process to determine an outlier fixed 
dollar loss threshold amount that will result in outlier payments being 
equal to 2 percent of total estimated payments under the simulation. 
Based on this process, using the FY 2009 claims data, we estimate that 
IPF outlier payments as a percentage of total estimated payments are 
approximately 2.2 percent in RY 2010. Thus, we are proposing to update 
the RY 2012 IPF outlier threshold amount to ensure that estimated RY 
2012 outlier payments are approximately 2 percent of total estimated 
IPF payments. We are proposing to change the outlier fixed dollar loss 
threshold amount of $6,372 for RY 2011 to $7,316 for RY 2012 to reduce 
estimated outlier payments and thereby maintain estimated outlier 
payments at 2 percent of total estimated aggregate IPF payments for RY 
2012.
b. Proposed Statistical Accuracy of Cost-to-Charge Ratios
    As previously stated, under the IPF PPS, an outlier payment is made 
if an IPF's cost for a stay exceeds a fixed dollar loss threshold 
amount. In order to establish an IPF's cost for a particular case, we 
multiply the IPF's reported charges on the discharge bill by its 
overall cost-to-charge ratio (CCR). This approach to determining an 
IPF's cost is consistent with the approach used under the IPPS and 
other PPSs. In FY 2004, we implemented changes to the IPPS outlier 
policy used to determine CCRs for acute care hospitals because we 
became aware that payment vulnerabilities resulted in inappropriate 
outlier payments. Under the IPPS, we established a statistical measure 
of accuracy for CCRs in order to ensure that aberrant CCR data did not 
result in inappropriate outlier payments.
    As we indicated in the November 2004 IPF PPS final rule, because we 
believe that the IPF outlier policy is susceptible to the same payment 
vulnerabilities as the IPPS, we adopted an approach to ensure the 
statistical accuracy of CCRs under the IPF PPS (69 FR 66961). 
Therefore, we adopted the following procedure in the November 2004 IPF 
PPS final rule:
     We calculated two national ceilings, one for IPFs located 
in rural areas and one for IPFs located in urban areas. We computed the 
ceilings by first calculating the national average and the standard 
deviation of the CCR for both urban and rural IPFs.
    To determine the rural and urban ceilings, we multiplied each of 
the standard deviations by 3 and added the result to the appropriate 
national CCR average (either rural or urban). We estimated a proposed 
upper threshold CCR for IPFs in RY 2012 of 1.8522 for rural IPFs, and 
1.7619 for urban IPFs, based on CBSA-based geographic designations. If 
an IPF's CCR is above the applicable ceiling, the ratio is considered 
statistically inaccurate and we assign the appropriate national (either 
rural or urban) median CCR to the IPF.
    We apply the national CCRs to the following situations:
    ++ New IPFs that have not yet submitted their first Medicare cost 
report.
    ++ IPFs whose overall CCR is in excess of 3 standard deviations 
above the corresponding national geometric mean (that is, above the 
ceiling).
    ++ Other IPFs for which the Medicare contractor obtains inaccurate 
or incomplete data with which to calculate a CCR.
    For new IPFs, we are using these national CCRs until the facility's 
actual CCR can be computed using the first tentatively or final settled 
cost report.
    We are not making any changes to the procedures for ensuring the 
statistical accuracy of CCRs in RY 2012. However, we are proposing to 
update the national urban and rural CCRs (ceilings and medians) for 
IPFs for RY 2012 based on the CCRs entered in the latest available IPF 
PPS Provider Specific File.
    Specifically, for RY 2012, and to be used in each of the three 
situations listed above, we estimate a proposed national average CCR of 
0.6480 for rural IPFs and a proposed national average CCR of 0.5140 for 
urban IPFs. These calculations are based on the IPF's location (either 
urban or rural) using the CBSA-based geographic designations.
    A complete discussion regarding the national median CCRs appears in 
the November 2004 IPF PPS final rule (69 FR 66961 through 66964).

[[Page 5022]]

2. Expiration of the Stop-Loss Provision
    In the November 2004 IPF PPS final rule, we implemented a stop-loss 
policy that reduced financial risk to IPFs projected to experience 
substantial reductions in Medicare payments during the period of 
transition to the IPF PPS. This stop-loss policy guaranteed that each 
facility received total IPF PPS payments that were no less than 70 
percent of its TEFRA payments had the IPF PPS not been implemented. 
This policy was applied to the IPF PPS portion of Medicare payments 
during the 3-year transition.
    In the implementation year, the 70 percent of TEFRA payment stop-
loss policy required a reduction in the standardized Federal per diem 
and ECT base rates of 0.39 percent in order to make the stop-loss 
payments budget neutral. As described in the May 2008 IPF PPS notice 
for RY 2009, we increased the Federal per diem base rate and ECT rate 
by 0.39 percent because these rates were reduced by 0.39 percent in the 
implementation year to ensure stop-loss payments were budget neutral.
    The stop-loss provision ended during RY 2009 (that is for 
discharges occurring on or after July 1, 2008 through June 30, 2009). 
The stop-loss policy is no longer applicable under the IPF PPS.
3. Future Refinements
    As we have noted throughout this proposed rule, we have delayed 
making refinements to the IPF PPS until we have adequate IPF PPS data 
on which to base those decisions. Now that we are approximately 5 years 
into the system, we believe that we have enough data to begin that 
process. We have begun the necessary analysis to better understand IPF 
industry practices so that we may refine the IPF PPS as appropriate. 
While we are not proposing to make the following refinements in this 
rulemaking, we believe that in the rulemaking for FY 2013 we will be 
ready to present the results of our analysis.
    Specifically, with the change from ICD-9-CM to ICD-10-CM coming in 
2013, we are analyzing the comorbidity categories and related codes for 
utilization and continued suitability. While we would continue to 
provide for comorbidity adjustments, we are analyzing whether the 
current groupings and codes continue to be warranted and whether other 
appropriate codes should be added. Also, we are analyzing our current 
policies for interrupted stays, readmissions, same-day transfers, and 
length of stays in order to assess whether these policies continue to 
be appropriate. Additionally, in accordance with section 1886(s)(4) of 
the Act, which was added by section 10322 of the Affordable Care Act, 
IPFs must submit data on quality measures, as specified by the 
Secretary, for each RY beginning in RY 2014. If data is not submitted, 
any annual update to a Federal base rate for discharges for the 
payments shall be reduced by 2 percentage points. Quality measures are 
currently being developed to effectuate this requirement. Lastly, for 
the first time MedPAC will become involved in evaluating facility 
margins and will likely make recommendations regarding the appropriate 
payment update to IPFs based on their findings. CMS is interested in 
gaining feedback on these areas for future refinements and therefore we 
invite comments on these issues described in this section at this time.

VI. Proposed Regulations Text Corrections

    We are proposing several minor corrections to the regulations text 
to address typographical errors. We note that these proposed changes do 
not impact policy. We are proposing to correct typographical errors at 
Sec.  412.404, ``Conditions for payment under the prospective payment 
system for inpatient hospital services of psychiatric facilities; Sec.  
412.422, ``Basis of payment;'' and Sec.  412.426, ``Transition 
period.'' In addition to these corrections, we are proposing to add 
clarifying language at Sec.  412.426 and Sec.  412.432(d), ``Method of 
payment under the inpatient psychiatric facility prospective payment 
system.'' The proposed revisions are described below.

Section 412.404(a)(1)

    Under Sec.  412.404, in paragraph (a)(1), ``General requirements,'' 
we are proposing to delete the word ``in'' between the words 
``furnished'' and ``to Medicare''.

Section 412.422(b)(2)

    Under Sec.  412.422, in paragraph (b)(2), we are proposing to 
correct the reference to Sec.  413.80 to Sec.  413.89. The regulations 
covered at Sec.  413.89 include bad debts, charity, and courtesy 
allowances.

Section 412.426(a)

    Under Sec.  412.426, in paragraph (a), ``Duration of transition 
period and composition of the blended transition payment,'' we are 
proposing to replace ``Except as provided in paragraph (d) of this 
section'' with ``Except as provided in paragraph (c) of this section.'' 
There is no paragraph (d); this exception should refer to paragraph 
(c), ``Treatment of new inpatient psychiatric facilities.''
    Also in paragraph (a), we are proposing to add the words ``of this 
part'' after ``as specified in Sec.  412.424(d)'' and ``of this 
section'' after ``as specified under paragraph (b).'' This regulatory 
language is required by the Federal Register.
    In each of paragraphs Sec.  412.426(a)(1) through (a)(3), we are 
proposing to delete the words ``on or'' directly before the words 
``before January''. For example, paragraph (a)(1) currently states, 
``For cost reporting periods beginning on or after January 1, 2005 and 
on or before January 1, 2006* * *'' We are proposing that this 
statement read: ``For cost reporting periods beginning on or after 
January 1, 2005 and before January 1, 2006 * * * '' This correction 
does not represent a change in policy. Rather, it is a correction to 
conform the regulation text to our policy, which was established in our 
final rule that appeared in the Federal Register on November 15, 2004 
(69 FR 66980) (which was subsequently corrected on April 1, 2005 (70 FR 
16729)). It is clear that the current regulation text is incorrect. The 
same January date (for example, January 1, 2007) cannot be both the 
date on which a new transition period begins and the date on which the 
previous transition period ends. Our policy, since we established the 
transition, has been to begin a transition period on or after a January 
1 date and to end that transition period before the next transition 
period begins. Because our regulation text does not accurately reflect 
our actual policy, we are proposing this correction.
    At Sec.  412.426(a)(4), we are proposing to replace the statement, 
``For cost reporting periods beginning on or after July 1, 2008, 
payment is based entirely on the Federal per diem payment amount'' with 
the following statement: ``For cost reporting periods beginning on or 
after January 1, 2008, payment is based entirely on the Federal per 
diem payment amount.'' The transition period during which payment was 
based on a combination of the Federal per diem payment amount and TEFRA 
payments, ended on January 1, 2008, not July 1, 2008.

Section 412.432(d)

    Under Sec.  412.432, in paragraph (d), ``Outlier payments,'' we are 
proposing to add the words ``of this part'' after ``subject to the cost 
report settlement specified in Sec.  412.84(i) and Sec.  412.84(m).'' 
This regulatory language is required by the Federal Register and 
clarifies that Sec.  412.84(i) and Sec.  412.84(m) refer to 42 CFR part 
412, ``Prospective

[[Page 5023]]

Payment Systems for Inpatient Hospital Services.''

VII. Provisions of the Proposed Regulations

    In this proposed rule, we are proposing to update the IPF PPS 
payment rates for RY 2012. We are also proposing to revise the IPF PPS 
payment update period and make other policy changes and clarifications. 
The following is a summary of the areas that we are addressing in this 
proposed rule:
     We are proposing to switch the annual update period for 
the IPF PPS from a rate year that begins on July 1 and goes through 
June 30 to one that coincides with a FY, that is, that begins on 
October 1 and goes through September 30. For the update period that 
begins in 2012, and thereafter, we would refer to the update period as 
a FY. In order to make this switch, we are proposing that rate year 
2012 be a 15-month period, from July 1, 2011 through September 30, 
2012. This change in the payment update period would allow us to have 
one consolidated annual update to both the rates and the ICD-9-CM 
coding changes (MS-DRG and comorbidities). The coding changes will 
continue to be effective October 1 of each year.
     We are proposing to rebase and revise the FY 2002-based 
RPL market basket to a FY 2008-based RPL market basket. We are 
proposing a 3.0 percent market basket update to the IPF PPS for RY 2012 
based on the most recent estimate of the market basket update for the 
proposed 15-month 2012 IPF PPS rate year, with a 0.25 percentage point 
reduction as required by section 1886 (s)(3)(A) of the Act.
     We are proposing to adopt IPF policies similar to such 
IPPS GME policies providing for temporary adjustments to an IPF's FTE 
cap to reflect residents added due to the closure of an IPF or an IPF's 
residency training program.
     We are proposing to update the fixed dollar loss threshold 
amount in order to maintain the appropriate outlier percentage.
     We are proposing to update the ECT adjustment by a factor 
specified by CMS.
     We are proposing to update the national urban and rural 
cost-to-charge ratio medians and ceilings.
     We are proposing to update the cost of living adjustment 
factors for IPFs located in Alaska and Hawaii, if appropriate.
     We are proposing to describe the ICD-9-CM and MS-DRG 
classification changes discussed in the annual update to the hospital 
inpatient prospective payment system regulations.
     We are proposing the best available hospital wage index 
and information regarding whether an adjustment to the Federal per diem 
base rate is needed to maintain budget neutrality.
     We are proposing to retain the 17 percent adjustment for 
IPFs located in rural areas, the 1.31 adjustment for IPFs with a 
qualifying ED, the 0.5150 teaching adjustment to the Federal per diem 
rate, and the MS-DRG adjustment factor currently being paid to IPFs for 
RY 2011.
     We are proposing to update the MS-DRG listing and 
comorbidity categories to reflect the ICD-9-CM revisions effective 
October 1, 2010.

VIII. Collection of Information Requirements

    This document does not impose any information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IX. Regulatory Impact Analysis

A. Statement of Need

    This proposed rule would update the prospective payment rates for 
Medicare inpatient hospital services provided by inpatient psychiatric 
facilities for discharges occurring during the rate year beginning July 
1, 2011 through September 30, 2012. We propose to apply the 15-month 
FY2008-based RPL market basket increase of 3.0 percent, adjusted by the 
0.25 percentage point reduction, as required by section 1886(s)(3)(A) 
of the Act. In addition, the rule proposes policy changes affecting the 
IPF PPS teaching adjustment, as well as makes some clarifications and 
corrections to terminology and regulations text.

B. Overall Impact

    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the September 19, 1980 Regulatory Flexibility Act (RFA) (Pub. L. 96-
354), section 1102(b) of the Act, the Unfunded Mandates Reform Act of 
1995 (Pub. L. 104-4), Executive Order 13132 on Federalism, and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). A regulatory impact 
analysis (RIA) must be prepared for major rules with economically 
significant effects ($100 million or more in any 1 year). This proposed 
rule is a major rule as defined in Title 5, United States Code, section 
804(2), because we estimate that the impact to the Medicare program, 
and the annual effects to the economy, will be more than $100 million. 
We estimate that the total impact of these proposed changes for 
estimated RY 2012 payments compared to estimated RY 2011 payments would 
be an increase of approximately $110 million (this reflects a $120 
million increase from the update to the payment rates and a $10 million 
decrease due to the proposed update to the outlier threshold amount to 
decrease estimated outlier payments from approximately 2.2 percent in 
RY 2011 to 2.0 percent in RY 2012).
    The RFA requires agencies to analyze options for regulatory relief 
of small entities, if a rule has a significant impact on a substantial 
number of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
governmental jurisdictions. Most IPFs and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $7 million to $34.5 million in any one year (for details, 
refer to the SBA Small Business Size Standards found at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=2465b064ba6965cc1fbd2eae60854b11&rgn=div8&view=text&node=13:1.0.1.1.16.1.266.9&idno=13). Because we lack data on individual 
hospital receipts, we cannot determine the number of small proprietary 
IPFs or the proportion of IPFs' revenue that is derived from Medicare 
payments. Therefore, we assume that all IPFs are considered small 
entities. The Department of Health and Human Services generally uses a 
revenue impact of 3 to 5 percent as a significance threshold under the 
RFA. As shown in Table 15, we estimate that the revenue impact of this 
proposed rule on all IPFs is to increase estimated Medicare payments by 
about 2.54 percent, with rural IPFs estimated to receive an increase in 
estimated Medicare payments greater than 3 percent (an aggregate 3.56 
percent). Since Medicare payments do not necessarily constitute total 
revenue for all IPFs, the overall total revenue impact to IPFs would be 
less than the significant threshold of 3

[[Page 5024]]

to 5 percent under the RFA. As a result, the Secretary has determined 
that this proposed rule will not have a significant impact on a 
substantial number of small entities. Medicare fiscal intermediaries, 
Medicare Administrative Contractors, and carriers are not considered to 
be small entities. Individuals and States are not included in the 
definition of a small entity. We solicit comment on the above analysis.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 603 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 will not 
have an adverse impact on the rural hospitals based on the data of the 
387 rural units and 67 rural hospitals in our database of 1,653 IPFs 
for which data were available. Therefore, we are not preparing an 
analysis for section 1102(b) of the Act because the Secretary has 
determined that this proposed rule will not have a significant impact 
on the operations of a substantial number of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any 1 year of $100 
million in 1995 dollars, updated annually for inflation. In 2010, that 
threshold is approximately $135 million. This proposed rule will not 
impose spending costs on State, local, or tribal governments in the 
aggregate, or by the private sector, of $135 million.
    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. As stated above this proposed rule would not have a 
substantial effect on State and local governments.

C. Anticipated Effects of the Proposed Rule

    We discuss below the historical background of the IPF PPS and the 
impact of this proposed rule on the Federal Medicare budget and on 
IPFs.
1. Budgetary Impact
    As discussed in the November 2004 and May 2006 IPF PPS final rules, 
we applied a budget neutrality factor to the Federal per diem and ECT 
base rates to ensure that total estimated payments under the IPF PPS in 
the implementation period would equal the amount that would have been 
paid if the IPF PPS had not been implemented. The budget neutrality 
factor includes the following components: outlier adjustment, stop-loss 
adjustment, and the behavioral offset. As discussed in the May 2008 IPF 
PPS notice (73 FR 25711), the stop-loss adjustment is no longer 
applicable under the IPF PPS.
    In accordance with Sec.  412.424(c)(3)(ii), we indicated that we 
would evaluate the accuracy of the budget neutrality adjustment within 
the first 5 years after implementation of the payment system. We may 
make a one-time prospective adjustment to the Federal per diem and ECT 
base rates to account for differences between the historical data on 
cost-based TEFRA payments (the basis of the budget neutrality 
adjustment) and estimates of TEFRA payments based on actual data from 
the first year of the IPF PPS. As part of that process, we will 
reassess the accuracy of all of the factors impacting budget 
neutrality. In addition, as discussed in section III.C.6 of this 
proposed rule, we are using the wage index and labor-related share in a 
budget neutral manner by applying a wage index budget neutrality factor 
to the Federal per diem and ECT base rates. Therefore, the budgetary 
impact to the Medicare program of this proposed rule will be due to the 
15-month market basket update for RY 2012 of 3.0 percent (see section 
III.C.5 of this proposed rule) as adjusted by the ``other adjustment'' 
of -0.25 percentage point according to section 1886(s)(3)(A) of the 
Act, and the proposed update to the outlier fixed dollar loss threshold 
amount.
    We estimate that the RY 2012 impact would be a net increase of $110 
million in payments to IPF providers. This reflects a $120 million 
increase from the update to the payment rates and a $10 million 
decrease due to the proposed update to the outlier threshold amount to 
decrease estimated outlier payments from approximately 2.2 percent in 
RY 2011 to 2.0 percent in RY 2012.
2. Impacts on Providers
    To understand the impact of the changes to the IPF PPS on 
providers, discussed in this proposed rule, it is necessary to compare 
estimated payments under the IPF PPS rates and factors for RY 2012 
versus those under RY 2011. The estimated payments for RY 2011 and RY 
2012 will be 100 percent of the IPF PPS payment, since the transition 
period has ended and stop-loss payments are no longer paid. We 
determined the percent change of estimated RY 2012 IPF PPS payments to 
estimated RY 2011 IPF PPS payments for each category of IPFs. In 
addition, for each category of IPFs, we have included the estimated 
percent change in payments resulting from the proposed update to the 
outlier fixed dollar loss threshold amount, the labor-related share and 
wage index changes for the RY 2012 IPF PPS, and the 15-month market 
basket update for RY 2012, as adjusted by the ``other adjustment'' 
according to section 1886(s)(3)(A) of the Act.
    To illustrate the impacts of the RY 2012 changes in this proposed 
rule, our analysis begins with a RY 2011 baseline simulation model 
based on FY 2009 IPF payments inflated to the midpoint of RY 2011 using 
IHS Global Insight's most recent forecast of the market basket update 
(see section III.C.5 of this proposed rule); the estimated outlier 
payments in RY 2011; the CBSA designations for IPFs based on OMB's MSA 
definitions after June 2003; the FY 2010 pre-floor, pre-reclassified 
hospital wage index; the RY 2011 labor-market share; and the RY 2011 
percentage amount of the rural adjustment. During the simulation, the 
total estimated outlier payments are maintained at 2 percent of total 
estimated IPF PPS payments.
    Each of the following proposed changes is added incrementally to 
this baseline model in order for us to isolate the effects of each 
change:
     The update to the outlier fixed dollar loss threshold 
amount.
     The FY 2011 pre-floor, pre-reclassified hospital wage 
index and RY 2012 labor-related share.
     The 15-month market basket update for RY 2012 of 3.0 
percent adjusted by 0.25 percentage point reduction in accordance with 
section 1886(s)(3)(A) of the Act.
    Our final comparison illustrates the percent change in payments 
from RY 2011 (that is, July 1, 2010 to June 30, 2011) to RY 2012 (that 
is, July 1, 2011 to September 30, 2012) including all the changes in 
this proposed rule.
BILLING CODE 4210-01-P

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[GRAPHIC] [TIFF OMITTED] TP27JA11.001

BILLING CODE 4120-01-C
3. Results
    Table 15 above displays the results of our analysis. The table 
groups IPFs into the categories listed below based on characteristics 
provided in the Provider of Services (POS) file, the IPF provider 
specific file, and cost report data from HCRIS:
     Facility Type.
     Location.

[[Page 5027]]

     Teaching Status Adjustment.
     Census Region.
     Size.
The top row of the table shows the overall impact on the 1,653 IPFs 
included in this analysis.
    In column 3, we present the effects of the proposed update to the 
outlier fixed dollar loss threshold amount. We estimate that IPF 
outlier payments as a percentage of total estimated IPF payments are 
2.2 percent in RY 2011. Thus, we are proposing to adjust the outlier 
threshold amount from $6,372 in RY 2011 to $7,316 in RY 2012 in order 
to set total estimated outlier payments equal to 2 percent of total 
estimated payments in RY 2012. The estimated change in total IPF 
payments for RY 2012, therefore, includes an approximate 0.2 percent 
decrease in payments because the estimated outlier portion of total 
payments is estimated to decrease from approximately 2.2 percent to 2 
percent.
    The overall aggregate effect of this proposed outlier adjustment 
updates (as shown in column 3 of table 15), across all hospital groups, 
is to decrease total estimated payments to IPFs by about 0.21 percent. 
We do not estimate that any group of IPFs will experience an increase 
in payments from this proposed update. We estimate the largest decrease 
in payments to be a 1.57 percent decrease in estimated payments to 
urban, government IPF units located in CAHs which is due to the small 
number of IPFs of that type and the high volume of outlier payments 
made to those IPFs.
    In column 4, we present the effects of the proposed budget-neutral 
update to the labor-related share and the wage index adjustment under 
the CBSA geographic area definitions announced by OMB in June 2003. 
This is a comparison of the simulated RY 2012 payments under the FY 
2011 hospital wage index under CBSA classification and associated 
labor-related share to the simulated RY 2011 payments under the FY 2010 
hospital wage index under CBSA classifications and associated labor-
related share. We note that there is no projected change in aggregate 
payments to IPFs, as indicated in the first row of column 4. However, 
there would be distributional effects among different categories of 
IPFs. For example, we estimate a 0.98 percent increase in overall 
payments to rural IPFs, with the largest increase in estimated payments 
of 2.2 percent for rural, for-profit freestanding psychiatric 
hospitals. In addition, we estimate the largest decrease in estimated 
payments to be a 0.89 percent decrease for IPFs in the New England 
region.
    Column 5 shows the estimated effect of the proposed update to the 
IPF PPS payment rates, which includes a 3.0 percent 15-month market 
basket update with the 0.25 percentage point reduction in accordance 
with section 1886(s)(3)(A).
    Column 6 compares our estimates of the changes reflected in this 
proposed rule for RY 2012, to our estimates of payments for RY 2011 
(without these changes). This column reflects all RY 2012 changes 
relative to RY 2011. The average estimated increase for all IPFs is 
approximately 2.54 percent. This estimated net increase includes the 
effects of the 3.0 percent 15-month market basket update adjusted by 
the ``other adjustment'' of -0.25 percentage point, as required by 
section 1886(s)(3)(A) of the Act. It also includes the approximate 0.2 
percent overall estimated decrease in estimated IPF outlier payments 
from the proposed update to the outlier fixed dollar loss threshold 
amount. Since we are making the updates to the IPF labor-related share 
and wage index in a budget-neutral manner, they will not affect total 
estimated IPF payments in the aggregate. However, they will affect the 
estimated distribution of payments among providers.
    Overall, no IPFs are estimated to experience a net decrease in 
payments as a result of the proposed updates in this rule. IPFs in 
urban areas will experience a 2.37 percent increase and IPFs in rural 
areas will experience a 3.56 percent increase. The largest payment 
increase is estimated at 4.98 percent for rural, for-profit 
freestanding psychiatric hospitals. This is due to the larger than 
average positive effect of the FY 2011 CBSA wage index and labor-
related share updates for rural IPFs in this category.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other PPSs, we estimate that Medicare spending (total Medicare program 
payments) for IPF services over the next 5 years would be as shown in 
Table 16 below.

                      Table 16--Estimated Payments
------------------------------------------------------------------------
                                                              Dollars in
                         Rate year                             millions
------------------------------------------------------------------------
July 1, 2011 to June 30, 2012..............................       $4,615
July 1, 2012 to June 30, 2013..............................        4,938
July 1, 2013 to June 30, 2014..............................        5,320
July 1, 2014 to June 30, 2015..............................        5,750
July 1, 2015 to June 30, 2016..............................        6,235
------------------------------------------------------------------------

    These estimates are based on the current forecast of the increases 
in the RPL market basket, including an adjustment for productivity, for 
the rate year beginning in 2012 and each subsequent rate year, as 
required by section 1886(s)(3)(A) of the Act, as follows:
     2.6 percent for rate years beginning in 2011 (RY 2012).
     1.7 percent for rate years beginning in 2012 (RY 2013).
     1.9 percent for rate years beginning in 2013 (RY 2014).
     2.1 percent for rate years beginning in 2014 (RY 2015).
     2.3 percent for rate years beginning in 2015 (RY 2016).
    The estimates in Table 14 also include the application of the 
``other adjustment,'' as required by section 1886(s)(3)(A) of the Act, 
as follows:
     -0.25 percent for rate years beginning in 2011.
     -0.1 percent for rate years beginning in 2012.
     -0.1 percent for rate years beginning in 2013.
     -0.3 percent for rate years beginning in 2014.
     -0.2 percent for rate years beginning in 2015.
    We estimate that there would be a change in fee-for-service 
Medicare beneficiary enrollment as follows:
     3.3 percent in RY 2012.
     3.7 percent in RY 2013.
     4.3 percent in RY 2014.
     4.9 percent in RY 2015.
     5.6 percent in RY 2016.
5. Effect on Beneficiaries
    Under the IPF PPS, IPFs would receive payment based on the average 
resources consumed by patients for each day. We do not expect changes 
in the quality of care or access to services for Medicare beneficiaries 
under the RY 2012 IPF PPS. In fact, we believe that access to IPF 
services will be enhanced due to the patient- and facility-level 
adjustment factors, all of which are intended to adequately reimburse 
IPFs for expensive cases. Finally, the outlier policy is intended to 
assist IPFs that experience high-cost cases.

D. Alternatives Considered

    The statute does not specify an update strategy for the IPF PPS and 
is broadly written to give the Secretary discretion in establishing an 
update methodology. Therefore, we are updating the IPF PPS using the 
methodology published in the November 2004 IPF PPS final rule.
    We note that this proposed rule initiates policy changes with 
regard to the IPF PPS, and it also provides an update to the rates for 
RY 2012. We considered making refinements to the IPF PPS in this 
proposed rule. However,

[[Page 5028]]

we decided that we needed more time to assess the data and would 
therefore once again delay running the regression analysis until we 
have adequate IPF PPS data. We have initiated the necessary analysis to 
better understand IPF industry practices. We did not consider rebasing 
the IPF PPS for concerns that rebasing would be too costly (re-
calculate the cost-per-day) and time consuming.

E. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 17 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule. This 
table provides our best estimate of the increase in Medicare payments 
under the IPF PPS as a result of the proposed changes presented in this 
proposed rule and based on the data for 1,653 IPFs in our database. All 
expenditures are classified as transfers to Medicare providers (that 
is, IPFs).

       Table 17--Accounting Statement: Classification of Estimated
      Expenditures, From the 2011 IPF PPS RY to the 2012 IPF PPS RY
                              [In millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $110
From Whom To Whom?                          Federal Government To IPF
                                             Medicare Providers.
------------------------------------------------------------------------

    In accordance with the provisions of Executive Order 12866, this 
regulation 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.
    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV 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, 1862, and 1871 of the Social Security 
Act (42 U.S.C. 1302, 1395y, and 1395hh).

Subpart N--Prospective payment system for inpatient hospital 
services of inpatient psychiatric facilities

    2. In Sec.  412.402, new definitions of ``IPF prospective payment 
system rate year'' and ``MS-IFP-DRG'' are added in alphabetical order 
to read as follows:

Sec.  412.402  Definitions.

* * * * *
    IPF prospective payment system rate year means --
    (1) Through June 30, 2011, the 12-month period of July 1 through 
June 30.
    (2) Beginning July 1, 2011, the 15-month period of July 1, 2011 
through September 30, 2012.
    (3) Beginning October 1, 2012, the 12-month period of October 1 
through September 30, referred to as Fiscal Year (FY).
* * * * *
    MS-IFP-DRG means the severity adjusted diagnosis groups used to 
classify IPF patients. For IPF discharges occurring on or after July 1, 
2008, all reference to MS-DRGs used for the IPF PPS are to MS-IPF-DRGs.
* * * * *
    3. Section 412.404 is amended by revising paragraph (a)(1) to read 
as follows:

Sec.  412.404  Conditions for payment under the prospective payment 
system for inpatient hospital services of psychiatric facilities.

    (a) General requirements. (1) Effective for cost reporting periods 
beginning on or after January 1, 2005, an inpatient psychiatric 
facility must meet the conditions of this section to receive payment 
under the prospective payment system described in this subpart for 
inpatient hospital services furnished to Medicare Part A fee-for-
service beneficiaries.
* * * * *
    4. Section 412.422 is amended by revising paragraph (b)(2) to read 
as follows:

Sec.  412.422  Basis of payment.

* * * * *
    (b) * * *
    (2) In addition to the Federal per diem payment amounts, inpatient 
psychiatric facilities receive payment for bad debts of Medicare 
beneficiaries, as specified in Sec.  413.89 of this chapter.
    5. Section 412.424 is amended by adding a new paragraph 
(d)(1)(iii)(F) to read as follows:

Sec.  412.424  Methodology for calculating the Federal per diem payment 
amount.

* * * * *
    (d) * * *
    (1) * * *
    (iii) * * *
    (F) Closure of an IPF. (1) For cost reporting periods beginning on 
or after July 1, 2011, an IPF may receive a temporary adjustment to its 
FTE cap to reflect residents added because of another IPF's closure if 
the IPF meets the following criteria:
    (i) The IPF is training additional residents from an IPF that 
closed on or after July 1, 2011.
    (ii) No later than 60 days after the IPF begins to train the 
residents, the IPF submits a request to its Medicare contractor for a 
temporary adjustment to its cap, documents that the IPF is eligible for 
this temporary adjustment by identifying the residents who have come 
from the closed IPF and have caused the IPF to exceed its cap, and 
specifies the length of time the adjustment is needed.
    (2) Closure of an IPF's residency training program. If an IPF that 
closes its residency training program agrees to temporarily reduce its 
FTE cap according to the criteria specified in paragraph 
(d)(1)(iii)(F)(2)(ii) of this section, another IPF(s) may receive a 
temporary adjustment to its FTE cap to reflect residents added because 
of the closure of the residency training program if the criteria 
specified in paragraph (d)(1)(iii)(F)(2)(i) of this section are met.
    (i) Receiving IPF(s). For cost reporting periods beginning on or 
after July 1, 2001, an IPF may receive a temporary adjustment to its 
FTE cap to reflect residents added because of the closure of another 
IPF's residency training program if the IPF is training additional 
residents from the residency training program of an IPF that closed a 
program; and if no later than 60 days after the IPF begins to train the 
residents, the IPF submits to its Medicare Contractor a request for a 
temporary adjustment to its FTE cap, documents that it is eligible for 
this temporary adjustment by identifying the residents who have come 
from another IPF's closed program and have caused the IPF to exceed its 
cap, specifies the length of time the adjustment is needed, and submits 
to its Medicare contractor a copy of the FTE reduction statement by the 
hospital that closed its program, as specified in paragraph 
(d)(1)(iii)(F)(2)(ii) of this section.
    (ii) IPF that closed its program. An IPF that agrees to train 
residents who have been displaced by the closure of another IPF's 
program may receive a temporary FTE cap adjustment only if the hospital 
with the closed program temporarily reduces its FTE cap based on the 
FTE residents in each program year training in the program at the time

[[Page 5029]]

of the program's closure. This yearly reduction in the FTE cap will be 
determined based on the number of those residents who would have been 
training in the program during that year had the program not closed. No 
later than 60 days after the residents who were in the closed program 
begin training at another hospital, the hospital with the closed 
program must submit to its Medicare contractor a statement signed and 
dated by its representative that specifies that it agrees to the 
temporary reduction in its FTE cap to allow the IPF training the 
displaced residents to obtain a temporary adjustment to its cap; 
identifies the residents who were in training at the time of the 
program's closure; identifies the IPFs to which the residents are 
transferring once the program closes; and specifies the reduction for 
the applicable program years.
* * * * *
    6. Section 412.426 is amended by revising paragraph (a) to read as 
follows:

Sec.  412.426  Transition period.

    (a) Duration of transition period and composition of the blended 
transition payment. Except as provided in paragraph (c) of this 
section, for cost reporting periods beginning on or after January 1, 
2005 through January 1, 2008, an inpatient psychiatric facility 
receives a payment comprised of a blend of the estimated Federal per 
diem payment amount, as specified in Sec.  412.424(d) of this subpart 
and a facility-specific payment as specified under paragraph (b) of 
this section.
    (1) For cost reporting periods beginning on or after January 1, 
2005 and before January 1, 2006, payment is based on 75 percent of the 
facility-specific payment and 25 percent is based on the Federal per 
diem payment amount.
    (2) For cost reporting periods beginning on or after January 1, 
2006 and before January 1, 2007, payment is based on 50 percent of the 
facility-specific payment and 50 percent is based on the Federal per 
diem payment amount.
    (3) For cost reporting periods beginning on or after January 1, 
2007 and before January 1, 2008, payment is based on 25 percent of the 
facility-specific payment and 75 percent is based on the Federal per 
diem payment amount.
    (4) For cost reporting periods beginning on or after January 1, 
2008, payment is based entirely on the Federal per diem payment amount.
* * * * *
    7. Section 412.432 is amended by revising paragraph (d) to read as 
follows:

Sec.  412.432  Method of payment under the inpatient psychiatric 
facility prospective payment system.

* * * * *
    (d) Outlier payments. Additional payments for outliers are not made 
on an interim basis. Outlier payments are made based on the submission 
of a discharge bill and represents final payment subject to the cost 
report settlement specified in Sec.  412.84(i) and Sec.  412.84(m) of 
this part.
* * * * *

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

    Dated: January 13, 2011.
Donald Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: January 20, 2011.
Kathleen Sebelius,
Secretary.

    [Note: The following Addendums will not appear in the Code of 
Federal Regulations].

Addendum A--Rate and Adjustment Factors

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[FR Doc. 2011-1507 Filed 1-21-11; 4:15 pm]
BILLING CODE 4120-01-P
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