```

[Federal Register Volume 76, Number 160 (Thursday, August 18, 2011)]
[Rules and Regulations]
[Pages 51476-51846]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19719]

[[Page 51475]]

Vol. 76

Thursday,

No. 160

August 18, 2011

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 412, 413 and 476

Medicare Program; Hospital Inpatient Prospective Payment Systems for 
Acute Care Hospitals and the Long-Term Care Hospital Prospective 
Payment System and FY 2012 Rates; Hospitals' FTE Resident Caps for 
Graduate Medical Education Payment; Final Rule

Federal Register / Vol. 76 , No. 160 / Thursday, August 18, 2011 / 
Rules and Regulations

[[Page 51476]]

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, and 476

[CMS-1518-F; CMS-1430-F]
RIN 0938-AQ24; RIN 0938-AQ92

Medicare Program; Hospital Inpatient Prospective Payment Systems 
for Acute Care Hospitals and the Long-Term Care Hospital Prospective 
Payment System and FY 2012 Rates; Hospitals' FTE Resident Caps for 
Graduate Medical Education Payment

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

ACTION: Final rules.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs of acute 
care hospitals to implement changes arising from our continuing 
experience with these systems and to implement certain statutory 
provisions contained in the Patient Protection and Affordable Care Act 
and the Health Care and Education Reconciliation Act of 2010 
(collectively known as the Affordable Care Act) and other legislation. 
We also are setting forth the update to the rate-of-increase limits for 
certain hospitals excluded from the IPPS that are paid on a reasonable 
cost basis subject to these limits.
    We are updating the payment policy and the annual payment rates for 
the Medicare prospective payment system (PPS) for inpatient hospital 
services provided by long-term care hospitals (LTCHs) and implementing 
certain statutory changes made by the Affordable Care Act. In addition, 
we are finalizing an interim final rule with comment period that 
implements section 203 of the Medicare and Medicaid Extenders Act of 
2010 relating to the treatment of teaching hospitals that are members 
of the same Medicare graduate medical education affiliated groups for 
the purpose of determining possible full-time equivalent (FTE) resident 
cap reductions.

DATES: Effective dates: These final rules are effective on October 1, 
2011, except for the provisions of Sec.  412.230(d)(5), which are 
effective September 1, 2011. Effective July 29, 2011, the interim rule 
published March 14, 2011, at 76 FR 13515, is confirmed as final without 
change.
    Applicability dates: The update to the rate-of-increase limits for 
certain hospitals excluded from the IPPS that are paid on a reasonable 
cost basis subject to these limits is applicable beginning on or after 
October 1, 2011. The payment policy and the annual payment rates for 
inpatient hospital services provided by IPPS hospitals and by long-term 
care hospitals (LTCHs) and for implementing certain statutory changes 
made by the Affordable Care Act and other legislation are applicable to 
discharges occurring on or after October 1, 2011 unless otherwise 
specified in this final rule.

FOR FURTHER INFORMATION CONTACT:

Tzvi Hefter, (410) 786-4487, and Ing-Jye Cheng, (410) 786-4548, 
Operating Prospective Payment, MS-DRGs, Hospital Acquired Conditions 
(HAC), Wage Index, New Medical Service and Technology Add-On Payments, 
Hospital Geographic Reclassifications, Graduate Medical Education, 
Capital Prospective Payment, Excluded Hospitals, Medicare 
Disproportionate Share Hospital (DSH), and Postacute Care Transfer 
Issues.
Michele Hudson, (410) 786-4487, and Judith Richter, (410) 786-2590, 
Long-Term Care Hospital Prospective Payment System and MS-LTC-DRG 
Relative Weights Issues.
Bridget Dickensheets, (410) 786-8670, Rebasing and Revising of the 
Market Basket for LTCHs Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
James Poyer, (410) 786-2261, Inpatient Quality Reporting--Program 
Administration, Validation, and Reconsideration Issues.
Shaheen Halim, (410) 786-0641, Inpatient Quality Reporting--Measures 
Issues Except Hospital Consumer Assessment of Healthcare Providers and 
Systems Issues; and Readmission Measures for Hospitals Issues.
Elizabeth Goldstein, (410) 786-6665, Inpatient Quality Reporting--
Hospital Consumer Assessment of Healthcare Providers and Systems 
Measures Issues.
Mary Pratt, (410) 786-6867, LTCH Quality Data Reporting Issues.
Kim Spaulding Bush, (410) 786-3232, Hospital Value-Based Purchasing 
Efficiency Measures Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

    This Federal Register document is also available from the Federal 
Register online database through GPO Access, a service of the U.S. 
Government Printing Office. Free public access is available on a Wide 
Area Information Server (WAIS) through the Internet and via 
asynchronous dial-in. Internet users can access the database by using 
the World Wide Web, (the Superintendent of Documents' home Web page 
address is http://www.gpoaccess.gov/), by using local WAIS client 
software, or by telnet to swais.access.gpo.gov, then log in as guest 
(no password required). Dial-in users should use communications 
software and modem to call (202) 512-1661; type swais, then log in as 
guest (no password required).

Tables Available Only Through the Internet on the CMS Web Site

    In the past, a majority of the tables referred to throughout this 
preamble and in the Addendum to this final rule were published in the 
Federal Register as part of the annual proposed and final rules. 
However, beginning in FY 2012, some of the IPPS tables and LTCH PPS 
tables will no longer be published as part of the annual IPPS and LTCH 
PPS proposed and final rules. Instead, these tables will be available 
only through the Internet. The IPPS tables for this final rule are 
available only through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link 
on the left side of the screen titled, ``FY 2012 IPPS Final Rule Home 
Page'' or ``Acute Inpatient--Files for Download.'' The LTCH PPS tables 
for this FY 2012 final rule are available only through the Internet on 
the CMS Web site at: http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the list item for Regulation Number CMS-1518-
F. For complete details on the availability of the tables referenced in 
this final rule, we refer readers to section VI. of the Addendum to 
this final rule.
    Readers who experience any problems accessing any of the tables 
that are posted on the CMS Web sites identified above should contact 
Nisha Bhat at (410) 786-4487.

Acronyms

3M 3M Health Information System
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AHA American Hospital Association
AHIC American Health Information Community
AHIMA American Health Information Management Association
AHRQ Agency for Healthcare Research and Quality
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMA American Medical Association
AMGA American Medical Group Association

[[Page 51477]]

AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASC Ambulatory surgical center
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
COLA Cost-of-living adjustment
CoP [Hospital] condition of participation
CPI Consumer price index
CRNA Certified Registered Nurse Anesthetist
CY Calendar year
DPP Disproportionate patient percentage
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EDB [Medicare] Enrollment Database
EHR Electronic health record
EMR Electronic medical record
FAH Federation of Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
HCO High-cost outlier
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HICAN Health Insurance Claims Account Number
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-CM International Classification of Diseases, Tenth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Revision, 
Procedure Coding System
ICR Information collection requirement
IGI IHS Global Insight, Inc.
IHS Indian Health Service
IME Indirect medical education
I-O Input-Output
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
IQR Inpatient Quality Reporting
LAMCs Large area metropolitan counties
LOS Length of stay
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MA Medicare Advantage
MAC Medicare Administrative Contractor
MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Public Law 109-432
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMEA Medicare and Medicaid Extenders Act of 2010, Public Law 111-309
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
NALTH National Association of Long Term Hospitals
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NQF National Quality Forum
NTIS National Technical Information Service
NTTAA National Technology Transfer and Advancement Act of 1991 (Pub. 
L. 104-113)
NVHRI National Voluntary Hospital Reporting Initiative
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
OPM U.S. Office of Personnel Management
O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PMSAs Primary metropolitan statistical areas
POA Present on admission
PPACA Patient Protection and Affordable Care Act, Public Law 111-148
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PRTFs Psychiatric residential treatment facilities
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RPL Rehabilitation psychiatric long-term care (hospital)
RRC Rural referral center
RTI Research Triangle Institute, International
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification

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SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TEP Technical expert panel
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law 110-90
UHDDS Uniform hospital discharge data set

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded From the IPPS
    3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    4. Critical Access Hospitals (CAHs)
    5. Payments for Graduate Medical Education (GME)
    B. Provisions of the Patient Protection and Affordable Care Act 
(Pub. L. 111-148) and the Health Care and Education Reconciliation 
Act of 2010 (Pub. L. 111-152) Applicable to FY 2012
    C. Issuance of a Notice of Proposed Rulemaking
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    3. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    4. Proposed FY 2012 Policy Governing the IPPS for Capital-
Related Costs
    5. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    6. Proposed Changes to the LTCH PPS
    7. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals
    8. Determining Proposed Prospective Payments Rates for LTCHs
    9. Impact Analysis
    10. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    11. Discussion of Medicare Payment Advisory Commission 
Recommendations
    D. Public Comments Received in Response to the FY 2012 IPPS/LTCH 
PPS Proposed Rule
    E. Finalization of Interim Final Rule With Comment Period on 
Revisions to the Reductions and Increases to Hospitals' FTE Resident 
Caps for Graduate Medical Education Payment Purposes
II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. FY 2012 MS-DRG Documentation and Coding Adjustment, Including 
the Applicability to the Hospital-Specific Rates and the Puerto 
Rico-Specific Standardized Amount
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Prospective Adjustment to the Average Standardized Amounts 
Required by Section 7(b)(1)(A) of Public Law 110-90
    3. Recoupment or Repayment Adjustments in FYs 2010 through 2012 
Required by Public Law 110-90
    4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    5. Prospective Adjustment for FY 2010 and Subsequent Years 
Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 
1886(d)(3)(vi) of the Act
    6. Recoupment or Repayment Adjustment for FY 2010 Authorized by 
Section 7(b)(1)(B) of Public Law 110-90
    7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    8. Documentation and Coding Adjustment to the Hospital-Specific 
Rates for FY 2011 and Subsequent Fiscal Years
    9. Application of the Documentation and Coding Adjustment to the 
Puerto Rico-Specific Standardized Amount
    a. Background
    b. Documentation and Coding Adjustment to the Puerto Rico-
Specific Standardized Amount
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Summary of the RTI Study of Charge Compression and CCR 
Refinement
    3. Summary of Policy Changes Made in FY 2011
    4. Discussion for FY 2012
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. Background
    a. Statutory Authority
    b. HAC Selection
    c. Collaborative Process
    d. Application of HAC Payment Policy to MS-DRG Classifications
    e. Public Input Regarding Selected and Potential Candidate HACs
    f. POA Indicator Reporting
    2. Additions and Revisions to the HAC Policy for FY 2012
    a. Contrast-Induced Acute Kidney Injury
    b. New Diagnosis Codes Added to Existing HACs
    c. Revision to HAC Subcategory Title
    d. Conclusion
    3. RTI Program Evaluation Summary
    a. Background
    b. FY 2009 Data Analysis
    c. FY 2010 Data Analysis
    d. FY 2010 RTI Analysis on POA Indicator Reporting of Current 
HACs.
    e. FY 2010 RTI Analysis of Frequency of Discharges and POA 
Indicator Reporting for Current HACs
    f. RTI Analysis of Circumstances When Application of HAC 
Provisions Would Not Result in MS-DRG Reassignment for Current HACs
    g. RTI Analysis of Coding Changes for HAC-Associated Secondary 
Diagnoses for Current HACs
    h. RTI Analysis of Estimated Net Savings for Current HACs
    i. Previously Considered Candidate HACs--RTI Analysis of 
Frequency of Discharges and POA Indicator Reporting
    j. Current and Previously Considered Candidate HACs--RTI Report 
on Evidence-Based Guidelines
    k. Final Policy Regarding Current HACs and Previously Considered 
Candidate HACs
    G. Changes to Specific MS-DRG Classifications
    1. Pre-Major Diagnostic Categories (Pre-MDCs)
    a. Noninvasive Mechanical Ventilation
    b. Debridement With Mechanical Ventilation Greater Than 96 Hours 
With Major Operating Room (O.R.) Procedure
    c. Autologous Bone Marrow Transplant
    2. MDC 1 (Diseases and Disorders of the Nervous System): 
Rechargeable Dual Array Deep Brain Stimulation System
    3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and 
Throat): Skull Based Surgeries
    4. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Percutaneous Mitral Valve Repair With Implant
    b. Aneurysm Repair Procedure Codes
    5. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue)
    a. Artificial Discs
    b. Major Joint Replacement or Reattachment of Lower Extremities
    c. Combined Anterior/Posterior Spinal Fusion
    6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous 
Tissue, and Breast): Excisional Debridement of Wound, Infection, or 
Burn
    7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders)
    a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles
    b. Sleeve Gastrectomy Procedure for Morbid Obesity
    8. MDC 15 (Newborns and Other Neonates with Conditions 
Originating in the Perinatal Period): Discharge Status Code 66 
(Discharged/Transferred to Critical Access Hospital (CAH))
    9. Medicare Code Editor (MCE) Changes
    10. Surgical Hierarchies
    11. Complications or Comorbidity (CC) Exclusions List
    a. Background
    b. CC Exclusions List for FY 2012
    12. Review of Procedure Codes in MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 Into MDCs
    b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    c. Adding Diagnosis or Procedure Codes to MDCs
    13. Changes to the ICD-9-CM Coding System, Including Discussion 
of the

[[Page 51479]]

Replacement of the ICD-9-CM System With the ICD-10-CM and ICD-10-PCS 
Systems in FY 2014
    a. ICD-9-CM Coding System
    b. Code Freeze
    c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on 
Hospital Inpatient Claims
    d. ICD-10 MS-DRGs
    14. Other Issues
    a. O.R./Non-O.R. Status of Procedures
    b. IPPS Recalled Device Policy Clarification
    15. Public Comments on Issues Not Addressed in Proposed Rule
    H. Recalibration of MS-DRG Weights
    I. Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2012 Status of Technologies Approved for FY 2011 Add-On 
Payments
    a. Spiration[supreg] IBV Valve System
    b. Cardio West\TM\ Temporary Artificial Heart System (Cardio 
West\TM\ TAH-t)
    c. Auto Laser Interstitial Thermal Therapy (AutoLITT\TM\) System
    4. FY 2012 Applications for New Technology Add-On Payments
    a. AxiaLIF[supreg] 2L+\TM\ System
    b. PerfectCLEAN with Micrillon[supreg]
III. Changes to the Hospital Wage Index for Acute Care Hospitals
    A. Background
    B. Core-Based Statistical Areas for the Hospital Wage Index
    C. Occupational Mix Adjustment to the FY 2012 Wage Index
    1. Development of Data for the FY 2012 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index
    3. Calculation of the Occupational Mix Adjustment for FY 2012
    D. Worksheet S-3 Wage Data for the FY 2012 Wage Index
    1. Included Categories of Costs
    2. Changes to the Reporting Requirements for Pension Costs for 
the Medicare Wage Index
    a. Background
    b. Allowable Pension Cost for the Medicare Wage Index
    3. Excluded Categories of Costs
    4. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals under the IPPS
    E. Verification of Worksheet S-3 Wage Data
    F. Method for Computing the FY 2012 Unadjusted Wage Index
    1. Steps for Computation
    2. Imputed Floor Policy
    3. FY 2012 Puerto Rico Wage Index
    G. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2012 Occupational Mix Adjusted Wage Index
    H. Revisions to the Wage Index Based on Hospital Redesignations 
and Reclassifications
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2012 MGCRB Reclassifications
    a. FY 2012 Reclassification Requirements and Approvals
    b. Applications for Reclassifications for FY 2013
    4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Public Law 108-173
    7. Waiving Lugar Redesignation for the Out-Migration Adjustment
    8. Other Geographic Reclassification Issues
    a. Requested Reclassification for Single Hospital MSAs
    b. Requests for Exceptions to Geographic Reclassification Rules
    I. FY 2012 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees
    J. Process for Requests for Wage Index Data Corrections
    K. Labor-Related Share for the FY 2012 Wage Index
IV. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Hospital Inpatient Quality Reporting Program
    1. Background
    a. Overview
    b. Statutory History and History of Measures Adopted for the 
Hospital IQR Program
    c. Maintenance of Technical Specifications for Quality Measures
    d. Public Display of Quality Measures
    2. Retirement of Hospital IQR Program Measures
    a. Considerations in Retiring Quality Measures from the Hospital 
IQR Program
    b. Retirement of Hospital IQR Program Measures for the FY 2014 
Payment Determination and Subsequent Years
    3. Measures for the FY 2014 and FY 2015 Hospital IQR Payment 
Determinations
    a. Considerations in Expanding and Updating Quality Measures 
Under the Hospital IQR Program
    b. Hospital IQR Program Measures for the FY 2014 Hospital IQR 
Payment Determination
    c. Hospital IQR Program Quality Measures for the FY 2015 Payment 
Determination
    4. Possible New Quality Measures and Measure Topics for Future 
Years
    5. Form, Manner, and Timing of Quality Data Submission
    a. Background
    b. Procedural Requirements for the FY 2012 Payment 
Determinations and Subsequent Years
    c. Procedural Requirements for FY 2013 and Subsequent Years
    d. Data Submission Requirements for Chart-Abstracted Measures
    e. Sampling and Case Thresholds Beginning With the FY 2015 
Payment Determination
    f. HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 
Payment Determinations
    g. Procedures for Claims-Based Measures
    h. Data Submission Requirements for Structural Measures
    i. Data Submission and Reporting Requirements for Healthcare-
Associated Infection (HAI) Measures Reported via NHSN
    6. Chart Validation Requirements for Chart-Abstracted Measures
    a. Changes to the Chart Validation Requirements and Methods for 
the FY 2012 Payment Determination and Subsequent Years
    b. Supplements to the Chart Validation Process for the FY 2014 
Payment Determination and Subsequent Years
    7. QIO Regulation Changes for Provider Medical Record Deadlines 
Possibly Including Serious Reportable Events
    8. Data Accuracy and Completeness Acknowledgement Requirements 
for the FY 2012 Payment Determination and Subsequent Years
    9. Public Display Requirements for the FY 2014 Payment 
Determination and Subsequent Years
    10. Reconsideration and Appeal Procedures for the FY 2012 
Payment Determination
    11. Hospital IQR Program Disaster Waivers
    12. Electronic Health Records (EHRs)
    a. Background
    b. HITECH Act EHR Provisions
    B. Hospital Value-Based Purchasing (VBP) Program
    1. Background
    2. Overview of the Hospital VBP Program Proposed Rule
    3. FY 2014 Hospital VBP Program Measures
    a. Background
    b. Efficiency Measure--Medicare Spending per Beneficiary 
Measure--for the FY 2014 Hospital VBP Program
    4. Efficiency Domain (Medicare Spending per Beneficiary Measure) 
Performance Period and Baseline Period
    5. Simultaneous Specification of Additional Measures for the 
Hospital VBP Program and the Hospital IQR Program
    6. Responses to Additional Hospital VBP Program Comments
    C. Hospital Readmissions Reduction Program
    1. Background
    a. Overview
    b. Statutory Basis for the Hospital Readmissions Reduction 
Program
    2. Implementation of the Hospital Readmissions Reduction Program
    a. Overview
    b. Provisions in the FY 2012 IPPS/LTCH PPS Rulemaking
    c. Provisions to be Included in the FY 2013 IPPS/LTCH PPS 
Proposed Rule
    d. Expansion of the Applicable Conditions To Be Included in the 
Future Rulemaking
    3. Provisions of the Hospital Readmissions Reduction Program
    a. Applicable Conditions for FY 2013 Hospital Readmissions 
Reduction Program
    b. Definition of ``Readmissions''
    c. Readmission Measures and Related Methodology
    D. Rural Referral Centers (RRCs) (Sec.  412.96)
    1. Case-Mix Index (CMI)
    2. Discharges
    E. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)

[[Page 51480]]

    1. Background
    2. Temporary Changes for FYs 2011 and 2012
    3. Discharge Data Source Used to Identify Qualifying Low-Volume 
Hospitals and Calculate the Payment Adjustment (Percentage Increase) 
for FY 2012
    F. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2012
    G. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs) and Indirect Medical Education (IME) (Sec. Sec.  
412.105 and 412.106)
    1. Background
    2. Policy Change Relating to the Exclusion of Hospice Beds and 
Patient Days From the Calculation of the Medicare DSH Payment 
Adjustment and the IME Payment Adjustment
    a. Background
    b. Hospice Inpatient Services
    H. Medicare-Dependent, Small Rural Hospitals (MDHs) (Sec.  
412.108)
    1. Background
    2. Extension of the MDH Program
    I. Certified Register Nurse Anesthetists (CRNA) Services 
Furnished in Rural Hospitals and CAHs (Sec.  412.113)
    J. Additional Payments for Qualifying Hospitals With Lowest per 
Enrollee Medicare Spending
    1. Background
    2. Method for Identifying Qualifying Hospitals and Eligible 
Counties
    3. Determination of Annual Payment Amounts
    4. Eligible Counties and Qualifying Hospitals
    5. Payment Determination and Distributions for FY 2011 and FY 
2012
    K. Changes in the Inpatient Hospital Update
    1. FY 2012 Inpatient Hospital Update
    2. FY 2012 Puerto Rico Hospital Update
    3. Productivity Adjustment
    L. Additional Payments to Hospitals With High Percentage of End-
Stage Renal Disease (ESRD) Discharges (Sec.  412.104)
    M. Changes to the Reporting Requirements for Pension Costs for 
Medicare Cost-Finding Purposes
    1. Background
    2. Allowable Defined Benefit Pension Plan Cost for Medicare 
Cost-Finding Purposes
    N. Rural Community Hospital Demonstration Program
    1. Background
    2. Changes to the Demonstration Program Made by the Affordable 
Care Act
    3. FY 2012 Budget Neutrality Adjustment
    a. Component of the FY 2012 Budget Neutrality Adjustment that 
Accounts for Estimated Demonstration Program Costs of the ``Pre-
Expansion'' Participating Hospitals
    b. Portion of the FY 2012 Budget Neutrality Adjustment That 
Accounts for Estimated FY 2012 Demonstration Program Costs for 
Hospitals Newly Selected to Participate in the Demonstration Program
    c. Portion of the FY 2012 Budget Neutrality Adjustment to Offset 
the Amount by Which the Costs of the Demonstration Program in FYs 
2007 and 2008 Exceeded the Amount That Was Identified in the FYs 
2007 and 2008 IPPS Final Rules as the Budget Neutrality Offset for 
FYs 2007 and 2008
    O. Bundling of Payments for Services Provided to Outpatients Who 
Later Are Admitted as Inpatients: 3-Day Payment Window
    1. Background
    2. Establishment of Condition Code 51 (Attestation of Unrelated 
Outpatient Nondiagnostic Services)
    3. Applicability of the Payment Window Policy to Services 
Furnished at Physicians' Practices
    P. Changes to MS-DRGs Subject to the Postacute Care Transfer 
Policy
    1. Background
    2. Changes to the Postacute Care Transfer MS-DRGs
    Q. Hospital Services Furnished Under Arrangements
    R. Finalization of Interim Final Rule With Comment Period on 
Revisions to the Reductions and Increases to Hospitals' FTE Resident 
Caps for Graduate Medical Education Purposes
    1. Background and Provisions of the Interim Final Rule With 
Comment Period
    a. Statutory Authority
    b. Reductions and Increases to Hospitals' FTE Resident Caps for 
GME Payment Purposes Under Section 5503 of the Affordable Care Act
    c. Treatment of Affiliated Groups Under Section 5503 of the 
Affordable Care Act
    d. Section 203 of the Medicare and Medicaid Extenders Act of 
2010 (Pub. L. 111-309)
    2. Summary of the Provisions of the Interim Final Rule With 
Comment Period
    3. Summary of Public Comments, Departmental Responses, and 
Statements of Final Policies
    a. Summary of Public Comments and Departmental Responses
    b. Final Policies
    4. Collection of Information Requirements
    5. Regulatory Impact Statement
    a. Statement of Need
    b. Overall Impact
    c. Anticipated Effects
    d. Alternatives Considered
    e. Conclusion
    6. Comment on Issues Outside of the Scope of the Interim Final 
Rule With Comment Period
V. Changes to the IPPS for Capital-Related Costs
    A. Overview
    B. Exception Payments
    C. New Hospitals
    D. Hospitals Located in Puerto Rico
    E. Changes for FY 2012: MS-DRG Documentation and Coding 
Adjustment
    1. Background
    2. Prospsective MS-DRG Documentation and Coding Adjustment to 
the National Capital Federal Rate for FY 2012 and Subsequent Years
    3. Documentation and Coding Adjustment to the Puerto Rico-
Specific Capital Rate
    F. Other Proposed Changes for FY 2012
VI. Changes for Hospitals Excluded From the IPPS
    A. Excluded Hospitals
    B. Critical Access Hospital (CAH) Payment for Ambulance Services
    1. Background
    2. Requirement for CAH Ambulance Within a 35-Mile Location of a 
CAH or Entity
    C. Report of Adjustment (Exceptions) Payments
VII. Changes to the Long-Term Care Hospital Prospective Payment 
System (LTCH PPS) for FY 2012
    A. Background of the LTCH PPS
    1. Legislative and Regulatory Authority
    2. Criteria for Classification as a LTCH
    a. Classification as a LTCH
    b. Hospitals Excluded From the LTCH PPS
    3. Limitation on Charges to Beneficiaries
    4. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
    B. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-
LTC-DRG) Classifications and Relative Weights
    1. Background
    2. Patient Classifications Into MS-LTC-DRGs
    a. Background
    b. Changes to the MS-LTC-DRGs for FY 2012
    3. Development of the FY 2012 MS-LTC-DRG Relative Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Development of the MS-LTC-DRG Relative Weights for FY 2012
    c. Data
    d. Hospital-Specific Relative Value (HSRV) Methodology
    e. Treatment of Severity Levels in Developing the MS-LTC-DRG 
Relative Weights
    f. Low-Volume MS-LTC-DRGs
    g. Steps for Determining the Proposed FY 2012 MS-LTC-DRG 
Relative Weights
    C. Quality Reporting Program for LTCHs
    1. Background and Statutory Authority
    2. Quality Measures for the LTCH Quality Reporting Program for 
FY 2014
    a. Considerations in the Selection of the Quality Measures
    b. LTCH Quality Measures for FY 2014 Payment Determination
    3. Possible LTCH Quality Measures Under Consideration for Future 
Years
    4. Data Submission Methods and Timelines
    a. Method of Data Submission for HAIs
    b. Timeline for Data Reporting Related to HAIs
    c. Method of Data Collection and Submission for the Pressure 
Ulcer Measure Data
    d. Timeline for Data Reporting Related to Pressure Ulcers
    5. Public Reporting and Availability of Data Submitted
    D. Rebasing and Revising of the Market Basket Used Under the 
LTCH PPS
    1. Background
    2. Overview of the FY 2008-Based RPL Market Basket
    3. Rebasing and Revising of the RPL Market Basket
    a. Development of Cost Categories

[[Page 51481]]

    b. Final Cost Category Computation
    c. Selection of Price Proxies
    d. Methodology for Capital Portion of the RPL Market Basket
    e. FY 2012 Market Basket Update for LTCHs
    f. Labor-Related Share
    E. Changes to the LTCH Payment Rates and Other Changes to the FY 
2012 LTCH PPS
    1. Overview of Development of the LTCH Payment Rates
    2. FY 2012 LTCH PPS Annual Market Basket Update
    a. Overview
    b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    c. Market Basket Under the LTCH PPS for FY 2012
    d. Productivity Adjustment
    e. Annual Market Basket Update for LTCHs for FY 2012
    3. Budget Neutrality Adjustment for the Changes to the Area Wage 
Level Adjustment
    4. Greater Than 25 Day Average Length of Stay Requirement for 
LTCHs
    a. Determining the Average Length of Stay When There is a Change 
of Ownership
    b. Inclusion of Medicare Advantage (MA) Days in the Average 
Length of Stay Calculation
    F. Application of LTCH Moratorium on the Increase in Beds at 
Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and LTCH 
Satellite Facilities Established or Classified as Such Under Section 
114(d)(2) of Public Law 110-173
VIII. MedPAC Recommendations
IX. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    1. Statutory Requirement for Solicitation of Comments
    2. ICRs for Add-On Payments for New Services and Technologies
    3. ICRs for the Hospital Inpatient Quality Reporting (IQR) 
Program
    4. ICRs for the Occupational Mix Adjustment to the FY 2012 Index 
(Hospital Wage Index Occupational Mix Survey)
    5. Hospital Applications for Geographic Reclassifications by the 
MGCRB
    6. ICRs for the Quality Reporting Program for LTCHs
Regulation Text
Addendum--Schedule of Standardized Amounts, Update Factors, and 
Rate-of-Increase Percentages Effective With Cost Reporting Periods 
Beginning on or After October 1, 2011
I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for Acute Care Hospitals for FY 2012
    A. Calculation of the Adjusted Standardized Amount
    B. Adjustments for Area Wage Levels and Cost-of-Living
    C. MS-DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2012
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2012
    C. Capital Input Price Index
IV. Changes to Payment Rates for Certain Excluded Hospitals: Rate-
of-Increase Percentages for FY 2012
V. Changes to the Payment Rates for the LTCH PPS for FY 2012
    A. LTCH PPS Standard Federal Rate for FY 2012
    B. Adjustment for Area Wage Levels Under the LTCH PPS for FY 
2012
    C. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases
    D. Computing the Adjusted LTCH PPS Federal Prospective Payments 
for FY 2012
VI. Tables Referenced in This Final Rulemaking and Available Through 
the Internet on the CMS Web Site
Appendix A--Economic Analyses
I. Regulatory Impact Analysis
    A. Introduction
    B. Need
    C. Objectives of the IPPS
    D. Limitations of Our Analysis for the IPPS
    E. Hospitals Included in and Excluded From the IPPS
    F. Effects on Hospitals and Hospital Units Excluded From the 
IPPS
    G. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs
    1. Basis and Methodology of Estimates
    2. Analysis of Table I
    3. Impact Analysis of Table II
    H. Effects of Other Policy Changes
    1. Effects of Policy on HACs, Including Infections
    2. Effects of Policy Changes Relating to New Medical Service and 
Technology Add-On Payments
    3. Effects of Requirements for Hospital Inpatient Quality 
Reporting (IQR) Program
    4. Effects of Additional Hospital Value-Based Purchasing (VBP) 
Program Requirements
    5. Effects of Requirements for Hospital Readmissions Reduction 
Program
    6. Effects of Policy Changes Relating to Payment Adjustments for 
Medicare Disproportionate Share Hospitals (DSHs) and Indirect 
Medical Education (IME)
    7. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment
    8. Effects of Changes Relating to MDHs
    9. Effects of Policy Relating to CRNA Services Furnished in 
Rural Hospitals and CAHs
    10. Effects of Changes Relating to ESRD Add-On Payment
    11. Effects of Changes Relating to the Reporting Requirements 
for Pension Costs for Medicare Cost-Finding and Wage Reporting 
Purposes
    12. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    13. Effects of Changes to List of MS-DRGs Subject to the 
Postacute Care Transfer and DRG Special Pay Policy
    14. Effects of Changes Relating to Hospital Services Furnished 
Under Arrangements
    15. Effects of Change Relating to CAH Payment for Ambulance 
Services
    16. Effects of Finalization of Revisions to the Reductions and 
Increases to Hospitals' FTE Resident Caps for Graduate Medical 
Education Payment Purposes
    I. Effects of Changes in the Capital IPPS
    1. General Considerations
    2. Results
    J. Effects of Payment Rate Changes and Policy Changes Under the 
LTCH PPS
    1. Introduction and General Considerations
    2. Impact on Rural Hospitals
    3. Anticipated Effects of LTCH PPS Payment Rate Change and 
Policy Changes
    4. Effect on the Medicare Program
    5. Effect on Medicare Beneficiaries
    K. Alternatives Considered
    L. Overall Conclusion
    1. Acute Care Hospitals
    2. LTCHs
    M. Accounting Statements and Tables
    1. Acute Care Hospitals
    2. LTCHs
II. Regulatory Flexibility Act (RFA) Analysis
III. Unfunded Mandate Reform Act (UMRA) Analysis
IV. Executive Order 12866
Appendix B: Recommendation of Update Factors for Operating Cost 
Rates of Payment for Inpatient Hospital Services
I. Background
II. Inpatient Hospital Update for FY 2012
    A. Final FY 2012 Inpatient Hospital Update
    B. Final Update for SCHs and MDHs for FY 2012
    C. Final FY 2012 Puerto Rico Hospital Update
    D. Final Update for Hospitals Excluded From the IPPS
III. Secretary's Recommendation
IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided

[[Page 51482]]

into a labor-related share and a nonlabor-related share. The labor-
related share is adjusted by the wage index applicable to the area 
where the hospital is located. If the hospital is located in Alaska or 
Hawaii, the nonlabor-related share is adjusted by a cost-of-living 
adjustment factor. This base payment rate is multiplied by the DRG 
relative weight.
    If the hospital treats a high percentage of certain low-income 
patients, it receives a percentage add-on payment applied to the DRG-
adjusted base payment rate. This add-on payment, known as the 
disproportionate share hospital (DSH) adjustment, provides for a 
percentage increase in Medicare payments to hospitals that qualify 
under either of two statutory formulas designed to identify hospitals 
that serve a disproportionate share of low-income patients. For 
qualifying hospitals, the amount of this adjustment varies based on the 
outcome of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any eligible outlier payment is added to the DRG-adjusted base payment 
rate, plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate, which 
is determined from their costs in a base year. For example, sole 
community hospitals (SCHs) receive the higher of a hospital-specific 
rate based on their costs in a base year (the highest of FY 1982, FY 
1987, FY 1996, or FY 2006) or the IPPS Federal rate based on the 
standardized amount. Through and including FY 2006, a Medicare-
dependent, small rural hospital (MDH) received the higher of the 
Federal rate or the Federal rate plus 50 percent of the amount by which 
the Federal rate is exceeded by the higher of its FY 1982 or FY 1987 
hospital-specific rate. As discussed below, for discharges occurring on 
or after October 1, 2007, but before October 1, 2012, an MDH will 
receive the higher of the Federal rate or the Federal rate plus 75 
percent of the amount by which the Federal rate is exceeded by the 
highest of its FY 1982, FY 1987, or FY 2002 hospital-specific rate. 
SCHs are the sole source of care in their areas, and MDHs are a major 
source of care for Medicare beneficiaries in their areas. Specifically, 
section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that 
is located more than 35 road miles from another hospital or that, by 
reason of factors such as isolated location, weather conditions, travel 
conditions, or absence of other like hospitals (as determined by the 
Secretary), is the sole source of hospital inpatient services 
reasonably available to Medicare beneficiaries. In addition, certain 
rural hospitals previously designated by the Secretary as essential 
access community hospitals are considered SCHs. Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not less than 60 percent 
of its inpatient days or discharges in its cost reporting year 
beginning in FY 1987 or in two of its three most recently settled 
Medicare cost reporting years). Both of these categories of hospitals 
are afforded this special payment protection in order to maintain 
access to services for beneficiaries.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under the 
operating IPPS. In addition, hospitals may receive outlier payments for 
those cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
hospitals and hospital units are excluded from the IPPS. These 
hospitals and units are: Rehabilitation hospitals and units; long-term 
care hospitals (LTCHs); psychiatric hospitals and units; children's 
hospitals; and cancer hospitals. Religious nonmedical health care 
institutions (RNHCIs) are also excluded from the IPPS. Various sections 
of the Balanced Budget Act of 1997 (BBA, Public Law 105-33), the 
Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (BBRA, Pub. L. 106-
113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and 
Protection Act of 2000 (BIPA, Pub. L. 106-554) provide for the 
implementation of PPSs for rehabilitation hospitals and units (referred 
to as inpatient rehabilitation facilities (IRFs)), LTCHs, and 
psychiatric hospitals and units (referred to as inpatient psychiatric 
facilities (IPFs)). (We note that the annual updates to the LTCH PPS 
are now included as part of the IPPS annual update document. Updates to 
the IRF PPS and IPF PPS are issued as separate documents.) Children's 
hospitals, cancer hospitals, and RNHCIs continue to be paid solely 
under a reasonable cost-based system subject to a rate-of-increase 
ceiling on inpatient operating costs per discharge.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR Parts 412 and 413.
3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    The Medicare prospective payment system (PPS) for LTCHs applies to 
hospitals described in section 1886(d)(1)(B)(iv) effective for cost 
reporting periods beginning on or after October 1, 2002. The LTCH PPS 
was established under the authority of sections 123(a) and (c) of 
Public Law 106-113 and section 307(b)(1) of Public Law 106-554 (as 
codified under section 1886(m)(1) of the Act). During the 5-year 
(optional) transition period, a LTCH's payment under the PPS was based 
on an increasing proportion of the LTCH Federal rate with a 
corresponding decreasing proportion based on reasonable cost 
principles. Effective for cost reporting periods beginning on or after 
October 1, 2006, all LTCHs are paid 100 percent of the Federal rate. 
The existing regulations governing payment under the LTCH PPS are 
located in 42 CFR Part 412, Subpart O. Beginning

[[Page 51483]]

October 1, 2009, we issue the annual updates to the LTCH PPS in the 
same documents that update the IPPS (73 FR 26797 through 26798).
4. Critical Access Hospitals (CAHs)
    Under sections 1814(l), 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services are generally based on 101 percent of reasonable 
cost. Reasonable cost is determined under the provisions of section 
1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 
413 and 415.
5. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR Part 413.

B. Provisions of the Patient Protection and Affordable Care Act (Pub. 
L. 111-148) and the Health Care and Education Reconciliation Act of 
2010 (Pub. L. 111-152) Applicable to FY 2012

    The Patient Protection and Affordable Care Act (Pub. L. 111-148), 
enacted on March 23, 2010, and the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152), enacted on March 30, 
2010, made a number of changes that affect the IPPS and the LTCH PPS. 
(Pub. L. 111-148 and Pub. L. 111-152 are collectively referred to as 
the ``Affordable Care Act.'') A number of the provisions of the 
Affordable Care Act affect the updates to the IPPS and the LTCH PPS and 
providers and suppliers. The provisions of the Affordable Care Act that 
were applicable to the IPPS and the LTCH PPS for FYs 2010 and 2011 were 
implemented in the following documents:
    On June 2, 2010, we issued in the Federal Register a notice (75 FR 
31118) that contained the final wage indices, hospital 
reclassifications, payment rates, impacts, and other related tables, 
effective for the FY 2010 IPPS and the RY 2010 LTCH PPS, which were 
required by or directly resulted from implementation of provisions of 
the Affordable Care Act.
    On August 16, 2010, we issued in the Federal Register a final rule 
(75 FR 50042) that implemented provisions of the Affordable Care Act 
applicable to the IPPS and LTCH/PPS for FY 2011.
    In this final rule, we are implementing the following provisions 
(or portions of the following provisions) of the Affordable Care Act 
that are applicable to the IPPS and LTCH PPS for FY 2012:
     Section 3001 of Public Law 111-148, which provides for 
establishment of a hospital value-based purchasing program and 
applicable measures for value-based incentive payments with respect to 
discharges occurring during FY 2013.
     Section 3004 of Public Law 111-148, which provides for the 
submission of quality data for LTCHs beginning in FY 2013 in order to 
receive the full annual update to the payment rates beginning with FY 
2014 and the establishment of quality data measures by FY 2012 for the 
FY 2014 payment determination.
     Section 3025 of Public Law 111-148, which provides for a 
hospital readmissions reduction program and related quality data 
reporting measures.
     Section 3124 of Public Law 111-148, which provides for 
extension of the Medicare-dependent, small rural hospital (MDH) program 
through FY 2012.
     Section 3401 of Public Law 111-148, which provides for the 
incorporation of productivity improvements into the market basket 
updates for IPPS hospitals and LTCHs.
    In addition, we are continuing in FY 2012 to implement the 
following provisions, which were initiated in FY 2011:
     Section 10324 of Public Law 111-148, which provided for a 
wage adjustment for hospitals located in frontier States.
     Sections 3401 and 10319 of Public Law 111-148 and section 
1105 of Public Law 111-152, which revise certain market basket update 
percentages for IPPS and LTCH PPS payment rates for FY 2012.
     Sections 3125 and 10314 of Public Law 111-148, which 
provide for temporary percentage increases in payment adjustments to 
low-volume hospitals for discharges occurring in FY 2012.
     Section 1109 of Public Law 111-152, which provides for 
additional payments in FY 2012 for qualifying hospitals in the lowest 
quartile of per capita Medicare spending.
     Section 5503 of Public Law 111-148, as amended by Public 
Law 111-152 and section 203 of Public Law 111-309, which provides for 
the reduction in FTE resident caps for direct GME under Medicare for 
certain hospitals, and to authorize the ``redistribution'' of the 
estimated number of FTE resident slots to other qualified hospitals. In 
addition, section 5503 requires the application of these provisions to 
IME in the same manner as the FTE resident caps for direct GME.

C. Issuance of a Notice of Proposed Rulemaking

    The May 5, 2011 Federal Register (76 FR 25788) included the 
proposed rule that set forth proposed changes to the Medicare IPPS for 
operating costs and for capital-related costs of acute care hospitals 
in FY 2012. We also set forth proposed changes relating to payments for 
IME costs and payments to certain hospitals that continue to be 
excluded from the IPPS and paid on a reasonable cost basis. In 
addition, we set forth proposed changes to the payment rates, factors, 
and other payment rate policies under the LTCH PPS for FY 2012.
    Below is a summary of the major changes that we proposed to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of the proposed rule, we included--
     Proposed changes to MS-DRG classifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment for FY 2012 resulting from implementation of the MS-DRG 
system.
     A discussion of the Research Triangle Institute, 
International (RTI) reports and recommendations relating to charge 
compression.
     Proposed recalibrations of the MS-DRG relative weights.
     Proposed changes to hospital-acquired conditions (HACs) 
and a listing and discussion of HACs, including infections, that would 
be subject to the statutorily required quality adjustment in MS-DRG 
payments for FY 2012.
    We discussed the FY 2012 status of new technologies approved for 
add-on payments for FY 2011 and presented our evaluation and analysis 
of the FY 2012 applicants for add-on payments for high-cost new medical 
services and technologies (including public input, as directed by 
Public Law 108-173, obtained in a town hall meeting).

[[Page 51484]]

2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to the proposed rule, we proposed 
revisions to the wage index for acute care hospitals and the annual 
update of the wage data. Specific issues addressed included the 
following:
     The proposed FY 2012 wage index update using wage data 
from cost reporting periods beginning in FY 2008.
     Analysis and implementation of the proposed FY 2012 
occupational mix adjustment to the wage index for acute care hospitals, 
including discussion of the 2010 occupational mix survey.
     A proposal to change the reporting requirements for 
pension costs for the Medicare wage index.
     Proposed revisions to the wage index for acute care 
hospitals based on hospital redesignations and reclassifications.
     The proposed adjustment to the wage index for acute care 
hospitals for FY 2012 based on commuting patterns of hospital employees 
who reside in a county and work in a different area with a higher wage 
index.
     The timetable for reviewing and verifying the wage data 
used to compute the proposed FY 2012 hospital wage index.
     Determination of the labor-related share for the proposed 
FY 2012 wage index.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section IV. of the preamble of the proposed rule, we discussed a 
number of the provisions of the regulations in 42 CFR Parts 412, 413, 
and 476, including the following:
     The reporting of hospital quality data under the Hospital 
Inpatient Quality Reporting (IQR) Program as a condition for receiving 
the full annual payment update increase.
     The proposed implementation of the Hospital Value-Based 
Purchasing Program measures.
     The proposed establishment of hospital readmission 
measures for reporting of hospital quality data.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
     The statutorily required IME adjustment factor for FY 
2012.
     Proposed payment adjustment for low-volume hospitals.
     Proposal for counting hospice days in the formula for 
determining the payment adjustment for disproportionate share 
hospitals.
     Proposal for making additional payments for qualifying 
hospitals with lowest per enrollee Medicare spending for FY 2012.
     Proposal to clarify ESRD add-on payment requirements based 
on cost report requirements.
     Proposal relating to changes to the reporting requirements 
for pension costs for Medicare cost-finding purposes.
     Proposal to implement statutory change to the hospital 
payment update, including incorporation of a productivity adjustment.
     Discussion of the Rural Community Hospital Demonstration 
Program and a proposal for making a budget neutrality adjustment for 
the demonstration program.
     Discussion of August 2010 interim final rule with comment 
period and further proposed changes relating to the 3-day payment 
window for payments for services provided to outpatients who are later 
admitted as inpatients.
4. Proposed FY 2012 Policy Governing the IPPS for Capital-Related Costs
    In section V. of the preamble to the proposed rule, we discussed 
the proposed payment policy requirements for capital-related costs and 
capital payments to hospitals for FY 2012 and the proposed MS-DRG 
documentation and coding adjustment for FY 2012.
5. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VI. of the preamble of the proposed rule, we discussed 
proposed changes to payments to certain excluded hospitals. In 
addition, we discussed proposed changes relating to payment for TEFRA 
services furnished under arrangements and payment for ambulance 
services furnished by CAH-owned and operated entities.
6. Proposed Changes to the LTCH PPS
    In section VII. of the preamble of the proposed rule, we set forth 
proposed changes to the payment rates, factors, and other payment rate 
policies under the LTCH PPS for FY 2012, including the annual update of 
the MS-LTC-DRG classifications and relative weights for use under the 
LTCH PPS for FY 2012 and the proposed rebasing and revising of the 
market basket for LTCHs. In addition, we set forth proposals for 
implementing the quality data reporting program for LTCHs. We also 
proposed to clarify two policies regarding the calculation of the 
average length of stay requirement for LTCHs, and proposed a policy to 
address a LTCH moratorium issue.
7. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the proposed FY 2012 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We also proposed to establish the threshold 
amounts for outlier cases. In addition, we addressed the proposed 
update factors for determining the rate-of-increase limits for cost 
reporting periods beginning in FY 2012 for certain hospitals excluded 
from the IPPS.
8. Determining Proposed Prospective Payment Rates for LTCHs
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the proposed FY 2012 
prospective standard Federal rate. We also proposed to establish the 
proposed adjustments for wage levels, the labor-related share, the 
cost-of-living adjustment, and high-cost outliers, including the fixed-
loss amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH 
PPS.
9. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected acute care 
hospitals and LTCHs.
10. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2012 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs of 
acute care hospitals (and hospital-specific rates applicable to SCHs 
and MDHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by certain hospitals 
excluded from the IPPS.
     The standard Federal rate for hospital inpatient services 
furnished by LTCHs.
11. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews

[[Page 51485]]

and makes recommendations on Medicare payment policies. MedPAC's March 
2011 recommendations concerning hospital inpatient payment policies 
address the update factor for hospital inpatient operating costs and 
capital-related costs under the IPPS, for hospitals and distinct part 
hospital units excluded from the IPPS. We addressed these 
recommendations in Appendix B of the proposed rule. For further 
information relating specifically to the MedPAC March 2011 report or to 
obtain a copy of the report, contact MedPAC at (202) 220-3700 or visit 
MedPAC's Web site at: http://www.medpac.gov.

D. Public Comments Received in Response to the FY 2012 IPPS/LTCH PPS 
Proposed Rule

    We received approximately 385 timely pieces of correspondence 
containing multiple comments on the FY 2012 IPPS/LTCH PPS proposed 
rule. We note that some of these public comments were outside of the 
scope of the proposed rule. These out-of-scope public comments are not 
addressed with policy responses in this final rule. Summaries of the 
public comments that are within the scope of the proposed rule and our 
responses to those comments are set forth in the various sections of 
this final rule under the appropriate heading.

E. Finalization of Interim Final Rule With Comment Period on Revisions 
to the Reductions and Increases to Hospitals' FTE Resident Caps for 
Graduate Medical Education Payment Purposes

    On March 14, 2011, we issued in the Federal Register (76 FR 13515) 
an interim final rule with comment period to implement section 203 of 
the Medicare and Medicaid Extenders Act of 2010 (MMEA), Public Law 111-
309, relating to the treatment of teaching hospitals that are members 
of the same Medicare graduate medical education (GME) affiliated groups 
for the purpose of determining possible full-time equivalent (FTE) 
resident cap reductions. We received nine timely pieces of 
correspondence in response this interim final rule with comment period. 
In section IV.R. of this document, we are summarizing and responding to 
these public comments and are finalizing the policies contained in the 
interim final rule with comment period without modification.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights

A. Background

    Section 1886(d) of the Act specifies that the Secretary shall 
establish a classification system (referred to as DRGs) for inpatient 
discharges and adjust payments under the IPPS based on appropriate 
weighting factors assigned to each DRG. Therefore, under the IPPS, 
Medicare pays for inpatient hospital services on a rate per discharge 
basis that varies according to the DRG to which a beneficiary's stay is 
assigned. The formula used to calculate payment for a specific case 
multiplies an individual hospital's payment rate per case by the weight 
of the DRG to which the case is assigned. Each DRG weight represents 
the average resources required to care for cases in that particular 
DRG, relative to the average resources used to treat cases in all DRGs.
    Congress recognized that it would be necessary to recalculate the 
DRG relative weights periodically to account for changes in resource 
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires 
that the Secretary adjust the DRG classifications and relative weights 
at least annually. These adjustments are made to reflect changes in 
treatment patterns, technology, and any other factors that may change 
the relative use of hospital resources.

B. MS-DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2008 IPPS final rule with 
comment period (72 FR 47138), we focused our efforts in FY 2008 on 
making significant reforms to the IPPS consistent with the 
recommendations made by MedPAC in its ``Report to the Congress, 
Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended 
that the Secretary refine the entire DRG system by taking severity of 
illness into account and applying hospital-specific relative value 
(HSRV) weights to DRGs.\1\ We began this reform process by adopting 
cost-based weights over a 3-year transition period beginning in FY 2007 
and making interim changes to the DRG system for FY 2007 by creating 20 
new CMS DRGs and modifying 32 other DRGs across 13 different clinical 
areas involving nearly 1.7 million cases. As described in more detail 
below, these refinements were intermediate steps towards comprehensive 
reform of both the relative weights and the DRG system as we undertook 
further study. For FY 2008, we adopted 745 new Medicare Severity DRGs 
(MS-DRGs) to replace the CMS DRGs. We refer readers to section II.D. of 
the FY 2008 IPPS final rule with comment period for a full detailed 
discussion of how the MS-DRG system, based on severity levels of 
illness, was established (72 FR 47141).
---------------------------------------------------------------------------

    \1\ Medicare Payment Advisory Commission: Report to the 
Congress, Physician-Owned Specialty Hospitals, March 2005, page 
viii.
---------------------------------------------------------------------------

    Currently, cases are classified into MS-DRGs for payment under the 
IPPS based on the following information reported by the hospital: The 
principal diagnosis, up to eight additional diagnoses, and up to six 
procedures performed during the stay. (We refer readers to section 
II.G.11.c. of this final rule for a discussion of our efforts to 
increase our internal systems capacity to process diagnosis and 
procedures on hospital claims to 25 diagnosis codes and 25 procedure 
codes prior to the use of the International Classification of Diseases, 
10th Revision, Clinical Modification (ICD-10-CM) for diagnosis coding 
and the International Classification of Diseases, 10th Revision, 
Procedure Coding System (ICD-10 PCS) for inpatient hospital procedure 
coding, effective October 1, 2013.) In a small number of MS-DRGs, 
classification is also based on the age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM) prior to October 1, 
2013. We refer readers to section II.G.11.b. of this final rule for a 
reference to the replacement of ICD-9-CM, Volumes 1 and 2, including 
the Official ICD-9-CM Guidelines for Coding and Reporting, Volume 3, 
with the ICD-10-CM and ICD-10-PCS, including the Official ICD-10-CM and 
ICD-10-PCS Guidelines for Coding and Reporting, effective October 1, 
2013 (FY 2014).
    The process of developing the MS-DRGs was begun by dividing all 
possible principal diagnoses into mutually exclusive principal 
diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The 
MDCs were formulated by physician panels to ensure that the DRGs would 
be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final MS-DRG could contain 
patients in different MDCs. For example, MDC 6 is Diseases and 
Disorders of the Digestive System. This approach is used because 
clinical care is generally organized in

[[Page 51486]]

accordance with the organ system affected. However, some MDCs are not 
constructed on this basis because they involve multiple organ systems 
(for example, MDC 22 (Burns)). For FY 2012, cases will be assigned to 
one of 751 MS-DRGs in 25 MDCs. The table below lists the 25 MDCs.

                       Major Diagnostic Categories
                                 [MDCs]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
1............................  Diseases and Disorders of the Nervous
                                System.
2............................  Diseases and Disorders of the Eye.
3............................  Diseases and Disorders of the Ear, Nose,
                                Mouth, and Throat.
4............................  Diseases and Disorders of the Respiratory
                                System.
5............................  Diseases and Disorders of the Circulatory
                                System.
6............................  Diseases and Disorders of the Digestive
                                System.
7............................  Diseases and Disorders of the
                                Hepatobiliary System and Pancreas.
8............................  Diseases and Disorders of the
                                Musculoskeletal System and Connective
                                Tissue.
9............................  Diseases and Disorders of the Skin,
                                Subcutaneous Tissue and Breast.
10...........................  Endocrine, Nutritional and Metabolic
                                Diseases and Disorders.
11...........................  Diseases and Disorders of the Kidney and
                                Urinary Tract.
12...........................  Diseases and Disorders of the Male
                                Reproductive System.
13...........................  Diseases and Disorders of the Female
                                Reproductive System.
14...........................  Pregnancy, Childbirth, and the
                                Puerperium.
15...........................  Newborns and Other Neonates with
                                Conditions Originating in the Perinatal
                                Period.
16...........................  Diseases and Disorders of the Blood and
                                Blood Forming Organs and Immunological
                                Disorders.
17...........................  Myeloproliferative Diseases and Disorders
                                and Poorly Differentiated Neoplasms.
18...........................  Infectious and Parasitic Diseases
                                (Systemic or Unspecified Sites).
19...........................  Mental Diseases and Disorders.
20...........................  Alcohol/Drug Use and Alcohol/Drug Induced
                                Organic Mental Disorders.
21...........................  Injuries, Poisonings, and Toxic Effects
                                of Drugs.
22...........................  Burns.
23...........................  Factors Influencing Health Status and
                                Other Contacts with Health Services.
24...........................  Multiple Significant Trauma.
25...........................  Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to an MS-DRG. However, under the 
most recent version of the Medicare GROUPER (Version 28.0), there are 
13 MS-DRGs to which cases are directly assigned on the basis of ICD-9-
CM procedure codes. These MS-DRGs are for heart transplant or implant 
of heart assist systems; liver and/or intestinal transplants; bone 
marrow transplants; lung transplants; simultaneous pancreas/kidney 
transplants; pancreas transplants; and tracheostomies. Cases are 
assigned to these MS-DRGs before they are classified to an MDC. The 
table below lists the 13 current pre-MDCs.

                     Pre-Major Diagnostic Categories
                               [Pre-MDCs]
------------------------------------------------------------------------
 
------------------------------------------------------------------------
MS-DRG 001........................  Heart Transplant or Implant of Heart
                                     Assist System with MCC.
MS-DRG 002........................  Heart Transplant or Implant of Heart
                                     Assist System without MCC.
MS-DRG 003........................  ECMO or Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except for Face, Mouth,
                                     and Neck Diagnosis with Major O.R.
MS-DRG 004........................  Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except for Face, Mouth,
                                     and Neck Diagnosis with Major O.R.
MS-DRG 005........................  Liver Transplant with MCC or
                                     Intestinal Transplant.
MS-DRG 006........................  Liver Transplant without MCC.
MS-DRG 007........................  Lung Transplant.
MS-DRG 008........................  Simultaneous Pancreas/Kidney
                                     Transplant.
MS-DRG 009........................  Bone Marrow Transplant.
MS-DRG 010........................  Pancreas Transplant.
MS-DRG 011........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses with MCC.
MS-DRG 012........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses with CC.
MS-DRG 013........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses without CC/MCC.
------------------------------------------------------------------------

    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on hospital resource consumption. Because the presence of a 
surgical procedure that required the use of the operating room would 
have a significant effect on the type of hospital resources used by a 
patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC) or a major complication or comorbidity (MCC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect MS-DRG

[[Page 51487]]

assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones. Lithotripsy procedures are not routinely 
performed in an operating room. Therefore, lithotripsy codes are not 
classified as O.R. procedures. However, our clinical advisors believe 
that patients with urinary stones who undergo extracorporeal shock wave 
lithotripsy should be considered similar to other patients who undergo 
O.R. procedures. Therefore, we treat this group of patients similar to 
patients undergoing O.R. procedures.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications or 
comorbidities would consistently affect hospital resource consumption. 
Each diagnosis was categorized into one of three severity levels. These 
three levels include a major complication or comorbidity (MCC), a 
complication or comorbidity (CC), or a non-CC. Physician panels 
classified each diagnosis code based on a highly iterative process 
involving a combination of statistical results from test data as well 
as clinical judgment. As stated earlier, we refer readers to section 
II.D. of the FY 2008 IPPS final rule with comment period for a full 
detailed discussion of how the MS-DRG system was established based on 
severity levels of illness (72 FR 47141).
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into an MS-DRG.
    After patient information is screened through the MCE and further 
development of the claim is conducted, the cases are classified into 
the appropriate MS-DRG by the Medicare GROUPER software program. The 
GROUPER program was developed as a means of classifying each case into 
an MS-DRG on the basis of the diagnosis and procedure codes and, for a 
limited number of MS-DRGs, demographic information (that is, sex, age, 
and discharge status).
    After cases are screened through the MCE and assigned to an MS-DRG 
by the GROUPER, the PRICER software calculates a base MS-DRG payment. 
The PRICER calculates the payment for each case covered by the IPPS 
based on the MS-DRG relative weight and additional factors associated 
with each hospital, such as IME and DSH payment adjustments. These 
additional factors increase the payment amount to hospitals above the 
base MS-DRG payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible MS-DRG 
classification changes and to recalibrate the MS-DRG weights. However, 
in the FY 2000 IPPS final rule (64 FR 41499 and 41500), we discussed a 
process for considering non-MedPAR data in the recalibration process. 
We stated that for use of non-MedPAR data to be feasible for purposes 
of DRG recalibration and reclassification, the data must, among other 
things: (1) Be independently verified; (2) reflect a complete set of 
cases (or a representative sample of cases); and (3) enable us to 
calculate appropriate DRG relative weights and ensure that cases are 
classified to the ``correct'' DRG, and to one DRG only, in the 
recalibration process. Further, in order for us to consider using 
particular non-MedPAR data, we must have sufficient time to evaluate 
and test the data. The time necessary to do so depend upon the nature 
and quality of the non-MedPAR data submitted. Generally, however, a 
significant sample of the non-MedPAR data should be submitted by mid-
October for consideration in conjunction with the next year's proposed 
rule. This date allows us time to test the data and make a preliminary 
assessment as to the feasibility of using the data. Subsequently, a 
complete non-MedPAR database should be submitted by early December for 
consideration in conjunction with the next year's proposed rule.
    As we indicated above, for FY 2008, we made significant 
improvements in the DRG system to recognize severity of illness and 
resource usage by adopting MS-DRGs that were reflected in the FY 2008 
GROUPER, Version 25.0, and were effective for discharges occurring on 
or after October 1, 2007. Our MS-DRG analysis for the FY 2012 proposed 
rule was based on data from the September 2010 update of the FY 2010 
MedPAR file, which contained hospital bills received through September 
30, 2010, for discharges occurring through September 30, 2010. For this 
FY 2012 final rule, our MS-DRG analysis is based on data from the March 
2011 update of the FY 2010 MedPAR file, which contained hospital bills 
received through March 31, 2011, for discharges occurring through 
September 30, 2010.
2. Yearly Review for Making MS-DRG Changes
    Many of the changes to the MS-DRG classifications we make annually 
are the result of specific issues brought to our attention by 
interested parties. We encourage individuals with comments about MS-DRG 
classifications to submit these comments no later than early December 
of each year so they can be carefully considered for possible inclusion 
in the annual proposed rule and, if included, may be subjected to 
public review and comment. Therefore, similar to the timetable for 
interested parties to submit non-MedPAR data for consideration in the 
MS-DRG recalibration process, comments about MS-DRG classification 
issues should be submitted no later than early December in order to be 
considered and possibly included in the next annual proposed rule 
updating the IPPS.
    The actual process of forming the MS-DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. In 
the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described 
in detail the process we used to develop the MS-DRGs that we adopted 
for FY 2008. In addition, in deciding whether to make further 
modification to the MS-DRGs for particular circumstances brought to our 
attention, we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new MS-DRG unless it would include a 
substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

    In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed 
a number

[[Page 51488]]

of recommendations made by MedPAC regarding revisions to the DRG system 
used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 through 
47939; and 72 FR 47140 through 47189). As we noted in the FY 2006 IPPS 
final rule, we had insufficient time to complete a thorough evaluation 
of these recommendations for full implementation in FY 2006. However, 
we did adopt severity-weighted cardiac DRGs in FY 2006 to address 
public comments on this issue and the specific concerns of MedPAC 
regarding cardiac surgery DRGs. We also indicated that we planned to 
further consider all of MedPAC's recommendations and thoroughly analyze 
options and their impacts on the various types of hospitals in the FY 
2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). Based on public comments received on the FY 2007 
IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 
IPPS final rule (71 FR 47906 through 47912), we discussed several 
concerns raised by public commenters regarding the proposal to adopt CS 
DRGs. We acknowledged the many public comments suggesting the logic of 
Medicare's DRG system should continue to remain in the public domain as 
it has since the inception of the PPS. We also acknowledged concerns 
about the impact on hospitals and software vendors of moving to a 
proprietary system. Several commenters suggested that CMS refine the 
existing DRG classification system to preserve the many policy 
decisions that were made over the last 20 years and were already 
incorporated into the DRG system, such as complexity of services and 
new device technologies. Consistent with the concerns expressed in the 
public comments, this option had the advantage of using the existing 
DRGs as a starting point (which was already familiar to the public) and 
retained the benefit of many DRG decisions that were made in recent 
years. We stated our belief that the suggested approach of 
incorporating severity measures into the existing DRG system was a 
viable option that would be evaluated.
    Therefore, we decided to make interim changes to the existing DRGs 
for FY 2007 by creating 20 new DRGs involving 13 different clinical 
areas that would significantly improve the CMS DRG system's recognition 
of severity of illness. We also modified 32 DRGs to better capture 
differences in severity. The new and revised DRGs were selected from 40 
existing CMS DRGs that contained 1,666,476 cases and represented a 
number of body systems. In creating these 20 new DRGs, we deleted 8 
existing DRGs and modified 32 existing DRGs. We indicated that these 
interim steps for FY 2007 were being taken as a prelude to more 
comprehensive changes to better account for severity in the DRG system 
by FY 2008.
    In the FY 2007 IPPS final rule (71 FR 47898), we indicated our 
intent to pursue further DRG reform through two initiatives. First, we 
announced that we were in the process of engaging a contractor to 
assist us with evaluating alternative DRG systems that were raised as 
potential alternatives to the CMS DRGs in the public comments. Second, 
we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes 
as part of making further refinements to the current CMS DRGs to better 
recognize severity of illness based on the work that CMS (then HCFA) 
did in the mid-1990's in connection with adopting severity DRGs. We 
describe below the progress we have made on these two initiatives and 
our actions for FYs 2008, 2009, 2010, and 2011, and our proposed and 
final actions for FY 2012 based on our continued analysis of reform of 
the DRG system. We note that the adoption of the MS-DRGs to better 
recognize severity of illness has implications for the outlier 
threshold, the application of the postacute care transfer policy, the 
measurement of real case-mix versus apparent case-mix, and the IME and 
DSH payment adjustments. We discuss these implications for FY 2012 in 
other sections of this preamble and in the Addendum to this final rule.
    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
using HSRVs beginning with the FY 2007 IPPS proposed rule for 
determining the DRG relative weights. Although we proposed to adopt the 
HSRV weighting methodology for FY 2007, we decided not to adopt the 
proposed methodology in the final rule after considering the public 
comments we received on the proposal. Instead, in the FY 2007 IPPS 
final rule, we adopted a cost-based weighting methodology without the 
HSRV portion of the proposed methodology. The cost-based weights were 
adopted over a 3-year transition period in \1/3\ increments between FY 
2007 and FY 2009. In addition, in the FY 2007 IPPS final rule, we 
indicated our intent to further study the HSRV-based methodology as 
well as other issues brought to our attention related to the cost-based 
weighting methodology adopted in the FY 2007 final rule. There was 
significant concern in the public comments that our cost-based 
weighting methodology does not adequately account for charge 
compression--the practice of applying a higher percentage charge markup 
over costs to lower cost items and services and a lower percentage 
charge markup over costs to higher cost items and services. Further, 
public commenters expressed concern about potential inconsistencies 
between how costs and charges are reported on the Medicare cost reports 
and charges on the Medicare claims. In the FY 2007 IPPS final rule, we 
used costs and charges from the cost reports to determine departmental 
level cost-to-charge ratios (CCRs) which we then applied to charges on 
the Medicare claims to determine the cost-based weights. The commenters 
were concerned about potential distortions to the cost-based weights 
that would result from inconsistent reporting between the cost reports 
and the Medicare claims. After publication of the FY 2007 IPPS final 
rule, we entered into a contract with RTI International (RTI) to study 
both charge compression and the extent, if any, to which our 
methodology for calculating DRG relative weights is affected by 
inconsistencies between how hospitals report costs and charges on the 
cost reports and how hospitals report charges on individual claims. 
Further, as part of its study of alternative DRG systems, the RAND 
Corporation analyzed the HSRV cost-weighting methodology. We refer 
readers to section II.E. of the preamble of this final rule for a 
discussion of the issue of charge compression and the cost-weighting 
methodology for FY 2012.
    We believe that revisions to the DRG system to better recognize 
severity of illness and changes to the relative weights based on costs 
rather than charges are improving the accuracy of the payment rates in 
the IPPS. We agree with MedPAC that these refinements should be 
pursued. Although we continue to caution that any prospective payment 
system based on grouping cases will always present some opportunities 
for providers to specialize in cases they believe have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we are proposing to make in this proposed rule for FY 2012 will improve 
payment accuracy and reduce financial incentives to create specialty 
hospitals.
    We refer readers to section II.D. of the FY 2008 IPPS final rule 
with comment period for a full discussion of how the MS-DRG system was 
established based

[[Page 51489]]

on severity levels of illness (72 FR 47141).

D. FY 2012 MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    As we discussed earlier in this preamble, we adopted the MS-DRG 
patient classification system for the IPPS, effective October 1, 2007, 
to better recognize severity of illness in Medicare payment rates for 
acute care hospitals. The adoption of the MS-DRG system resulted in the 
expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008. 
(Currently, there are 751 MS-DRGs, which include 4 additional MS-DRGs 
that we are adopting for FY 2012.) By increasing the number of MS-DRGs 
and more fully taking into account patient severity of illness in 
Medicare payment rates for acute care hospitals, MS-DRGs encourage 
hospitals to improve their documentation and coding of patient 
diagnoses.
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we indicated that the adoption of the MS-DRGs had the 
potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to the 
incentives for additional documentation and coding. In that final rule 
with comment period, we exercised our authority under section 
1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget 
neutrality by adjusting the national standardized amount, to eliminate 
the estimated effect of changes in coding or classification that do not 
reflect real changes in case-mix. Our actuaries estimated that 
maintaining budget neutrality required an adjustment of -4.8 percent to 
the national standardized amount. We provided for phasing in this -4.8 
percent adjustment over 3 years. Specifically, we established 
prospective documentation and coding adjustments of -1.2 percent for FY 
2008, -1.8 percent for FY 2009, and -1.8 percent for FY 2010.
    On September 29, 2007, Congress enacted the TMA [Transitional 
Medical Assistance], Abstinence Education, and QI [Qualifying 
Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 
7(a) of Public Law 110-90 reduced the documentation and coding 
adjustment made as a result of the MS-DRG system that we adopted in the 
FY 2008 IPPS final rule with comment period to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. Section 7(a) of Public Law 110-90 did not 
adjust the FY 2010 -1.8 percent documentation and coding adjustment 
promulgated in the FY 2008 IPPS final rule with comment period. To 
comply with section 7(a) of Public Law 110-90, we promulgated a final 
rule on November 27, 2007 (72 FR 66886) that modified the IPPS 
documentation and coding adjustment for FY 2008 to -0.6 percent, and 
revised the FY 2008 payment rates, factors, and thresholds accordingly. 
These revisions were effective on October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2009 IPPS final rule (73 FR 
48447) and required by statute, we applied a documentation and coding 
adjustment of -0.9 percent to the FY 2009 IPPS national standardized 
amount. The documentation and coding adjustments established in the FY 
2008 IPPS final rule with comment period, as amended by Public Law 110-
90, are cumulative. As a result, the -0.9 percent documentation and 
coding adjustment for FY 2009 was in addition to the -0.6 percent 
adjustment for FY 2008, yielding a combined effect of -1.5 percent.
2. Prospective Adjustment to the Average Standardized Amounts Required 
by Section 7(b)(1)(A) of Public Law 110-90
    Section 7(b)(1)(A) of Public Law 110-90 requires that, if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act 
authorizes adjustments to the average standardized amounts for 
subsequent fiscal years in order to eliminate the effect of such coding 
or classification changes. These adjustments are intended to ensure 
that future annual aggregate IPPS payments are the same as the payments 
that otherwise would have been made had the prospective adjustments for 
documentation and coding applied in FY 2008 and FY 2009 reflected the 
change that occurred in those years.
3. Recoupment or Repayment Adjustments in FYs 2010 Through 2012 
Required by Public Law 110-90
    If, based on a retroactive evaluation of claims data, the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different from the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of 
Public Law 110-90 requires the Secretary to make an additional 
adjustment to the standardized amounts under section 1886(d) of the 
Act. This adjustment must offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 (including interest) resulting 
from the difference between the estimated actual documentation and 
coding effect and the documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90. This adjustment is in addition to 
making an appropriate adjustment to the standardized amounts under 
section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) 
of Public Law 110-90. That is, these adjustments are intended to recoup 
(or repay, in the case of underpayments) spending in excess of (or less 
than) spending that would have occurred had the prospective adjustments 
for changes in documentation and coding applied in FY 2008 and FY 2009 
precisely matched the changes that occurred in those years. Public Law 
110-90 requires that the Secretary make these recoupment or repayment 
adjustments for discharges occurring during FYs 2010, 2011, and 2012.
4. Retrospective Evaluation of FY 2008 and FY 2009 Claims Data
    In order to implement the requirements of section 7 of Public Law 
110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that 
we planned a thorough retrospective evaluation of our claims data. We 
stated that the results of this evaluation would be used by our 
actuaries to determine any necessary payment adjustments to the 
standardized amounts under section 1886(d) of the Act to ensure the 
budget neutrality of the MS-DRGs implementation for FY 2008 and FY 
2009, as required by law. In the FY 2009 IPPS proposed rule (73 FR 
23541 through 23542), we described our preliminary plan for a 
retrospective analysis of inpatient hospital claims

[[Page 51490]]

data and invited public input on our proposed methodology.
    In that proposed rule, we indicated that we intended to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expected that the two largest parts of 
this overall national average change would be attributable to 
underlying changes in actual patient severity of illness and to 
documentation and coding improvements under the MS-DRG system. In order 
to separate the two effects, we planned to isolate the effect of shifts 
in cases among base DRGs from the effect of shifts in the types of 
cases within base DRGs.
    The MS-DRGs divide the base DRGs into three severity levels (with 
MCC, with CC, and without CC); the previously used CMS DRGs had only 
two severity levels (with CC and without CC). Under the CMS DRG system, 
the majority of hospital discharges had a secondary diagnosis which was 
on the CC list, which led to the higher severity level. The MS-DRGs 
significantly changed the code lists of what was classified as an MCC 
or a CC. Many codes that were previously classified as a CC are no 
longer included on the MS-DRG CC list because the data and clinical 
review showed these conditions did not lead to a significant increase 
in resource use. The addition of a new level of high severity 
conditions, the MCC list, also provided a new incentive to code more 
precisely in order to increase the severity level. We anticipated that 
hospitals would examine the MS-DRG MCC and CC code lists and then work 
with physicians and coders on documentation and coding practices so 
that coders could appropriately assign codes from the highest possible 
severity level. We note that there have been numerous seminars and 
training sessions on this particular coding issue. The topic of 
improving documentation practices in order to code conditions on the 
MCC list was also discussed extensively by participants at the March 
11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. 
Participants discussed their hospitals' efforts to encourage physicians 
to provide more precise documentation so that coders could 
appropriately assign codes that would lead to a higher severity level. 
Because we expected most of the documentation and coding changes under 
the MS-DRG system would occur in the secondary diagnoses, we believed 
that the shifts among base DRGs were less likely to be the result of 
the MS-DRG system and the shifts within base DRGs were more likely to 
be the result of the MS-DRG system. We also anticipated evaluating data 
to identify the specific MS-DRGs and diagnoses that contributed 
significantly to the documentation and coding payment effect and to 
quantify their impact. This step entailed analysis of the secondary 
diagnoses driving the shifts in severity within specific base DRGs.
    In the FY 2009 IPPS proposed rule, we solicited public comments on 
the analysis plans described above, as well as suggestions on other 
possible approaches for performing a retrospective analysis to identify 
the amount of case-mix changes that occurred in FY 2008 and FY 2009 
that did not reflect real increases in patient severity of illness.
    A few commenters, including MedPAC, expressed support for the 
analytic approach described in the FY 2009 IPPS proposed rule. A number 
of other commenters expressed concerns about certain aspects of the 
approach and/or suggested alternate analyses or study designs. In 
addition, one commenter recommended that any determination or 
retrospective evaluation by the actuaries of the impact of the MS-DRGs 
on case-mix be open to public scrutiny prior to the implementation of 
the payment adjustments beginning in FY 2010.
    We took these comments into consideration as we developed our 
proposed analysis plan, and in the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24092 through 24101), we solicited public comment 
on our methodology and analysis. For the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule, we performed a retrospective evaluation of the FY 2008 
data for claims paid through December 2008. Based on this evaluation, 
our actuaries determined that implementation of the MS-DRG system 
resulted in a 2.5 percent change due to documentation and coding that 
did not reflect real changes in case-mix for discharges occurring 
during FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS final rule, we 
updated this analysis with FY 2008 data for claims paid through March 
2009, and we noted that the estimates for all IPPS remained essentially 
the same to those in the proposed rule (42 FR 43770, 43775). Also, in 
the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43768 through 
43772), we responded to comments on our methodology for the 
retrospective evaluation of FY 2008 claims data. We refer readers to 
that final rule for a detailed description of our analysis and prior 
responses to comments.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50057 through 
50068), we performed the same analysis for FY 2009 claims data using 
the same methodology as we did for FY 2008 claims. We note that, in the 
FY 2011 IPPS/LTCH PPS proposed rule, we performed this analysis using 
FY 2009 claims paid through December 2009. In the FY 2011 IPPS/LTCH PPS 
final rule, we updated the analysis with FY 2009 claims paid through 
March 2010, as we discussed in the proposed rule. We note that, for all 
IPPS hospitals, other than those in Puerto Rico, the estimates were 
unchanged from those in the proposed rule. We refer readers to the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50057 through 50068) for a 
detailed description of our analysis and prior responses to comments. 
The results of the analysis for the FY 2011 proposed and final rules 
provided additional support for our conclusion that the proposed 5.4 
percent estimate accurately reflected the FY 2009 increases in 
documentation and coding under the MS-DRG system.
    As in prior years, the FY 2008 and FY 2009 MedPAR files are 
available to the public to allow independent analysis of the FY 2008 
and FY 2009 documentation and coding effect. Interested individuals may 
still order these files through the Web site at: http://www.cms.hhs.gov/LimitedDataSets/ by clicking on MedPAR Limited Data Set 
(LDS)-Hospital (National). This Web page describes the file and 
provides directions and further detailed instructions for how to order.
    Persons placing an order must send the following: A Letter of 
Request, the LDS Data Use Agreement and Research Protocol (refer to the 
Web site for further instructions), the LDS Form, and a check for 
$3,655 to:
    Mailing address if using the U.S. Postal Service: Centers for 
Medicare & Medicaid Services, RDDC Account, Accounting Division, P.O. 
Box 7520, Baltimore, MD 21207-0520.
    Mailing address if using express mail: Centers for Medicare & 
Medicaid Services, OFM/Division of Accounting--RDDC, 7500 Security 
Boulevard, C3-07-11, Baltimore, MD 21244-1850.
5. Prospective Adjustment for FY 2010 and Subsequent Years Authorized 
by Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) 
of the Act
    Based on our evaluation of FY 2008 Medicare claims data that were 
most current at the time of the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, the estimated 2.5 percent change in FY 2008 case-mix due to 
changes in

[[Page 51491]]

documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008 exceeded the -0.6 percent 
prospective documentation and coding adjustment applied under section 
7(a) of Public Law 110-90 by 1.9 percentage points. In the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24096), we solicited public 
comment on our proposal to make a -1.9 percent prospective adjustment 
to the standardized amounts under section 1886(d) of the Act to address 
the effects of documentation and coding changes unrelated to changes in 
real case-mix in FY 2008. In the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule, in response to public comments, we indicated that we fully 
understood that our proposed adjustment of -1.9 percent would reduce 
the increase in payments that affected hospitals would have received in 
FY 2009 in the absence of the adjustment, and we determined that it 
would be appropriate to postpone adopting documentation and coding 
adjustments as authorized under section 7(a) of Public Law 110-90 and 
section 1886(d)(3)(A)(vi) of the Act until a full analysis of case-mix 
changes could be completed. We refer readers to the FY 2010 IPPS/LTCH 
PPS final rule (74 FR 43767 through 43777) for a detailed description 
of our proposal, responses to comments, and finalized policy.
    After analysis of the FY 2009 claims data for the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50057 through 50073), we found a total 
prospective documentation and coding effect of 1.054. After accounting 
for the -0.6 percent and the -0.9 percent documentation and coding 
adjustments in FYs 2008 and 2009, we found a remaining documentation 
and coding effect of 3.9 percent. As we have discussed, an additional 
cumulative adjustment of -3.9 percent would be necessary to meet the 
requirements of section 7(b)(1)(A) of Public Law 110-90 to make an 
adjustment to the average standardized amounts in order to eliminate 
the full effect of the documentation and coding changes on future 
payments. Unlike section 7(b)(1)(B) of Public Law 110-90, section 
7(b)(1)(A) does not specify when we must apply the prospective 
adjustment, but merely requires us to make an ``appropriate'' 
adjustment. Therefore, as we stated in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50061), we believe we have some discretion as to the manner 
in which we apply the prospective adjustment of -3.9 percent. We 
indicated that applying the full prospective adjustment of -3.9 percent 
for FY 2011, in combination with the proposed recoupment adjustment of 
-2.9 percent in FY 2011 (discussed below) would require an aggregate 
adjustment of -6.8 percent. As we discuss elsewhere in this section 
II.D., and more extensively in the FY 2011 IPPS/LTCH PPS final rule, it 
has been our practice to moderate payment adjustments when necessary to 
mitigate the effects of significant downward adjustments on hospitals, 
to avoid what could be widespread, disruptive effects of such 
adjustments on hospitals. As we also discuss below in this section 
II.D., we are required to implement the remaining adjustment in section 
7(b)(1)(B) of Public Law 110-90 no later than the FY 2012 rulemaking 
period, and accordingly, in the FY 2011 IPPS/LTCH PPS proposed rule, we 
proposed a recoupment adjustment under section 7(b)(1)(B) of -2.9 
percent for FY 2011 (75 FR 23870 and 23871). Therefore, we stated that 
we believed it was appropriate to not implement any or all of the -3.9 
percent prospective adjustment in FY 2011. Accordingly, we did not 
propose a prospective adjustment under section 7(b)(1)(A) of Public Law 
110-90 for FY 2011 (75 FR 23868 through 23870) for FY 2011. We note 
that, as a result, payments in FY 2011 (and in each future year until 
we implement the requisite adjustment) would be 3.9 percent higher than 
they would have been if we had implemented an adjustment under section 
7(b)(1)(A) of Public Law 110-90. Our actuaries estimate that this 3.9 
percentage point increase will result in an aggregate payment of 
approximately $4 billion. We also noted that payments in FY 2010 were 
also expected to be 3.9 percent higher than they would have been if we 
had implemented an adjustment under section 7(b)(1)(A) of Public Law 
110-90, which our actuaries estimated increased aggregate payments by 
approximately $4 billion in FY 2010.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25803 and 25804), 
we indicated that because further delay of this prospective adjustment 
will result in a continued accrual of unrecoverable overpayments, it 
was imperative that we proposed a prospective adjustment for FY 2012, 
while recognizing CMS' continued desire to mitigate the effects of any 
significant downward adjustments to hospitals. Therefore, we proposed a 
-3.15 percent prospective adjustment to the standardized amount to 
partially eliminate the full effect of the documentation and coding 
changes on future payments. Due to the offsetting nature of the 
remaining recoupment adjustment under section 7(b)(1)(B) of Public Law 
110-90 (described below in section II.D.6. of this preamble), and after 
considering other payment adjustments to FY 2012 rates proposed 
elsewhere within the proposed rule, we indicated that we believe the 
proposed -3.15 percent adjustment would allow for a significant 
reduction in potential unrecoverable overpayments, yet would maintain a 
comparable adjustment level between FY 2011 and FY 2012, reflecting the 
applicable percentage increase with a documentation and coding 
adjustment. We stated that we recognize that an additional adjustment 
of -0.75 (3.9 minus 3.15) percent would be required in future rule 
making to complete the necessary -3.9 adjustment to meet CMS' statutory 
requirement under section 7(b)(1)(A) of Public Law 110-90. In the 
proposed rule, we indicated that we were not at that time proposing a 
timeline to implement the remainder of this prospective adjustment.
6. Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    As discussed in section II.D.1. of this preamble, section 
7(b)(1)(B) of Public Law 110-90 requires the Secretary to make an 
adjustment to the standardized amounts under section 1886(d) of the Act 
to offset the estimated increase or decrease in aggregate payments for 
FY 2008 and FY 2009 (including interest) resulting from the difference 
between the estimated actual documentation and coding effect and the 
documentation and coding adjustments applied under section 7(a) of 
Public Law 110-90. This determination must be based on a retrospective 
evaluation of claims data.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule with comment period 
(74 FR 43773), we estimated a 2.5 percent change due to documentation 
and coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2008, exceeding the -0.6 percent prospective 
documentation and coding adjustment applied under section 7(a) of 
Public Law 110-90 by 1.9 percentage points. We stated that our 
actuaries had estimated that this 1.9 percentage point increase 
resulted in an increase in aggregate payments of approximately $2.2 
billion in FY 2008. We did not propose to make an adjustment to the FY 
2010 average standardized amounts to offset, in whole or in part, the 
estimated increase in aggregate payments for discharges occurring in FY 
2008, but stated in the proposed rule that we intended to address this 
issue in future rulemaking. In the FY 2010 IPPS/RY 2010 LTCH PPS

[[Page 51492]]

final rule (74 FR 43774), we stated that because we would not receive 
all FY 2009 claims data prior to publication of the final rule, we 
would address any increase or decrease in FY 2009 payments in future 
rulemaking for FY 2011 and 2012 after we performed a retrospective 
evaluation of the FY 2009 claims data. In response to public comments 
in FY 2010, we indicated that we recognized that any adjustment to 
account for the documentation and coding effect observed in the FY 2008 
and FY 2009 claims data may result in significant future payment 
reductions for providers. However, we indicated that we are required 
under section 7(b)(1)(B) of Public Law 110-90 to recover the difference 
of actual documentation and coding effect in FY 2008 and FY 2009 that 
is greater than the prior adjustments. We agreed with the commenters 
who requested that CMS delay any adjustment and, for the reasons stated 
above, indicated that we expected to address this issue in the FY 2011 
rulemaking. We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule (74 FR 43767 through 43777) for a detailed description of our 
proposal, responses to comments, and finalized policy.
    As we indicated in the FY 2011 IPPS/LTCH PPS final rule, the change 
due to documentation and coding that did not reflect real changes in 
case-mix for discharges occurring during FY 2008 and FY 2009 exceeded 
the -0.6 and -0.9 percent prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90 for those 2 
years, respectively, by 1.9 percentage points in FY 2008 and 3.9 
percentage points in FY 2009. In total, this change exceeded the 
cumulative prospective adjustments by 5.8 (1.9 plus 3.9) percentage 
points. Our actuaries estimated that this 5.8 percentage point increase 
resulted in an increase in aggregate payments of approximately $6.9 
billion. In the FY 2011 IPPS/LTCH PPS final rule, we noted that there 
may be a need to actuarially adjust the recoupment adjustment to 
accurately reflect accumulated interest. Therefore, we determined that 
an aggregate adjustment of -5.8 percent in FYs 2011 and 2012, subject 
to actuarial adjustment to reflect accumulated interest, would be 
necessary in order to meet the requirements of section 7(b)(1)(B) of 
Public Law 110-90 to adjust the standardized amounts for discharges 
occurring in FYs 2010, 2011, and/or 2012 to offset the estimated amount 
of the increase in aggregate payments (including interest) in FYs 2008 
and 2009. In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23871), we 
stated that we intended to take into account the need to reflect 
accumulated interest in proposing a recoupment adjustment under section 
7(b)(1)(B) of Public Law 110-90 for FY 2012.
    It is often our practice to phase in rate adjustments over more 
than one year in order to moderate the effect on rates in any one year. 
Therefore, consistent with the policies that we have adopted in many 
similar cases, in the FY 2011 IPPS/LTCH PPS proposed rule, we proposed 
to make an adjustment to the standardized amount of -2.9 percent, 
representing approximately half of the aggregate adjustment required 
under section 7(b)(1)(B) of Public Law 110-90, for FY 2011. An 
adjustment of this magnitude would allow us to moderate the effects on 
hospitals in one year while simultaneously making it possible to 
implement the entire adjustment within the timeframe required under 
section 7(b)(1)(B) of Public Law 110-90 (that is, no later than FY 
2012).
    Unlike the permanent prospective adjustment to the standardized 
amounts under section 7(b)(1)(A) of Public Law 110-90 described 
earlier, the recoupment adjustment to the standardized amounts under 
section 7(b)(1)(B) of Public Law 110-90 is not cumulative, and, 
therefore, would be removed for subsequent fiscal years once we have 
completely offset the increase in aggregate payments for discharges for 
FY 2008 and FY 2009 expenditures. In keeping with our practice of 
moderating payment adjustments when necessary, we stated that we 
anticipated that the proposal of phasing in the recoupment adjustment 
will have an additional, and significant, moderating effect on 
implementing the requirements of section 7(b)(1)(B) of Public Law 110-
90 for FY 2012.
    In the FY 2011 IPPS/LTCH PPS proposed rule, we sought public 
comment on our proposal to offset part of the total 5.8 percent 
increase in aggregate payments (including interest) for discharges 
occurring in FY 2008 and FY 2009 resulting from the adoption of the MS-
DRGs in FY 2011, noting that this proposal would result in a -2.9 
percent adjustment to the standardized amount. We received numerous 
comments on our proposal, especially from national and regional 
hospital associations, hospital systems, and individual hospitals. 
MedPAC also commented on our proposal. We refer readers to the FY 2011 
IPPS/LTCH PPS final rule with comment period (75 FR 50055 through 
50073) for a detailed description of our analysis and prior responses 
to comments, and finalized policy.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50062 through 
50068), we finalized the proposed adjustment to the standardized amount 
of -2.9 percent, which represented approximately half of the aggregate 
recoupment adjustment required under section 7(b)(1)(B) of Public Law 
110-90, for FY 2011. We were persuaded by both the MedPAC's analysis, 
and our own review of the methodologies recommended by various 
commenters, that the methodology we employed to determine the required 
recoupment adjustment was sound. Since the statute required that we 
implement the entire recoupment adjustment no later than FY 2012, we 
have sought, as we commonly do, to moderate the potential impact on 
hospitals by phasing in the required adjustment over more than one 
year. As we stated in prior rulemaking, a major advantage of making the 
-2.9 percent adjustment to the standardized amount in FY 2011 was that, 
because the required recoupment adjustment is not cumulative, we 
anticipated removing the FY 2011 -2.9 percent adjustment from the rates 
(in other words, making a positive 2.9 percent adjustment to the rates) 
in FY 2012, at the same time that the law required us to apply the 
remaining approximately -2.9 percent adjustment required by section 
7(b)(1)(B) of Public Law 110-90. These two steps in FY 2012, restoring 
the FY 2011 -2.9 percent adjustment and then applying the remaining 
adjustment of approximately -2.9 percent, would effectively cancel each 
other out. The result of these two steps would be an aggregate 
adjustment of approximately 0.0 percent. While we stated in the FY 2011 
IPPS/LTCH PPS final rule the need to potentially adjust the remaining -
2.9 percent estimate to account for accumulated interest, our actuaries 
have determined that there has been no significant interest 
accumulation and that no additional adjustment will be required. 
Therefore, for FY 2012, pursuant to the timeframes set forth by section 
7(b)(1)(B) of Public Law 110-90, and consistent with the discussion in 
the FY 2011 IPPS/LTCH PPS final rule, we proposed to complete the 
recoupment adjustment by implementing the remaining -2.9 percent 
adjustment, in addition to removing the effect of the -2.9 percent 
adjustment to the standardized amount finalized for FY 2011. Because 
these adjustments will, in effect, balance out, there will be no year-
to-year change in the standardized amount due to this recoupment 
adjustment. As this

[[Page 51493]]

adjustment will complete the required recoupment for overpayments due 
to documentation and coding effects on discharges occurring in FYs 2008 
and 2009, we anticipate removing the effect of this adjustment by 
adding 2.9 percent to the standardized amount in FY 2013. We continue 
to believe that this is a reasonable and fair approach that satisfies 
the requirements of the statute while substantially moderating the 
financial impact on hospitals.
    Comment: One commenter, MedPAC, reiterated its general support for 
the methodology used by our actuaries to estimate the magnitude of 
documentation and coding effect on IPPS payments due to the adoption of 
the MS-DRG system. In its letter, MedPAC explained that the methodology 
used by our actuaries ``is akin to comparing two sets of payments: What 
payments actually were in fiscal year 2009 under the 2009 MS-DRGs and 
relative weights; and what payments would have been in 2009 if MS-DRGs 
had not been adopted and CMS had continued to use the prior (2007) CMS 
DRGs and weights.'' MedPAC noted that by taking the difference between 
these two sets of payments, the methodology is designed to capture 
``the new GROUPER's interaction with how hospitals changed their 
documentation and coding. After the adoption of MS-DRGs in 2008, 
hospitals switched from recording general descriptions of patients' 
chronic conditions--which no longer affect payments under MS-DRGs--to 
recording the specific acute manifestations of patients' chronic 
conditions, which trigger higher payments under MS-DRGs. However, the 
same changes in diagnosis documentation and coding have little or no 
effect on the CMI measured using the 2007 CMS-DRGs and weights. This is 
because in that version of the GROUPER, both acute manifestations of 
chronic conditions and general descriptions of chronic conditions 
trigger higher payments. In contrast, when hospitals had little 
incentive to change documentation and coding--in 2007, for example--the 
two CMIs are approximately equal.''
    Consistent with its comments in prior years, MedPAC's comment noted 
that its analysis of Medicare hospital inpatient claims for 2007-2009 
yielded similar estimates of the documentation and coding effect. 
MedPAC concluded that ``CMS would need to reduce IPPS payments 
temporarily by 5.8 percent to recover overpayments that occurred in 
2008 and 2009. CMS also expected that overpayments equal to 3.9 percent 
of annual IPPS payments would continue through 2010, 2011, and future 
years until CMS makes a prospective offsetting adjustment (-3.9 
percent) to the IPPS payments rates.''
    MedPAC's comment described potential circumstances in which the 
methodology used both by our actuaries and MedPAC could overestimate 
the documentation and coding effect, noting that these possible 
circumstances ``could cause only a small change in the estimated effect 
of documentation changes.''
    MedPAC stated, ``In response to the new MS-DRGs, hospitals had an 
incentive to report diagnoses that count as CCs in the new system. 
MedPAC's argument is that hospitals may also have stopped reporting 
diagnoses that counted as CCs in the old system, but do not count in 
the new one.'' In short, MedPAC argued that the disappearance of the 
general chronic condition codes could have caused the CMIs based on the 
old FY 2007 GROUPER and weights to be understated in FYs 2008 and 2009. 
Thus, because CMIs based on the 2007 GROUPER and weights are the 
denominators of the documentation change estimates, understatement 
would bias the estimates upward. However, understatement would occur 
only to the extent that hospitals, when coding: (1) Did not replace 
such general chronic condition codes with corresponding acute 
manifestation codes and (2) the patient had no other secondary 
diagnosis code that qualified as a CC in the old GROUPER and are now 
CCs or MCCs under the MS-DRGs.
    MedPAC's analysis concluded that the maximum possible effect of 
this potential overestimation is 0.36 percent, and ``that total 
overpayments due to documentation changes in 2008 and 2009 may have 
ranged from 5.1 to 5.8 percent of IPPS payments ($6.0 to $6.9 
billion).''
    MedPAC recommended that CMS slow the pace of the payment 
adjustments so that hospitals would receive a net 1 percent update in 
FY 2012, as it recommend in its March 2011 Report to Congress. 
Furthermore, MedPAC stated that legislation should be enacted to 
require the Secretary of Health and Human Services to adjust payments 
further to recover all overpayments that have occurred or will occur in 
FYs 2010, 2011, and 2012 because the prospective adjustment was not 
completed. MedPAC asserted that:
    ``To allow payments to increase due to documentation and coding 
changes would undermine Congressional policy on updates. If Congress 
wants more money to flow into the hospital sector, a higher update is 
the appropriate mechanism, not cumulative changes in documentation and 
coding. Indeed, allowing those changes to increase hospital payments 
through the back door could eventually discourage needed refinements to 
the case-mix system in a tight budget era. In other words, if more 
money inevitably leaks into the system every time case-mix is refined, 
then there may be pressure to stop refining. That would lead to 
inequities for both providers and patients.''
    Response: We appreciate MedPAC's analysis and continued support of 
the methodology used to determine the documentation and coding effect, 
and we agree that this methodology appropriately isolates the 
documentation and coding effect from real case-mix. With the exception 
of the possible overstatement described above, we note that MedPAC's 
analysis yielded results similar to CMS' determination of the 
documentation and coding effect. Based on our evaluation of FY 2008 and 
FY 2009 claims, we continue to believe that $6.9 billion dollars in 
overpayments were made during the period of FY 2008 and 2009. We 
estimate that a recoupment adjustment totaling 5.8 percent is necessary 
to recover these overpayments, and that operating IPPS rates are 
currently overstated by 3.9 percent. We also note that section 
7(b)(1)(B) of the TMA requires the agency to recover these overpayments 
by FY 2012 and that section 7(b)(1)(A) of the TMA requires the agency 
to adjust rates to ensure that aggregate payments do not continue to be 
overstated.
    With regard to MedPAC's analysis regarding the possible 
overestimate of the documentation and coding effect, we note that 
MedPAC characterized the potential effect as ``small'' and provided no 
corroborating analysis or specific examples of when this scenario may 
have occurred. We consulted with our medical coding experts and were 
unable to identify specific examples to support MedPAC's hypothesis. We 
note that MedPAC stated in its comment letter that the potential for 
overestimation exists only to the extent that ``hospitals (1) did not 
replace such general chronic condition codes with corresponding acute 
manifestation codes and (2) the patient had no other secondary 
diagnosis code that qualified as a CC in the old grouper.'' We reviewed 
coding changes that occurred during the transition to MS-DRGs and were 
able to identify codes that would result in a CC prior to MS-DRGs but 
would not result in a CC in the MS-DRG system. However, we were unable 
to identify an instance where this would necessarily result in a lower 
MS-DRG assignment because more specific codes were

[[Page 51494]]

developed to support the more refined MS-DRG system and we would expect 
hospitals to use the more specific codes. For instance, congestive 
heart failure was a CC under CMS DRGs, but is not a CC under MS-DRGs. 
Under MS-DRGs, we started requiring more specific information on the 
type of heart failure in order to count this as a CC or MCC. Generally, 
under the MS-DRG system, the ``unspecified'' codes in a category no 
longer result in CCs.
    We did not receive any other public comments regarding MedPAC's 
statements that we may have overestimated the effect of the 
documentation and coding by considering cases grouped under the MS-DRG 
system as having a higher severity due to being coded without 
appropriate CCs under the pre-MS-DRG system.
    At this time, we believe it would not be appropriate to revise our 
estimates based solely on MedPAC's analysis without knowing of any 
specific examples of the scenario described above. Without this 
information, we cannot determine whether there was a sufficient volume 
of cases to cause a potential documentation and coding overestimate. 
However, we welcome specific examples from the public to possibly 
inform future rulemaking.
    We acknowledge MedPAC's recommendation to provide hospitals with a 
net 1 percent update. As noted above, the comment restates MedPAC's 
recommendation from its March 2011 Report to Congress. We address this 
issue below in our response to comments by the provider community that 
expressed concern regarding the impact of various payment adjustments 
on hospitals.
    We also acknowledge MedPAC's request that additional statutory 
authority be granted to the Secretary of Health and Human Services to 
recover overpayments made during subsequent fiscal years.
    Lastly, we agree with MedPAC that it is important to continue 
refining the methodology of how case mix is measured to ensure payment 
accuracy. We note that in this final rule we discuss potential 
refinements to the MS-DRG relative weight system, and CMS' active 
engagement in implementing the ICD-10 system. These discussions 
illustrate the efforts the agency is undertaking to improve the ability 
to measure case mix precisely and to pay hospitals for inpatient 
services more accurately.
    Comment: Most commenters, including national hospital associations, 
continued to acknowledge that there were documentation and coding 
increases in FY 2008 and FY 2009 that were in excess of the statutory 
0.6 percent and 0.9 percent adjustments specified in section 7(a) of 
the TMA. However, as in prior rulemakings on this issue, most 
commenters again questioned the methodology employed by MedPAC and our 
actuaries to determine the magnitude of the excess.
    We also received Congressional correspondence from numerous members 
of Congress stating that hospitals had expressed concerns regarding the 
CMS Actuary's methodology and requesting that CMS ensure that its 
methodology accurately reflects changes in patient severity prior to 
finalizing adjustments for documentation and coding in response to 
hospitals' concerns. Specifically, the correspondence suggested that 
CMS could consider alternative methodologies for estimating the effect 
of documentation and coding, including trend-based analysis and chart 
abstraction.
    Several commenters stated that historical case mix trend is 
inconsistent with our estimate of the effect of the FY 2008 and FY 2009 
documentation and coding changes due to the implementation of the MS-
DRGs. One commenter stated ``Our analysis, which used multiple years of 
patient claims, clearly shows that a significant portion of the change 
CMS found is actually the continuation of historical trends, rather 
than the effect of documentation and coding changes due to 
implementation of MS-DRGs. This analysis found a cumulative 
documentation and coding effect of 3.6 percent for FYs 2008 and 2009, 
as opposed to the 5.4 percent that CMS found.''
    Several commenters submitted an historical case-mix trend analysis 
last year, which showed a documentation and coding effect of 2.3 
percent. An analysis submitted by the same commenters this year showed 
a cumulative documentation and coding increase through FY 2009 of 3.6 
percent. The commenters revised their analysis to respond to CMS 
comments made in last year's rule. Specifically, the national hospital 
associations stated that, ``This year we make several modifications to 
that trend-based analysis to respond to CMS' critiques as enumerated in 
the FY 2011 inpatient PPS final rule. Given that we have addressed the 
agency's concerns, we are hopeful that it will give our methodology 
fresh consideration.'' One hospital association also pointed out that 
CMS included an assumption regarding real case-mix growth in the 
adjustment for ``changes in case-mix'' in the capital update framework 
at Sec.  412.308(c)(1)(ii) and suggested that the estimate made by our 
actuaries regarding documentation and coding be reduced by this 
assumption in order to maintain consistency with the capital update 
framework.
    Commenters also examined the methodology used by our actuaries and 
MedPAC using index number theory. As stated by these commenters, ``the 
relative case weights in a given grouper are like relative prices in a 
price index calculation (in fact they are relative prices for the 
different MS-DRGs) and the quantities of discharges in various MS-DRGs 
are like the quantities of goods in the price index calculation.'' 
Commenters claimed that, based on index number theory, the methodology 
employed by MedPAC and our actuaries can only provide upper and lower 
bounds of the combined effect of documentation and coding and real 
case-mix change. MedPAC, however, indicated that knowledge of the 2007 
MS-DRG GROUPER, the new MS-DRG GROUPER, historical documentation of 
patients' diagnoses, and the changes CMS made when it created the MS-
DRGs can be used to narrow the range of the potential documentation and 
coding effect as described above, although they noted that these 
``could cause only a small change in the estimated effect of 
documentation changes.''
    As in past years, several commenters indicated that CMS should use 
medical records data to distinguish documentation and coding changes 
from real case-mix changes. MedPAC disagreed with the commenters' 
rationale that the use of medical records data could determine the 
effect of both documentation and coding, and stated the following: 
``Gold-standard coders, however, only see the diagnoses written in the 
record and therefore are not able to distinguish changes in 
documentation from real changes in patients' diagnoses. This method of 
recoding existing documentation only works in situations where 
hospitals have no incentive to change documentation. That is clearly 
not the case with the transition to MS-DRGs.''
    Response: We disagree that the new analysis presented by the 
national hospital associations has addressed our concerns with the use 
of a trend analysis to determine the documentation and coding increase 
when a more direct measurement of the relevant increase can be obtained 
using our proposed methodology. In last year's rule, we expressed 
several concerns with regard to the use of a trend analysis, stating, 
``We believe that the determination of an appropriate

[[Page 51495]]

historical trend is less straightforward than our methodology, which, 
as described above, simply removes real case-mix growth from the 
calculation'' (75 FR 50066). While we pointed out certain analytical 
flaws in the trend analysis used last year (for a full discussion, we 
refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50065 
through 50066)), we did not state the correction of those flaws would 
yield a better documentation and coding estimate than the direct 
estimate obtained under our proposed methodology. In fact, we noted 
that ``changes in case-mix do not necessarily follow a consistent 
pattern over time.'' MedPAC provided analysis in its comment letter 
which supported CMS' position. MedPAC's analysis demonstrated that CMI 
growth was modest at best, never exceeding plus or minus 1 percent the 
decade prior to the introduction of MS-DRGs, and in some years was 
negative.
[GRAPHIC] [TIFF OMITTED] TR18AU11.000

    The national hospital associations' most significant response to 
our critique of their previous analysis in the FY 2011 IPPS/LTCH PPS 
final rule was to expand the time period upon which its trend analysis 
is based to include years where there were sustained negative changes 
in actual CMI. This raised their estimate of documentation and coding 
from 2.3 percent to 3.6 percent. We believe that this increase 
demonstrates the variability in the estimates that can be obtained 
using trend analyses. We also stated in last year's final rule that 
``despite our position that our methodology more directly measures the 
relevant increase, we did examine the alternative approach favored by 
commenters for calculating the documentation and classification 
increase. As a general statement, the approach of examining historical 
trends to estimate what case-mix would have been in the absence of the 
adoption of the MS-DRGs should not necessarily yield significantly 
different results from the analysis done by our actuaries and the 
MedPAC, if an appropriate historical trend can be determined.''
    We reiterate our concerns with the use of historical trends to 
determine documentation and coding this year, and we do not believe 
that the modifications to the commenters' analysis address all of these 
concerns. In particular, we agree with MedPAC that ``absent changes in 
documentation and coding and the shift away from inpatient surgeries, 
real changes in the CMI in 2008 through 2010 would be completely 
consistent with historical CMI changes since 2001.'' In performing its 
analysis, MedPAC adjusted for changes in the share of cases with 
surgery, share of cases with CCs, and the estimated effects of changes 
in documentation and coding. MedPAC summarized the results of its 
analysis in the following graph.

[[Page 51496]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.001

    In summary, with respect to trend analysis, we continue to believe 
that the determination of an appropriate historical trend is less 
straightforward than our proposed methodology, which simply removes 
real case-mix growth from the calculation. In addition, the estimates 
obtained using our proposed methodology are consistent with the 
historical case-mix growth, as demonstrated by MedPAC.
    We also disagree with commenters who stated that the methodology 
employed by MedPAC and our actuaries can only provide upper and lower 
bounds of the combined effect of documentation and coding and real 
case-mix change and cannot separate documentation and coding effects 
from real case-mix change. While MedPAC recognized that the potential 
for a range of estimates may exist, MedPAC disagreed with the 
conclusion that index number theory, as described above, should be used 
to determine this range. MedPAC stated that ``in this instance at 
least, the estimated range between the lower and upper bounds based on 
this approach is so wide that the estimates are useless for policy 
making.'' We agree with MedPAC that the wide range resulting from an 
index number theory approach renders such an approach useless in this 
context.
    In response to commenters' support for using hospital records to 
distinguish documentation and coding effect from real case-mix changes, 
we agree with MedPAC's rationale that such an analysis would fail to 
capture changes in documentation. MedPAC stated: ``In our view, this 
approach does not work. The reason is that hospitals had an incentive 
to persuade attending physicians to be more specific in describing 
patients' acute manifestations of chronic conditions in their medical 
records. Some hospitals hired documentation specialists with the goal 
of changing physicians' medical record documentation, not simply to do 
a better job of coding what they wrote in the record (Hahey 2008). 
Gold-standard coders, however, only see the diagnoses written in the 
record and therefore are not able to distinguish changes in 
documentation from real changes in patients' diagnoses. This method of 
recoding existing documentation only works in situations where 
hospitals have no incentive to change documentation. That is clearly 
not the case with the transition to MS-DRGs. Thus, a very important 
part of the effect of changes in documentation and coding cannot be 
detected by the proposed method.''
    We also note that as one part of our initial documentation and 
coding analysis, we attempted to examine coding changes based on 
hospital chart data from the Medicare Clinical Data Abstraction Center 
(CDAC). However, as we described in the FY 2010 IPPS/LTCH PPS final 
rule, it was not possible to perform this analysis due to aberrant CDAC 
data. We stated, ``While we attempted to use the CDAC data to 
distinguish real increase in case-mix growth from documentation and 
coding in the overall case-mix number, we found aberrant data and 
significant variation across the FY 1999-FY 2007 analysis period. It 
was not possible to distinguish changes in documentation and coding 
from changes in real case-mix in the CDAC data. Therefore, we concluded 
that the CDAC data would not support analysis of real case-mix growth 
that could be used in our retrospective evaluation of the FY 2008 
claims data.'' (74 FR 43769)
    Finally, we disagree with the commenters' suggestion that the 
assumptions in the capital update framework should be applied in our 
actuaries' estimate of documentation and coding, because the capital 
update framework is intended for projection purposes and would be 
inappropriate to use as a proxy for historical trends.
    After careful consideration of all of the public comments we 
received, including alternatives suggested by commenters, we remain 
confident in the accuracy of our methodology and its appropriateness in 
determining the required adjustment amounts.
    Comment: Numerous commenters expressed concern regarding the 
potentially severe negative fiscal impact that would be experienced by 
providers if the proposed documentation and coding improvement 
adjustment were to

[[Page 51497]]

be implemented. As noted above, MedPAC recommended that CMS reduce its 
proposed -3.15 percent adjustment to be consistent with a net update 
factor of +1.0 percent, as it recommended in its March 2011 Report to 
Congress.
    As noted previously, we also received Congressional correspondence 
from numerous members of Congress that requested CMS to reconsider what 
would be an appropriate adjustment to hospital payments and also 
requested that CMS reexamine its methodology. This correspondence noted 
that hospitals would experience payment reductions if the proposed rule 
were finalized without modification and further stated that hospitals 
needed ``adequate Medicare reimbursement to ensure that patients and 
communities receive the care they need.''
    Response: We recognize the concerns regarding possible financial 
disruption that may be caused by the proposed documentation and coding 
improvement payment adjustment. We note, however, that these payment 
adjustments are necessary to correct past overpayments due solely to 
documentation and coding improvements. We have already delayed 
implementation of the required prospective adjustment amount, and we 
proposed only a portion of the remaining required adjustment to allow 
hospitals time to adjust to future payment differences and to moderate 
the effect of this adjustment in any given year. We are required under 
section 7(b)(1)(B) of the TMA to complete the remaining one-time -2.9 
percent recoupment adjustment for FY 2008 and FY 2009 overpayments in 
FY 2012, and we believe the impact of completing this adjustment to be 
reasonable considering it will be completely offset by removing the FY 
2011 recoupment adjustment by placing a +2.9 percent adjustment back to 
the standardized amount. In FY 2013, a positive +2.9 percent adjustment 
will be made, completing the recoupment process.
    In the proposed rule, we stated it was imperative that CMS make a 
significant prospective adjustment amount in FY 2012 to prevent the 
accumulation of unrecoverable overpayments. As stated in previous 
responses to comments, we remain confident in the accuracy of the 
overall methodology and its appropriateness in determining the required 
adjustment amount. However, after consideration of the public comments, 
and in keeping with our longstanding policy to mitigate, when possible, 
the effects of significant downward adjustments on hospitals, we are 
finalizing a prospective adjustment of -2.0 percent, which is a 
reduction from our proposed adjustment of -3.15 percent. We note that 
this adjustment will result in a total update of +1.0 percent, in 
accordance with MedPAC's recommendation in its March 2011 Report to 
Congress for hospitals that report quality data consistent with the 
requirements of the Hospital IQR Program. Specifically, as discussed 
elsewhere in this final rule, the applicable percentage increase for FY 
2012 is +1.9 percent (based on a market basket of +3.0 percent, a 
multifactor productivity adjustment of -1.0 percentage point, and a 
statutory adjustment of -0.1 percentage point in accordance with 
section 3401 of the Affordable Care Act). When combined with the +1.1 
adjustment in light of Cape Cod v. Sebelius, 630 F.3d 203 (D.C. Cir. 
2011) discussed elsewhere in this final rule, the applicable percentage 
increase of +1.9 percent and this proposed prospective adjustment of -
2.0 percent results in a net total update of +1.0 percent, prior to 
additional adjustments for budget neutrality and other policy 
adjustments. We believe that this level of adjustment will help to 
minimize year to year volatility in payment rates due to the required 
documentation and coding adjustment. As we stated in the proposed rule, 
our analysis found that a prospective adjustment of -3.9 percent 
continues to be necessary. Because we are making a -2.0 percent 
prospective adjustment for FY 2012, a remaining prospective of 
adjustment of -1.9 percent will be necessary. While we are not at this 
time stating when we will make the remaining required -1.9 percent 
prospective adjustment, we consider it feasible to make all or most of 
the adjustment in FY 2013, when a +2.9 percent adjustment will be 
factored into rates to offset the one-time FY 2012 recoupment 
adjustment.
    The table below summarizes the adjustments for FY 2012 for 
documentation and coding for IPPS hospitals.

                                                   FY 2012 MS-DRG Documentation and Coding Adjustment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Remaining
                                                        Required         required                        Prospective       Recoupment       Remaining
                                                      prospective       recoupment    Total remaining   adjustment for   adjustment to     prospective
                                                     adjustment for   adjustment for     adjustment        FY 2012          FY 2012         adjustment
                                                     FYs 2008-2009    FYs 2008-2009                                         payments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Level of Adjustments..............................           -3.9%            -2.9%            -6.8%            -2.0%            -2.9%            -1.9%
--------------------------------------------------------------------------------------------------------------------------------------------------------

7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal rate; the updated hospital-specific rate based on FY 1982 
costs per discharge; the updated hospital-specific rate based on FY 
1987 costs per discharge; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or the updated hospital-specific rate 
based on FY 2006 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greatest of the FY 1982, FY 1987, or FY 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period (72 
FR 47152 through 47188), we established a policy of applying the 
documentation and coding adjustment to the hospital-specific rates. In 
that final rule with comment period, we indicated that because SCHs and 
MDHs use the same DRG system as all other hospitals, we believe they 
should be equally subject to the budget neutrality adjustment that we 
are applying for adoption of the MS-DRGs to all other hospitals. In 
establishing this policy, we relied on section 1886(d)(3)(A)(vi) of the 
Act, which provides us with the authority to adjust ``the standardized 
amount'' to eliminate the effect of changes in coding or classification 
that do not reflect real change in case-mix.
    However, in the final rule that appeared in the Federal Register on 
November 27, 2007 (72 FR 66886), we

[[Page 51498]]

rescinded the application of the documentation and coding adjustment to 
the hospital-specific rates retroactive to October 1, 2007. In that 
final rule, we indicated that, while we still believe it would be 
appropriate to apply the documentation and coding adjustment to the 
hospital-specific rates, upon further review, we decided that the 
application of the documentation and coding adjustment to the hospital-
specific rates is not consistent with the plain meaning of section 
1886(d)(3)(A)(vi) of the Act, which only mentions adjusting ``the 
standardized amount'' under section 1886(d) of the Act and does not 
mention adjusting the hospital-specific rates.
    In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that 
we continued to have concerns about this issue. Because hospitals paid 
based on the hospital-specific rate use the same MS-DRG system as other 
hospitals, we believe they have the potential to realize increased 
payments from documentation and coding changes that do not reflect real 
increases in patient severity of illness. In section 1886(d)(3)(A)(vi) 
of the Act, Congress stipulated that hospitals paid based on the 
standardized amount should not receive additional payments based on the 
effect of documentation and coding changes that do not reflect real 
changes in case-mix. Similarly, we believe that hospitals paid based on 
the hospital-specific rates should not have the potential to realize 
increased payments due to documentation and coding changes that do not 
reflect real increases in patient severity of illness. While we 
continue to believe that section 1886(d)(3)(A)(vi) of the Act does not 
provide explicit authority for application of the documentation and 
coding adjustment to the hospital-specific rates, we believe that we 
have the authority to apply the documentation and coding adjustment to 
the hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act. The special 
exceptions and adjustment provision authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' In the FY 2009 IPPS final rule (73 FR 
48448 through 48449), we indicated that, for the FY 2010 rulemaking, we 
planned to examine our FY 2008 claims data for hospitals paid based on 
the hospital-specific rate. We further indicated that if we found 
evidence of significant increases in case-mix for patients treated in 
these hospitals that do not reflect real changes in case-mix, we would 
consider proposing application of the documentation and coding 
adjustments to the FY 2010 hospital-specific rates under our authority 
in section 1886(d)(5)(I)(i) of the Act.
    In response to public comments received on the FY 2009 IPPS 
proposed rule, we stated in the FY 2009 IPPS final rule that we would 
consider whether such a proposal was warranted for FY 2010. To gather 
information to evaluate these considerations, we indicated that we 
planned to perform analyses on FY 2008 claims data to examine whether 
there has been a significant increase in case-mix for hospitals paid 
based on the hospital-specific rate. If we found that application of 
the documentation and coding adjustment to the hospital-specific rates 
for FY 2010 was warranted, we indicated that we would propose to make 
such an adjustment in the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule.
8. Documentation and Coding Adjustment to the Hospital-Specific Rates 
for FY 2011 and Subsequent Fiscal Years
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule and final rule 
(74 FR 24098 through 24100 and 74 FR 43775 through 43776, 
respectively), we discussed our retrospective evaluation of the FY 2008 
claims data for SCHs and MDHs using the same methodology described 
earlier for other IPPS hospitals. We found that, independently for both 
SCHs and MDHs, the change due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2008 slightly exceeded the proposed 2.5 percent result discussed 
earlier for other IPPS hospitals, but did not significantly differ from 
that result. We refer readers to those rules for a more complete 
discussion.
    Therefore, consistent with our statements in prior IPPS rules, we 
proposed to use our authority under section 1886(d)(5)(I)(i) of the Act 
to prospectively adjust the hospital-specific rates by the proposed -
2.5 percent in FY 2010 to account for our estimated documentation and 
coding effect in FY 2008 that does not reflect real changes in case-
mix. We proposed to leave this adjustment in place for subsequent 
fiscal years in order to ensure that changes in documentation and 
coding resulting from the adoption of the MS-DRGs do not lead to an 
increase in aggregate payments for SCHs and MDHs not reflective of an 
increase in real case-mix. The proposed -2.5 percent adjustment to the 
hospital-specific rates exceeded the -1.9 percent adjustment to the 
national standardized amount under section 7(b)(1)(A) of Public Law 
110-90 because, unlike the national standardized rates, the FY 2008 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24100), 
we solicited public comment on this proposal. Consistent with our 
approach for IPPS hospitals discussed earlier, in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule, we also delayed adoption of a documentation 
and coding adjustment to the hospital-specific rate until FY 2011. We 
refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule for a 
more detailed discussion of our proposal, responses to comments, and 
finalized policy.
    As we have noted previously, because SCHs and MDHs use the same MS-
DRG system as all other IPPS hospitals, we believe they have the 
potential to realize increased payments from documentation and coding 
changes that do not reflect real increases in patient severity of 
illness. Therefore, we believe they should be equally subject to a 
prospective budget neutrality adjustment that we are applying for 
adoption of the MS-DRGs to all other hospitals. We believe the 
documentation and coding estimates for all subsection (d) hospitals 
should be the same. While the findings for the documentation and coding 
effect for all IPPS hospitals are similar to the effect for SCHs and 
slightly different to the effect for MDHs, we continue to believe that 
this is the appropriate policy so as to neither advantage or 
disadvantage different types of providers. As we discuss in section 
II.D.4. of this preamble, our best estimate, based on the most recently 
available data, is that a cumulative adjustment of -5.4 percent is 
required to eliminate the full effect of the documentation and coding 
changes on future payments to SCHs and MDHs. Unlike the case of 
standardized amounts paid to IPPS hospitals, prior to FY 2011, we had 
not made any previous adjustments to the hospital-specific rates paid 
to SCHs and MDHs to account for documentation and coding changes. 
Therefore, the entire -5.4 percent recoupment adjustment needed to be 
made, as opposed to a -3.9 percent remaining adjustment for IPPS 
hospitals.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50068 through 
50071), we made an adjustment to the standardized

[[Page 51499]]

amount for IPPS hospitals of -2.9 percent under section 7(b)(1)(B) of 
Public Law 110-90, for FY 2011. As we noted in the FY 2011 IPPS/LTCH 
PPS final rule, in determining the level and pace of adjustments to 
account for such documentation and coding changes, we believe that it 
is important to maintain, as much as possible, both consistency and 
equity among these classes of hospitals. Therefore, we finalized a 
prospective adjustment of -2.9 percent to the hospital-specific rates 
paid to SCHs and MDHs. We refer readers to the FY 2011 IPPS/LTCH PPS 
final rule for a more detailed discussion of our proposal, responses to 
comments, and finalized policy.
    As discussed earlier in this section II.D., in the FY 2012 IPPS/
LTCH PPS proposed rule, we proposed a net -3.15 percent documentation 
and coding adjustment for IPPS hospitals in FY 2012 (-3.15 percent 
prospective adjustment plus a -2.9 percent recoupment adjustment in FY 
2012, offset by the removal of the -2.9 percent recoupment adjustment 
for FY 2010). The proposed IPPS adjustment exceeded the remaining -2.5 
percent documentation and coding adjustment for hospitals receiving a 
hospital-specific rate (that is, the entire -5.4 percent adjustment, 
minus the -2.9 percent adjustment finalized for FY 2011). As we 
indicated in the FY 2011 IPPS/LTCH PPS proposed rule and final rule, we 
are continuing, as much as possible, consistent with section 7(b)(1) of 
Public Law 110-90 and section 1886(d)(5)(I)(i) of the Act, to take such 
consistency and equity into account in developing future proposals for 
implementing documentation and coding adjustments. We believe that any 
adjustment to the hospital-specific rate due to documentation and 
coding effect should be as similar as possible to adjustments to the 
IPPS rate. Accordingly, we proposed a -2.5 percent payment adjustment 
to the hospital-specific rate. We believe that proposing the entire 
remaining prospective adjustment of -2.5 percent would allow CMS to 
maintain, to the extent possible, similarity and consistency in payment 
rates for different IPPS hospitals paid using the MS-DRG. As discussed 
below, we took a similar approach in finalizing an adjustment to the 
Puerto-Rico specific rate in FY 2011.
    Comment: Numerous commenters requested that CMS rescind its 
proposed documentation and coding adjustment for SCHs and MDHs and 
questioned CMS' statutory authority to apply this adjustment to 
providers receiving a hospital-specific rate. The commenters argued 
that because section 1886(d)(3)(A)(vi) of the Act only authorizes 
application of a documentation and coding adjustment to the 
standardized amount, Congress' specific instruction as to the 
applicability of this type of adjustment makes it impermissible for CMS 
to apply the adjustment to the hospital-specific rates. Furthermore, 
commenters contend that, due to their critical role in isolated 
communities, any negative documentation and coding adjustment to SCHs 
and MDHs would endanger their ability to provide the type of care that 
Congress specifically sought to protect by establishing their special 
Medicare payment systems.
    Response: We continue to disagree with the commenters that the 
Secretary's broad authority to make exceptions and adjustment to 
payment amounts under section 1886(d)(3)(A)(vi) of the Act cannot be 
applied in this instance. We have discussed the basis for applying such 
an adjustment in prior rules (in the FY 2009 proposed rule (73 FR 
23540), the FY 2009 IPPS final rule (73 FR 48448), and the FY 2010 
IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24098)) and do not agree 
that the language in section 1886(d)(3)(A)(vi) of the Act limits our 
authority under section 1886(d)(5)(I)(i) of the Act to make such an 
adjustment. We recognize that SCHs and MDHs are entitled, through 
legislation, to receive the hospital-specific rate in order to 
compensate for their unique service requirements in the provider 
community. Similar to our approach with IPPS hospitals, we are 
implementing a phase-in of the documentation and coding adjustment over 
an appropriate period, beginning in FY 2011. We will continue to 
separately analyze SCH and MDH claims data to ensure than any future 
adjustment is appropriate for these provider types.
    Comment: MedPAC responded to our request for comments regarding the 
level of adjustment for special categories of hospitals, such as 
hospitals paid under the hospital-specific payment rate, by pointing 
out hospitals have the same financial incentives for documentation and 
coding improvements and the same ability to benefit from the resulting 
change in case-mix, and by recommending that ``all IPPS hospitals 
should be treated the same.'' At the same time, MedPAC also stated that 
``delaying prevention of overpayments * * * creates a problem because 
overpayments will continue to accumulate in 2010 and later years until 
the effect of documentation and coding improvement is fully offset in 
the payment rates.'' In setting forward its multi-year recommendation 
to CMS for complying with the requirements of section 7 of Public Law 
110-90, MedPAC emphasized ``minimizing the accumulation of 
overpayments.''
    Response: We appreciate MedPAC's comments and agree that it is 
appropriate to conclude that hospitals paid under the hospital-specific 
rate have experienced a 5.4-percent increase documentation and coding 
in FYs 2008 and 2009, insofar as these hospitals had the same financial 
incentives to improve documentation and coding in those years as other 
IPPS hospitals. We further agree with MedPAC that it is appropriate to 
focus on minimizing the accumulation of overpayments, and we interpret 
this to mean that MedPAC recommends that CMS move forward as quickly as 
possible with prospective adjustments at an appropriate level. We 
appreciate MedPAC's guidance that ``all hospitals be treated the 
same,'' and stress the importance of consistent treatment of various 
classes of similarly situated hospitals in our payment policy 
determinations.
    We continue to believe that any adjustment to the hospital-specific 
rate due to documentation and coding effect should be as similar as 
possible to adjustments to the standardized amount. Accordingly, 
because we are finalizing a prospective adjustment to the standardized 
amount of -2.0 percent for FY 2012, we are also finalizing a 
prospective adjustment to the hospital-specific rate of -2.0 percent 
for FY 2012, instead of our proposed adjustment of -2.5 percent. Making 
this level of adjustment allows CMS to maintain, for FY 2012, 
consistency in payment rates for different IPPS hospitals paid using 
the MS-DRG. Because this -2.0 percent adjustment no longer reflects the 
entire remaining requirement adjustment amount of -2.5 percent, an 
additional -0.5 percent adjustment to the hospital-specific payment 
rates will be required in future rulemaking.
9. Application of the Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
a. Background
    Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amount and 25 percent of the Puerto Rico-specific 
standardized amount. As noted previously, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the Secretary the authority to

[[Page 51500]]

adjust ``the standardized amounts computed under this paragraph'' to 
eliminate the effect of changes in coding or classification that do not 
reflect real changes in case-mix. Section 1886(d)(3)(A)(vi) of the Act 
applies to the national standardized amounts computed under section 
1886(d)(3) of the Act, but does not apply to the Puerto Rico-specific 
standardized amount computed under section 1886(d)(9)(C) of the Act. In 
calculating the FY 2008 payment rates, we made an inadvertent error and 
applied the FY 2008 -0.6 percent documentation and coding adjustment to 
the Puerto Rico-specific standardized amount, relying on our authority 
under section 1886(d)(3)(A)(vi) of the Act. However, section 
1886(d)(3)(A)(vi) of the Act authorizes application of a documentation 
and coding adjustment to the national standardized amount and does not 
apply to the Puerto Rico specific standardized amount. In the FY 2009 
IPPS final rule (73 FR 48449), we corrected this inadvertent error by 
removing the -0.6 percent documentation and coding adjustment from the 
FY 2008 Puerto Rico-specific rates (that is, we made a positive 0.6 
percent adjustment, increasing the Puerto Rico-specific rates).
    While section 1886(d)(3)(A)(vi) of the Act is not applicable to the 
Puerto Rico-specific standardized amount, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount using our special exceptions 
and adjustment authority under section 1886(d)(5)(I)(i) of the Act. 
Similar to SCHs and MDHs that are paid based on the hospital-specific 
rate, we believe that Puerto Rico hospitals that are paid based on the 
Puerto Rico-specific standardized amount should not have the potential 
to realize increased payments due to documentation and coding changes 
that do not reflect real increases in patient severity of illness. 
Consistent with the approach described for SCHs and MDHs, in the FY 
2009 IPPS final rule (73 FR 48449), we indicated that we planned to 
examine our FY 2008 claims data for hospitals in Puerto Rico. We 
indicated in the FY 2009 IPPS proposed rule (73 FR 23541) that if we 
found evidence of significant increases in case-mix for patients 
treated in these hospitals, we would consider proposing to apply 
documentation and coding adjustments to the FY 2010 Puerto Rico-
specific standardized amount under our authority in section 
1886(d)(5)(I)(i) of the Act.
b. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Standardized Amount
    For the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, we performed a 
retrospective evaluation of the FY 2008 claims data for Puerto Rico 
hospitals using the same methodology described earlier for IPPS 
hospitals paid under the national standardized amounts under section 
1886(d) of the Act. We found that, for Puerto Rico hospitals, the 
increase in payments for discharges occurring during FY 2008 due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008 was approximately 1.1 percent. 
However, as we noted earlier for IPPS hospitals and hospitals receiving 
hospital-specific rates, if the estimated documentation and coding 
effect determined based on a full analysis of FY 2009 claims data was 
more or less than our then current estimates, it would change, possibly 
lessen, the anticipated cumulative adjustments that we had estimated we 
would have to make for the FY 2008 and FY 2009 combined adjustment. 
Therefore, we believed that it would be more prudent to delay 
implementation of the documentation and coding adjustment to allow for 
a more complete analysis of FY 2009 claims data for Puerto Rico 
hospitals.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43777), we 
indicated that, given these documentation and coding increases, 
consistent with our statements in prior IPPS rules, we would use our 
authority under section 1886(d)(5)(I)(i) of the Act to adjust the 
Puerto Rico-specific rate and solicited public comment on the proposed 
-1.1 percent prospective adjustment. However, in parallel to our 
decision to postpone adjustments to the Federal standardized amount, we 
also indicated that we were adopting a similar policy for the Puerto 
Rico-specific rate for FY 2010 and would consider the phase-in of this 
adjustment over an appropriate time period through future rulemaking. 
We noted that, as with the hospital-specific rates, the Puerto Rico-
specific standardized amount had not previously been adjusted based on 
estimated changes in documentation and coding associated with the 
adoption of the MS-DRGs.
    Consistent with our approach for IPPS hospitals for FY 2010, we 
indicated that we would address in the FY 2011 rulemaking cycle any 
change in FY 2009 case-mix due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2009.
    As we have noted above, similar to SCHs and MDHs, hospitals in 
Puerto Rico use the same MS-DRG system as all other hospitals and we 
believe they have the potential to realize increased payments from 
documentation and coding changes that do not reflect real increases in 
patient severity of illness. Therefore, we believe they should be 
equally subject to the prospective budget neutrality adjustment that we 
intend to apply to prospective payment rates for IPPS hospitals, 
including SCHs and MDHs, in order to eliminate the full effect of the 
documentation and coding changes associated with implementation of the 
MS-DRG system.
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 
through 50073), using the same methodology we applied to estimate 
documentation and coding changes under IPPS for non-Puerto Rico 
hospitals, our best estimate, based on the then most recently available 
data (FY 2009 claims paid through March 2010), was that, for 
documentation and coding that occurred over FY 2008 and FY 2009, a 
cumulative adjustment of -2.6 percent was required to eliminate the 
full effect of the documentation and coding changes on future payments 
from the Puerto Rico-specific rate. As we stated above, we believe it 
important to maintain both consistency and equity among all hospitals 
paid on the basis of the same MS-DRG system. At the same time, however, 
we recognize that the estimated cumulative impact on aggregate payment 
rates resulting from implementation of the MS-DRG system was smaller 
for Puerto Rico hospitals as compared to IPPS hospitals and SCHs and 
MDHs. Therefore, in the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 
23876), we proposed an adjustment to eliminate the full effect of the 
documentation and coding changes on the portion of future payments to 
Puerto Rico hospitals based on the Puerto Rico-specific rate. We stated 
that we believed that a full prospective adjustment was the most 
appropriate means to take into full account the effect of documentation 
and coding changes on payments, while maintaining equity as much as 
possible between hospitals paid on the basis of different prospective 
rates. We noted that our updated data analysis in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50072 through 50073) showed that this adjustment 
would be -2.6 percent. The previous estimate in the proposed rule was a 
-2.4 percent adjustment.
    One reason we proposed the full prospective adjustment for the 
Puerto Rico-specific rate in FY 2011 was to

[[Page 51501]]

maintain equity as much as possible in the documentation and coding 
adjustments applied to various hospital rates in FY 2011. Because our 
proposal was to make an adjustment that represents the full adjustment 
that is warranted for the Puerto Rico-specific rate, we indicated that 
we did not anticipate proposing any additional adjustments to this rate 
for documentation and coding effects.
    Therefore, because the Puerto Rico-specific rate received a full 
prospective adjustment of -2.6 percent in FY 2011, we proposed no 
further adjustment in the proposed rule for FY 2012.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2009 IPPS final rule (73 FR 48450), we continued to 
implement significant revisions to Medicare's inpatient hospital rates 
by completing our 3-year transition from charge-based relative weights 
to cost-based relative weights. Beginning in FY 2007, we implemented 
relative weights based on cost report data instead of based on charge 
information. We had initially proposed to develop cost-based relative 
weights using the hospital-specific relative value cost center (HSRVcc) 
methodology as recommended by MedPAC. However, after considering 
concerns expressed in the public comments we received on the proposal, 
we modified MedPAC's methodology to exclude the hospital-specific 
relative weight feature. Instead, we developed national CCRs based on 
distinct hospital departments and engaged a contractor to evaluate the 
HSRVcc methodology for future consideration. To mitigate payment 
instability due to the adoption of cost-based relative weights, we 
decided to transition cost-based weights over 3 years by blending them 
with charge-based weights beginning in FY 2007. (We refer readers to 
the FY 2007 IPPS final rule for details on the HSRVcc methodology and 
the 3-year transition blend from charge-based relative weights to cost-
based relative weights (71 FR 47882 through 47898).)
    In FY 2008, we adopted severity-based MS-DRGs, which increased the 
number of DRGs from 538 to 745. Many commenters raised concerns as to 
how the transition from charge-based weights to cost-based weights 
would continue with the introduction of new MS-DRGs. We decided to 
implement a 2-year transition for the MS-DRGs to coincide with the 
remainder of the transition to cost-based relative weights. In FY 2008, 
50 percent of the relative weight for each DRG was based on the CMS DRG 
relative weight and 50 percent was based on the MS-DRG relative weight.
    In FY 2009, the third and final year of the transition from charge-
based weights to cost-based weights, we calculated the MS-DRG relative 
weights based on 100 percent of hospital costs. We refer readers to the 
FY 2007 IPPS final rule (71 FR 47882) for a more detailed discussion of 
our final policy for calculating the cost-based DRG relative weights 
and to the FY 2008 IPPS final rule with comment period (72 FR 47199) 
for information on how we blended relative weights based on the CMS 
DRGs and MS-DRGs.
2. Summary of the RTI Study of Charge Compression and CCR Refinement
    As we transitioned to cost-based relative weights, some public 
commenters raised concerns about potential bias in the weights due to 
``charge compression,'' which is the practice of applying a higher 
percentage charge markup over costs to lower cost items and services, 
and a lower percentage charge markup over costs to higher cost items 
and services. As a result, the cost-based weights would undervalue 
high-cost items and overvalue low-cost items if a single CCR is applied 
to items of widely varying costs in the same cost center. To address 
this concern, in August 2006, we awarded a contract to RTI to study the 
effects of charge compression in calculating the relative weights and 
to consider methods to reduce the variation in the CCRs across services 
within cost centers. RTI issued an interim draft report in January 2007 
with its findings on charge compression (which was posted on the CMS 
Web site at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In 
that report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI's 
findings demonstrated that charge compression exists in several CCRs, 
most notably in the Medical Supplies and Equipment CCR.
    In its interim draft report, RTI offered a number of 
recommendations to mitigate the effects of charge compression, 
including estimating regression-based CCRs to disaggregate the Medical 
Supplies Charged to Patients, Drugs Charged to Patients, and Radiology 
cost centers, and adding new cost centers to the Medicare cost report, 
such as adding a ``Devices, Implants and Prosthetics'' line under 
``Medical Supplies Charged to Patients'' and a ``CT Scanning and MRI'' 
subscripted line under ``Radiology-Diagnostics''. Despite receiving 
public comments in support of the regression-based CCRs as a means to 
immediately resolve the problem of charge compression, particularly 
within the Medical Supplies and Equipment CCR, we did not adopt RTI's 
recommendation to create additional regression-based CCRs. (For more 
details on RTI's findings and recommendations, we refer readers to the 
FY 2009 IPPS final rule (73 FR 48452).) RTI subsequently expanded its 
analysis of charge compression beyond inpatient services to include a 
reassessment of the regression-based CCR models using both outpatient 
and inpatient charge data. This interim report was made available in 
April 2008 during the public comment period on the FY 2009 IPPS 
proposed rule and can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were 
separately displayed in the April 2008 interim report, as well as the 
more recent OPPS chapters, were included in the July 3, 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
[Ambulatory Payment Classification] and DRG Relative Payment Weights,'' 
that became available at the time of the development of the FY 2009 
IPPS final rule. The RTI final report can be found on RTI's Web site 
at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    RTI's final report found that, under the IPPS and the OPPS, 
accounting improvements to the cost reporting data reduce some of the 
sources of aggregation bias without having to use regression-based 
adjustments. In general, with respect to the regression-based 
adjustments, RTI confirmed the findings of its March 2007 report that 
regression models are a valid approach for diagnosing potential 
aggregation bias within selected services for the IPPS and found that 
regression models are equally valid for setting payments under the 
OPPS.
    RTI also noted that cost-based weights are only one component of a 
final prospective payment rate. There are other rate adjustments (wage 
index, IME, and DSH) to payments derived from the revised cost-based 
weights, and the cumulative effect of these components may not improve 
the ability of final payment to reflect resource cost. RTI endorsed 
short-term regression-based adjustments, but also concluded that more 
refined and accurate accounting data are the preferred long-term 
solution to mitigate charge compression and related bias in hospital 
cost-based weights. For a more detailed

[[Page 51502]]

summary of RTI's findings, recommendations, and public comments we 
received on the report, we refer readers to the FY 2009 IPPS final rule 
(73 FR 48452 through 48453).
3. Summary of Policy Changes Made in FY 2011
    In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48458 through 
48467), in response to the RTI's recommendations concerning cost report 
refinements, and because of RAND's finding that regression-based 
adjustments to the CCRs do not significantly improve payment accuracy, 
we discussed our decision to pursue changes to the cost report to split 
the cost center for Medical Supplies Charged to Patients into one line 
for ``Medical Supplies Charged to Patients'' and another line for 
``Implantable Devices Charged to Patients.'' (We refer readers to the 
Web site: http://www.rand.org/pubs/working_papers/WR560/, and the FY 
2009 IPPS/LTCH PPS final rule for details on the RAND report (73 FR 
48453 through 48457).) We acknowledged, as RTI had found, that charge 
compression occurs in several cost centers that exist on the Medicare 
cost report. However, as we stated in the FY 2009 IPPS/LTCH PPS final 
rule, we focused on the CCR for Medical Supplies and Equipment because 
RTI found that the largest impact on the MS-DRG relative weights could 
result from correcting charge compression for devices and implants. In 
determining what should be reported in these respective cost centers, 
we adopted the commenters' recommendation that hospitals should use 
revenue codes established by AHA's National Uniform Billing Committee 
to determine what should be reported in the ``Medical Supplies Charged 
to Patients'' and the ``Implantable Devices Charged to Patients'' cost 
centers. Accordingly, a new subscripted line 55.30 for ``Implantable 
Devices Charged to Patients'' was created in July 2009 as part of CMS' 
Transmittal 20 update to the existing cost report Form CMS-2552-96. 
This new subscripted cost center has been available for use for cost 
reporting periods beginning on or after May 1, 2009.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 
50080), we finalized our proposal to create standard cost centers for 
CT scans, MRI, and cardiac catheterization, and to require that 
hospitals report the costs and charges for these services under new 
cost centers on the revised Medicare cost report Form CMS 2552-10. As 
we discussed in the FY 2009 IPPS/LTCH PPS and CY 2009 OPPS/ASC proposed 
and final rules, RTI found that the costs and charges of CT scans, MRI, 
and cardiac catheterization differ significantly from the costs and 
charges of other services included in the standard associated cost 
center. RTI also concluded that both the IPPS and OPPS relative weights 
would better estimate the costs of those services if CMS were to add 
standard costs centers for CT scans, MRI, and cardiac catheterization 
in order for hospitals to report separately the costs and charges for 
those services and in order for CMS to calculate unique CCRs to 
estimate the cost from charges on claims data. (We refer readers to the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50075 through 50080) for a more 
detailed discussion on the reasons for the creation of standard cost 
centers for CT scans, MRI, and cardiac catheterization.) The new 
standard cost centers for MRI, CT scans, and cardiac catheterization 
are effective for cost report periods beginning on or after May 1, 
2010, on the revised cost report Form CMS-2552-10. CMS issued the new 
hospital cost report Form CMS-2552-10 on December 30, 2010. The new 
cost report form can be accessed at the CMS Web site at: https://www.cms.gov/Manuals/PBM/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=1&sortOrder=ascending&itemID=CMS021935&intNumPerPage=10. 
Once at this Web site, users should double click on ``Chapter 40.''
4. Discussion for FY 2012
    In the FY 2009 IPPS/LTCH PPS final rule (73 FR 48468), we stated 
that, due to what is typically a 3-year lag between the reporting of 
cost report data and the availability for use in ratesetting, we 
anticipated that we might be able to use data from the new 
``Implantable Devices Charged to Patients'' cost center to develop a 
CCR for Implantable Devices Charged to Patients in the FY 2012 or FY 
2013 IPPS rulemaking cycle. Specifically, we stated, ``Because there is 
approximately a 3-year lag between the availability of cost report data 
for IPPS and OPPS rate-setting purposes in a given fiscal year, we may 
be able to derive two distinct CCRs, one for medical supplies and one 
for devices, for use in calculating the FY 2012 or FY 2013 IPPS 
relative weights and the CY 2012 or CY 2013 OPPS relative weights'' (73 
FR 48468). However, as noted in the FY 2010 IPPS/LTCH PPS final rule 
(74 FR 43782), due to delays in the issuance of the revised cost report 
CMS 2552-10, a new CCR for Implantable Devices Charged to Patients may 
not be available until FY 2013. Similarly, when we finalized the 
decision in the FY 2011 IPPS/LTCH PPS final rule to add new cost 
centers for MRI, CT scans, and cardiac catheterization, we explained 
that data from any new cost centers that may be created will not be 
available until at least 3 years after they are first used (75 FR 
50077). That is, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50077), 
we stated that the data from the standard cost centers for MRI, CT 
scans, and cardiac catheterization respectively, would not even be 
available for possible use in calculating the relative weights earlier 
than 3 years after Form CMS-2552-10 becomes available. We further 
stated that, at that time, we would analyze the data and determine if 
it is appropriate to use those data to create distinct CCRs from these 
cost centers for use in the relative weights for the respective payment 
systems. We also reassured public commenters that there was no need for 
immediate concern regarding possible negative payment impacts on MRI 
and CT scans under the IPPS and the OPPS because the cost report data 
that would be used for the calculation of the relative weights were at 
least 3 years from being available. We stated that we will first 
thoroughly analyze and run impacts on the data and provide the public 
with the opportunity to comment before distinct CCRs for MRI and CT 
scans would be finalized for use in the calculation of the relative 
weights. We also urged all hospitals to properly report their costs and 
charges for MRI, CT scans, and all other services so that, in several 
years' time, we will have reliable data from all hospitals on which to 
base a decision as to whether to incorporate additional CCRs into the 
relative weight calculation (75 FR 50077).
    Accordingly, in preparation for the FY 2012 IPPS/LTCH PPS proposed 
rule, we assessed the availability of data in the ``Implantable Devices 
Charged to Patients'' cost center. In order to develop a robust 
analysis regarding the use of cost data from the ``Implantable Devices 
Charged to Patients'' cost center, it was necessary to have a critical 
mass of cost reports filed with data in this cost center. The cost 
center for ``Implantable Devices Charged to Patients'' is effective for 
cost reporting periods beginning on or after May 1, 2009. While 
developing the FY 2012 IPPS/LTCH PPS proposed rule, we checked the 
availability of FY 2009 cost reports in the December 31, 2010 quarter 
ending update of HCRIS, which was the latest upload of FY 2009 cost 
report data that we could use for the proposed rule. We determined that 
there were only 437 hospitals (out of approximately 3,500 IPPS 
hospitals)

[[Page 51503]]

that completed the ``Implantable Devices Charged to Patients'' cost 
center. We did not believe that this was a sufficient amount of data 
from which to generate a meaningful analysis in this particular 
situation. Therefore, we did not propose to use data from the 
``Implantable Devices Charged to Patients'' cost center to create a 
distinct CCR for Implantable Devices Charged to Patients for use in 
calculating the MS-DRG relative weights for FY 2012. We indicated that 
we would reassess the availability of data for the ``Implantable 
Devices Charged to Patients'' cost center, and the ``MRI, CT Scans, and 
Cardiac Catheterization'' cost centers, for the FY 2013 IPPS rulemaking 
cycle and, if appropriate, we would propose to create a distinct CCR at 
that time.
    Comment: Commenters requested that CMS reconsider its position to 
not use the data from the implantable device cost center to calculate 
the MS-DRG relative weights for FY 2012. The commenter noted that 
during the development of the proposed rule, CMS found that only 437 
hospitals out of approximately 3,500 IPPS hospitals reported data in 
the ``Implantable Devices Charged to Patients'' cost center of the 
Medicare hospital cost report based on the December 2010 update of FY 
2009 HCRIS. One commenter found, while reviewing the March 2011 update 
of FY 2009 HCRIS, that there are approximately 800 hospitals that are 
reporting cost information in the implantable medical device cost 
center.
    Another commenter stated that, based on the December 2010 update of 
FY 2009 HCRIS, 804 hospitals reported data on either line 55 (Medical 
Supplies Charged to Patients) or line 55.30 (Implantable Devices 
Charged to Patients), and in the March 2011 update of FY 2009 HCRIS, 
approximately 1,600 hospitals were reporting data on either of those 
lines. As such, the commenters believed there is now a sufficient 
amount of data to use the implantable device CCR to calculate the 
relative weights and improve accuracy of the payment rates. Commenters 
also noted that if we do not use the implantable device cost center to 
calculate the FY 2012 relative weights, there will be enough data to 
develop an implantable device CCR for FY 2013.
    One commenter suggested that CMS adopt regression-based CCRs to 
calculate the FY 2012 MS-DRG relative weights because CMS does not yet 
have sufficient cost report data to develop the implantable device CCR. 
This would allow CMS to address charge compression immediately and 
improve payment accuracy for medical devices and implantables.
    Response: In the FY 2012 IPPS/LTCH PPS proposed rule, we indicated 
that we did not have sufficient cost report data to develop the kind of 
robust analysis that we assured the public we would provide prior to 
implementing a new CCR for implantable medical devices. Therefore, we 
stated that we will reassess the availability of data for FY 2013. We 
have reviewed the availability of FY 2009 cost reports in the March 31, 
2011 quarter ending update of HCRIS, which is the latest upload of FY 
2009 cost report data that we currently have available. We have 
determined that, for cost reporting periods beginning on or after May 
1, 2009, the effective date of line 55.30 (Implantable Devices Charged 
to Patients), there are 961 hospitals (out of approximately 3,500 IPPS 
hospitals) that have completed the ``Implantable Devices Charged to 
Patients'' cost center. This represents an increase of 524 compared to 
the 437 entries that we found when developing the FY 2012 proposed 
rule. Regardless of the number of hospitals currently reporting data in 
the ``Implantable Devices Charged to Patients'' cost center, the data 
that were available at the time we were developing our proposed 
policies for FY 2012 were insufficient, and we believe it would be 
inappropriate to finalize a specific CCR for implantable devices 
charged to patients for FY 2012 without an opportunity for the public 
to review and comment on our analysis. Rather, we believe that it is 
appropriate to wait until FY 2013, when we hope to be able to provide a 
proper impact analysis of the addition of a CCR for implantable devices 
charged to patients in the relative weights calculation. Accordingly, 
we are not implementing a regression-based CCR for implantable devices 
at this time. Therefore, we are not implementing any new CCRs for use 
in the relative weights calculation for FY 2012.
    Comment: Commenters urged CMS to increase education efforts to 
encourage faster hospital adoption of the use of the implantable 
medical device cost center. Commenters noted that, at the time of the 
development of the FY 2012 IPPS/LTCH PPS proposed rule, only 437 
hospitals had completed the implantable device cost center, and this 
demonstrated that CMS needs to undertake additional outreach to 
hospitals to ensure that they appropriately complete the Medicare 
hospital cost report.
    Response: We agree that it is important that hospitals understand 
how to accurately report data in the ``Implantable Devices Charged to 
Patients'' cost center, and we have worked to add more clarity to the 
cost report instructions. However, we do believe that the December 31, 
2010 update of HCRIS reflected relatively few entries for this cost 
center because the corresponding cost center line was only available 
for use for cost reporting periods beginning on or after May 1, 2009. 
This effective date was somewhat awkward in terms of timing and would 
not have applied to a large number of hospitals whose data would not be 
evident to CMS until the March 31, 2011 update to HCRIS.
    Comment: Commenters suggested that CMS monitor the accuracy of the 
data reported in the implantable device cost center on the Medicare 
hospital cost report. Commenters urged CMS to impress the importance 
upon the Medicare Administrative Contractors (MACs) of establishing a 
mechanism to audit the implantable device cost center to ensure that 
the costs and charges are appropriately reported. One commenter 
suggested that CMS require MACs to require hospitals to explain why 
they had not reported in the implantable device cost center. In 
addition, the commenters suggested that CMS reissue instructions, 
similar to Transmittal 321, dated February 28, 2009, to the MACs with 
recommendations that MACs develop an audit program for line 55 (Medical 
Supplies Charged to Patients) and line 55.30 (Implantable Devices 
Charged to Patients). Commenters noted that potential audit mechanisms 
include identifying the presence of revenue codes 274, 275, 276 and 624 
reported on the PS&R used to settle the cost report, and comparing the 
CCR based on line 55.30 to the CCR based on line 55. In addition, one 
commenter suggested that the cost reporting software be modified to 
create a level 1 error in the case where no data is reported on line 
55.30 (Implantable Devices Charged to Patients) to compel hospitals to 
report that information.
    Response: We agree with the commenters that the cost reporting 
lines, whether they are for Implantable Devices Charged to Patients, 
MRI, CT scans, cardiac catheterization, or any others, should be 
subject to greater audit scrutiny from the Medicare contractors. The 
new Medicare cost report form CMS-2552-10, on line 121 of Worksheet S-
2, Part I, asks ``Did this facility incur and report costs for 
implantable devices charged to a patient? Enter in column 1 ``Y'' for 
yes or ``N'' for no.'' All hospital types, including non-IPPS 
hospitals, CAHs, and Maryland inpatient short-term acute hospitals, are 
required to properly report their costs and charges, and if the answer 
to this question is Y for any type of hospital, then line 72, column 
26, of

[[Page 51504]]

Worksheet B, Part I must be greater than 0, with an accurate amount 
that reflects the hospital's costs for implantable devices charged to 
patients. In addition, we note that a Level 1 edit on the CMS-2552-10 
form already exists that ensures that line 72, column 26, of Worksheet 
B, Part I (Implantable Devices Charged to Patients on Worksheet A of 
the CMS-2552-10 form) is greater than 0 if Worksheet S-2, Part I, line 
121 is ``Y''. The edit is also set up for the reverse scenario; that 
is, if there is an amount on Worksheet B, Part I, line 72, column 26, 
then the response on Worksheet S-2, Part I, line 121 must be ``Y.''
    Comment: Some commenters supported not making major refinements to 
the calculation of MS-DRG relative weights. Commenters valued the 
consistency, transparency, and predictability of the calculation of the 
MS-DRG relative weights.
    Response: We appreciate the commenters' support for our proposal of 
not making major refinements to the MS-DRG relative weights in the 
absence of sufficient data from which to create new CCRs. We also value 
consistency, transparency, and predictability in the calculation of the 
MS-DRG relative weights.
    Comment: One commenter supported our decision to create standard 
cost centers for CT, MRI, and cardiac catheterization for hospitals to 
report their costs and charges on the Medicare hospital cost report. In 
addition, the commenter supported urgently adopting the use of the CT, 
MRI, and cardiac catheterization cost centers in calculating the MS-DRG 
relative weights.
    Response: We appreciate the commenter's support. As we stated in 
the proposed rule, we will reassess the availability of data for the 
``Implantable Devices Charged to Patients'' cost center, and the ``MRI, 
CT Scans, and Cardiac Catheterization'' cost centers, for the FY 2013 
IPPS rulemaking cycle, and, if appropriate, we will propose to create 
distinct CCRs for these cost centers at that time.
    Comment: One commenter noted that allogeneic stem cell acquisition 
charges are reported using revenue code 0819 for ``Other Organ 
Acquisition.'' However, the commenter added, this revenue code is not 
part of the 15 national cost center CCRs used in the calculation of the 
MS-DRG relative weights. In addition, the commenter stated, the 
Medicare hospital cost report does not specifically identify a cost 
center for bone marrow acquisition costs. The commenter requested 
direction on capturing these acquisition costs and how those costs and 
charges are accounted for in the MS-DRG relative weight calculation.
    Response: We appreciate this comment, but note that it is not 
within the scope of the issues discussed in the FY 2012 IPPS/LTCH PPS 
proposed rule regarding the calculation of the MS-DRG relative weights. 
However, we also note that allogeneic bone marrow transplant charges 
are included in the 15 CCRs, specifically as part of the Blood and 
Blood Products CCR and that CCR's associated cost centers on the cost 
report.
    Comment: One commenter stated that CMS should specifically exclude 
sleeve gastrectomy charges derived from the Medicare claims data and 
sleeve gastrectomy costs from the Medicare hospital cost report data 
from the MS-DRG weight recalibrations. The commenter noted that CMS 
excludes Medicare claims for services that are non-covered for Medicare 
beneficiaries from the MS-DRG relative weight calculation and, 
therefore, sleeve gastrectomy charges should be excluded. In addition, 
the commenter recommended that CMS remind providers that Medicare cost 
reports should exclude charges and costs associated with the sleeve 
gastrectomy procedure, as it is a noncovered service.
    Response: We appreciate this comment, but note that it is not 
within the scope of the issues discussed in the FY 2012 IPPS/LTCH PPS 
proposed rule regarding the calculation of the MS-DRG relative weights. 
We will take this issue into consideration for future rulemaking.
    Comment: One commenter suggested that CMS evaluate the MedPAR 
claims database to ensure that it is not using Medicare managed care 
claims data to calculate the MS-DRG relative weights, as CMS has 
proposed to only use fee-for-service claims to calculate the MS-DRG 
relative weights.
    Response: We appreciate this comment, but note that it is not 
within the scope of the issues discussed in the FY 2012 IPPS/LTCH PPS 
proposed rule regarding the calculation of the MS-DRG relative weights. 
However, we note that it is already our policy to exclude managed care 
claims from the MS-DRG relative weights calculation.
    After consideration of the public comments received, we are not 
implementing any new CCRs for use in the relative weights calculation 
for FY 2012.

F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections

1. Background
a. Statutory Authority
    Section 1886(d)(4)(D) of the Act addresses certain hospital-
acquired conditions (HACs), including infections. Section 1886(d)(4)(D) 
of the Act specifies that, by October 1, 2007, the Secretary was 
required to select, in consultation with the Centers for Disease 
Control and Prevention (CDC), at least two conditions that: (a) are 
high cost, high volume, or both; (b) are assigned to a higher paying 
MS-DRG when present as a secondary diagnosis (that is, conditions under 
the MS-DRG system that are CCs or MCCs); and (c) could reasonably have 
been prevented through the application of evidence-based guidelines. 
Section 1886(d)(4)(D) of the Act also specifies that the list of 
conditions may be revised, again in consultation with CDC, from time to 
time as long as the list contains at least two conditions.
    Section 1886(d)(4)(D)(iii) of the Act requires that hospitals, 
effective with discharges occurring on or after October 1, 2007, submit 
information on Medicare claims specifying whether diagnoses were 
present on admission (POA). Section 1886(d)(4)(D)(i) of the Act 
specifies that, effective for discharges occurring on or after October 
1, 2008, Medicare no longer assigns an inpatient hospital discharge to 
a higher paying MS-DRG if a selected condition is not POA. Thus, if a 
selected condition that was not POA manifests during the hospital stay, 
it is considered a HAC and the case is paid as though the secondary 
diagnosis was not present. However, even if a HAC manifests during the 
hospital stay, if any nonselected CC/MCC appears on the claim, the 
claim will be paid at the higher MS-DRG rate. Under the HAC payment 
policy, all CCs/MCCs on the claim must be HACs in order to generate a 
lower MS-DRG payment. In addition, Medicare continues to assign a 
discharge to a higher paying MS-DRG if a selected condition is POA.
    The POA indicator reporting requirement and the HAC payment 
provision apply to IPPS hospitals only. Non-IPPS hospitals, including 
CAHs, LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, 
hospitals in Maryland operating under waivers, rural health clinics, 
federally qualified health centers, RNHCIs, and Department of Veterans 
Affairs/Department of Defense hospitals, are exempt from POA reporting 
and the HAC payment provision. Throughout this section, the

[[Page 51505]]

term ``hospital'' refers to an IPPS hospital.
    The HAC provision found in section 1886(d)(4)(D) of the Act is part 
of an array of Medicare tools that we are using to promote increased 
quality and efficiency of care. Those tools include measuring 
performance, using payment incentives, publicly reporting performance 
results, applying national and local coverage policy decisions, 
enforcing conditions of participation, and providing direct support for 
providers through Quality Improvement Organization (QIO) activities. 
The application of these tools, such as this HAC provision, is 
transforming Medicare from a passive payer to an active purchaser of 
higher value health care services. We are applying these strategies for 
inpatient hospital care and across the continuum of care for Medicare 
beneficiaries.
    This effort is highly compatible with the underlying purposes as 
well as existing structural features of Medicare's IPPS. Under the 
IPPS, hospitals are encouraged to treat patients efficiently because 
they receive the same DRG payment for stays that vary in length and in 
the services provided, which gives hospitals an incentive to avoid 
unnecessary costs in the delivery of care. In some cases, conditions 
acquired in the hospital do not generate higher payments than the 
hospital would otherwise receive for cases without these conditions. To 
this extent, the IPPS encourages hospitals to avoid complications.
    However, the treatment of certain conditions can generate higher 
Medicare payments in two ways. First, if a hospital incurs 
exceptionally high costs treating a patient, the hospital stay may 
generate an outlier payment. Because the outlier payment methodology 
requires that hospitals experience large losses on outlier cases before 
outlier payments are made, hospitals have an incentive to prevent 
outliers. Second, under the MS-DRG system that took effect in FY 2008 
and that has been refined through rulemaking in subsequent years, 
certain conditions can generate higher payments even if the outlier 
payment requirements are not met. Under the MS-DRG system, there are 
currently 259 sets of MS-DRGs that are split into 2 or 3 subgroups 
based on the presence or absence of a CC or an MCC. The presence of a 
CC or an MCC generally results in a higher payment. However, since we 
implemented the HAC provisions, if a secondary diagnosis acquired 
during a hospital stay is a HAC and no other CCs or MCCs are present, 
the hospital receives a payment under the MS-DRGs as if the HACs were 
not present. (We refer readers to section II.D. of the FY 2008 IPPS 
final rule with comment period for a discussion of DRG reforms (72 FR 
47141).)
b. HAC Selection
    Beginning in FY 2007, we have set forth proposals, and solicited 
and responded to public comments, to implement section 1886(d)(4)(D) of 
the Act through the IPPS annual rulemaking process. For specific 
policies addressed in each rulemaking cycle, we direct readers to the 
following publications: The FY 2007 IPPS proposed rule (71 FR 24100) 
and final rule (71 FR 48051 through 48053); the FY 2008 IPPS proposed 
rule (72 FR 24716 through 24726) and final rule with comment period (72 
FR 47200 through 47218); the FY 2009 IPPS proposed rule (73 FR 23547) 
and final rule (73 FR 48471); the FY 2010 IPPS/RY 2010 LTCH PPS 
proposed rule (74 FR 24106) and final rule (74 FR 43782); and the FY 
2011 IPPS/LTCH PPS proposed rule (75 FR 23880) and final rule (75 FR 
50080). A complete list of the 10 current categories of HACs is 
included in section II.F.2. of this preamble.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 
50101), we did not add any categories of additional HACs or make any 
changes to policies already established under the authority of section 
1886(d)(4)(D) of the Act.
c. Collaborative Process
    In establishing the HAC payment policy under section 1886(d)(4)(D) 
of the Act, our experts have worked closely with public health and 
infectious disease professionals from across the Department of Health 
and Human Services, including CDC, the Agency for Healthcare Research 
and Quality (AHRQ), and the Office of Public Health and Science (OPHS), 
to identify the candidate preventable HACs, review comments, and select 
HACs. CMS and CDC also have collaborated on the process for hospitals 
to submit a POA indicator for each diagnosis listed on IPPS hospital 
Medicare claims and on the payment implications of the various POA 
reporting options. In addition, as discussed below, we have used 
rulemaking and Listening Sessions to obtain public input.
d. Application of HAC Payment Policy to MS-DRG Classifications
    As described above, in certain cases, application of the HAC 
payment policy provisions can result in MS-DRG reassignment to a lower 
paying MS-DRG. The following diagram portrays the logic of the HAC 
payment policy provision as adopted in the FY 2008 IPPS final rule with 
comment period (72 FR 47200) and in the FY 2009 IPPS final rule (73 FR 
48471):

[[Page 51506]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.002

e. Public Input Regarding Selected and Potential Candidate HACs
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50080 through 
50101), we did not add or remove categories of HACs, nor did we make 
any changes to previously established policies. However, we continue to 
encourage public dialogue about refinement of the HAC list.
    Given the timeliness of the HAC discussion, particularly when 
considered within the context of recent legislative health care reform 
initiatives, we remain eager to engage in an ongoing public dialogue 
about the various aspects of this policy. We plan to continue to 
include updates and findings from the Research Triangle Institute, 
International (RTI) evaluation on CMS' Hospital-Acquired Conditions and 
Present on Admission Indicator Web site available at: http://www.cms.hhs.gov/HospitalAcqCond/.
f. POA Indicator Reporting
    Collection of POA indicator data is necessary to identify which 
conditions were acquired during hospitalization for the HAC payment 
provision as well as for broader public health uses of Medicare data. 
In the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 23381) (and as noted 
in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50081)), we listed the 
instructions and change requests that were issued to IPPS hospitals and 
also to non-IPPS hospitals regarding the submission of POA indicator 
data for all diagnosis codes on Medicare claims and the processing of 
non-PPS claims We also indicated that specific instructions on how to 
select the correct POA indicator for each diagnosis code were included 
in the ICD-9-CM Official Guidelines for Coding and Reporting, available 
on the CDC Web site at: http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. We reiterate that additional information regarding POA 
indicator reporting and application of the POA reporting options is 
available on the CMS Web site at: http://www.cms.gov/HospitalAcqCond/.
    In preparation for the transition to the ICD-10-CM/PCS code set 
effective October 1, 2013, further information regarding the use of the 
POA indictor with the ICD-10-CM/PCS classification as it pertains to 
the HAC policy will be discussed in future rulemaking. In the meantime, 
we encourage readers to review the educational materials and draft code 
sets currently available for ICD-10-CM/PCS at the CMS Web site at: 
http://www.cms.gov/ICD10/. In addition, the draft ICD-10-CM/PCS coding 
guidelines can be viewed at the CDC Web site at: http://www.cdc.gov/nchs/data/icd9/10cmguidelines2011.
    Historically, we have not provided coding advice. Rather, we 
collaborate with the American Hospital Association (AHA) through the 
Coding Clinic for ICD-9-CM. We will continue to collaborate with the 
AHA to promote the Coding Clinic for ICD-9-CM as the source for coding 
advice about the POA indicator.
    As discussed in previous IPPS proposed and final rules, there are 
five POA indicator reporting options, as defined by the ICD-9-CM 
Official Guidelines for Coding and Reporting:

------------------------------------------------------------------------
           Indicator                           Descriptor
------------------------------------------------------------------------
Y.............................  Indicates that the condition was present
                                 on admission.
W.............................  Affirms that the hospital has determined
                                 that, based on data and clinical
                                 judgment, it is not possible to
                                 document when the onset of the
                                 condition occurred.
N.............................  Indicates that the condition was not
                                 present on admission.
U.............................  Indicates that the documentation is
                                 insufficient to determine if the
                                 condition was present at the time of
                                 admission.
1.............................  Signifies exemption from POA reporting.
                                 CMS established this code as a
                                 workaround to blank reporting on the
                                 electronic 4010A1. A list of exempt ICD-
                                 9-CM diagnosis codes is available in
                                 the ICD-9-CM Official Guidelines for
                                 Coding and Reporting.
------------------------------------------------------------------------

    In the FY 2009 IPPS final rule (73 FR 48486 through 48487), we 
adopted final payment policies to: (1) pay the CC/MCC MS-DRGs for those 
HACs coded with ``Y'' and ``W'' indicators; and (2) not pay the CC/MCC 
MS-DRGs for those

[[Page 51507]]

HACs coded with ``N'' and ``U'' indicators.
    Beginning on or after January 1, 2011, hospitals are required to 
begin reporting POA indicators using the 5010 electronic transmittal 
standards format. The 5010 format removes the need to report a POA 
indicator of ``1'' for codes that are exempt from POA reporting. 
However, for claims that continue to be submitted using the 4010 
electronic transmittal standards format, the POA indicator of ``1'' is 
still necessary because of reporting restrictions from the use of the 
4010 electronic transmittal standards format.
    Hospitals that began reporting with the 5010 format on and after 
January 1, 2011, can no longer report a POA indicator of ``1'' for POA 
exempt codes. The POA field should instead be left blank for codes 
exempt from POA reporting. We have issued CMS instructions on this 
reporting change as a One-Time Notification, Pub. No. 100-20, 
Transmittal No. 756, Change Request 7024, effective on August 13, 2010. 
These instructions, entitled ``5010 Implementation-Changes to Present 
on Admission (POA) Indicator `1' and the K3 Segment,'' can be located 
at the following link on the CMS Web site: http://www.cms.gov/manuals/downloads/Pub100_20.pdf.
    We are continuing our efforts to clarify instructions regarding use 
of the POA indicator. As discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50088), we received public comments in response to the FY 
2011 IPPS/LTCH PPS proposed rule that expressed concern about the 
accuracy of reporting of POA indicators for HACs related to 
intracranial injury with loss of consciousness. The codes for loss of 
consciousness are listed in the Falls and Trauma HAC category, within 
the ``Intracranial Injury'' subcategory. Because loss of consciousness 
is a component of intracranial injuries rather than a separate 
condition, we agreed that the POA guidelines that instructed coders to 
assign an ``N'' indicator if any part of the combination code was not 
present on admission did not apply to the loss of consciousness codes. 
As a member of the Editorial Advisory Board for the Coding Clinic for 
ICD-9-CM, we worked with the American Hospital Association (AHA), 
American Health Information Management Association (AHIMA), and CDC to 
provide additional clarification on how these conditions should be 
reported. Additional guidance on how these cases should be reported can 
be found in AHA's Coding Clinic for ICD-9-CM, 2nd Quarter 2010, 
``Frequently Asked POA Questions'' section. That publication clarified 
the POA reporting for patients in whom a single code captures the fact 
that the patient was admitted as a result of a head injury and then 
subsequently lost consciousness after the admission. For these cases, 
we clarified that the POA indicator assigned should be ``Y,'' 
indicating that the head injury and resulting loss of consciousness 
occurred prior to (and was present on) admission.
    We expect that this clarification will lead to greater consistency 
and accuracy in POA indicator reporting for these conditions. We look 
forward to continuing our efforts as part of the AHA's Editorial 
Advisory Board for Coding Clinic for ICD-9-CM to provide guidance on 
accuracy of coding and the reporting of POA indicators. Hospitals look 
to this publication to provide detailed guidance on ICD-9-CM coding and 
POA reporting. We encourage hospitals to send any other questions about 
ICD-9-CM codes or POA indicator selection to the AHA so that the 
Editorial Advisory Board can continue its role of providing instruction 
on the accurate selection and reporting of both ICD-9-CM codes and POA 
indicators.
2. Additions and Revisions to the HAC Policy for FY 2012
a. Contrast-Induced Acute Kidney Injury
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25813 and 25814), 
we discussed our analysis for a proposed new condition as a possible 
candidate for selection for FY 2012 under section 1886(d)(4)(D) of the 
Act. As described in more detail in section II.F.1.a. of this preamble, 
each HAC must be: (1) High cost, high volume, or both; (2) assigned to 
a higher paying MS-DRG when present as a secondary diagnosis (that is, 
conditions under the MS-DRG system that are CCs or MCCs); and (3) could 
reasonably have been prevented through the application of evidence-
based guidelines. We also discussed other considerations relating to 
the selection of a HAC, including any administrative or operational 
issues associated with a proposed condition. For example, the condition 
may only be able to be identified by multiple codes, thereby requiring 
the development of special GROUPER logic to also exclude similar or 
related ICD-9-CM codes from being classified as a CC or an MCC. 
Similarly, a condition acquired during a hospital stay may arise from 
another condition that the patient had prior to admission, making it 
difficult to determine whether the condition was reasonably 
preventable. We invited public comment on clinical, coding, and 
prevention issues on our proposal to add contrast-induced acute kidney 
injury as a condition subject to the HAC payment provision for FY 2012 
(for discharges occurring on or after October 1, 2011).
    Contrast-induced acute kidney injury is a significant complication 
of the use of iodinated contrast media and accounts for a large number 
of cases of hospital-acquired acute kidney injury cases. A published 
study has shown that renal failure associated with contrast 
administration is correlated with up to 11 percent of cases of renal 
failure that occur in hospitals (Nash, K., Hafeez, A., et al: 
``Hospital-Acquired Renal Insufficiency,'' American Journal on Kidney 
Disease, 2002, Vol. 39, No. 5, pp. 930-936). Patients who experience 
acute kidney injury have an increased risk of inhospital mortality even 
after adjustments for disease comorbidities (McCullough, J.: 
``Contrast-Induced Acute Kidney Injury,'' Journal of the American 
College of Cardiology, 2008, Vol. 51, No. 15, pp. 1419-1428). Data 
suggest that the risk for mortality extends beyond the period of 
hospitalization, resulting in 1-year and 5-year mortality rates 
significantly higher than those patients who have not developed acute 
kidney injury. In addition, contrast-induced acute kidney injury is 
associated with an increased incidence of myocardial infarction, 
bleeding requiring transfusion, and prolonged hospital stays 
(McCullough, J.: American Journal of Medicine, 1997, Vol. 103, pp. 368-
375). We note that ``acute kidney injury'' is a new terminology 
endorsed by the National Kidney Foundation to replace ``acute renal 
failure.''
    There is not a unique code that identifies kidney injury. However, 
kidney injury can be identified as a subset of discharges with ICD-9-CM 
diagnosis code 584.9 (Acute kidney failure, unspecified). As we 
discussed in the FY 2012 IPPS/LTCH PPS proposed rule, our clinical 
advisors believe that diagnosis code 584.9, in combination with the 
associated procedure codes listed below, can accurately identify 
contrast-induced acute kidney injury:

 88.40 (Arteriography using contrast material, unspecified 
site)
 88.41 (Arteriography of cerebral arteries)
 88.42 (Aortography)
 88.43 (Arteriography of pulmonary arteries)
 88.44 (Arteriography of other intrathoracic vessels)
 88.45 (Arteriography of renal arteries)
 88.46 (Arteriography of placenta)
 88.47 (Arteriography of other intra-abdominal arteries)

[[Page 51508]]

 88.48 (Arteriography of femoral and other lower extremity 
arteries)
 88.49 (Arteriography of other specified sites)
 88.50 (Angiocardiography, not otherwise specified)
 88.51 (Angiocardiography of venae cavae)
 88.52 (Angiocardiography of right heart structures)
 88.53 (Angiocardiography of left heart structures)
 88.54 (Combined right and left heart angiocardiography)
 88.55 (Coronary arteriography using a single catheter)
 88.56 (Coronary arteriography using two catheters)
 88.57 (Other and unspecified coronary arteriography)
 88.58 (Negative-contrast cardiac roentgenography)
 88.59 (Intra-operative coronary fluorescence vascular 
angiography)
 88.60 (Phlebography using contrast material, unspecified site)
 88.61 (Phlebography of veins of head and neck using contrast 
material)
 88.62 (Phlebography of pulmonary veins using contrast materal)
 88.63 (Phlebography of other intrathoracic veins using 
contrast material)
 88.64 (Phlebography of the portal venous system using contrast 
material)
 88.65 (Phlebography of other intra-abdominal veins using 
contrast material)
 88.66 (Phlebography of femoral and other lower extremity veins 
using contrast material)
 88.67 (Phlebography of other specified sites using contrast 
material)
 87.71 (C.A.T. of kidney)
 87.72 (Other nephrotomogram)
 87.73 (Intravenous pyelogram)
 87.74 (Retrograde pyelogram)
 87.75 (Percutaneous pyelogram)

    We proposed to identify contrast-induced acute kidney injury with 
diagnosis code 584.9 in combination with one or more of the above 
associated procedure codes.
    We also considered identifying contrast-induced acute kidney injury 
through the use of external injury codes, or E-codes. Code E947.8 
(Other drugs and medicinal substances) has an inclusion term ``Contrast 
media used for diagnostic x-ray procedures'' to identify the use of 
contrast. However, as we noted in the proposed rule, we do not 
currently require the reporting of E-codes for the HAC payment 
provisions under the IPPS. Therefore, we were unable to rely on the 
identification of contrast-induced acute kidney injury through E-codes 
on Medicare IPPS HACs claims.
    Section 1886(d)(4)(D) of the Act requires that a HAC be a condition 
that is ``high cost, high volume, or both.'' In FY 2009, there were 
38,324 inpatient discharges coded with acute renal failure as specified 
by ICD-9-CM diagnosis code 584.9 reported as not present on admission 
(POA status = N) when reported with one of the above procedure codes 
submitted through Medicare claims. The cases had an average charge of 
$29,122 for the entire hospital stay. Studies suggest the additional 
average cost per day for a patient who has acquired contrast-induced 
acute kidney injury is $2,654. Other data report patients stays 
increases by 3.75 days once they have acquired the diagnosis 
(Subramanian, S.: ``Economic Burden of Contrast-Induced Nephropathy: 
Implications for Prevention Strategies,'' Journal of Medical Economics, 
2007, Vol. 10, pp. 119-134).
    There are widely recognized guidelines for the prevention of acute 
kidney injury that address the prevention of contrast-induced acute 
kidney injury, and we believe the condition is reasonably preventable. 
One of these guidelines can be found at: http://www.renal.org/Clinical/GuidelinesSection/AcuteKidneyInjury.aspx.
    The condition of contrast-induced acute kidney injury as specified 
in our proposal is a CC under the MS-DRGs.
    We indicated in the proposed rule that we had not identified any 
additional administrative or operational difficulties with proposing 
this condition as a HAC. We invited public comment on whether contrast-
induced acute kidney injury meets the requirements set forth under 
section 1886(d)(4)(D) of the Act, as well as other coding and 
prevention issues associated with our proposal to add this injury as a 
condition subject to the HAC payment provision for FY 2012 (for 
discharges occurring on or after October 1, 2011). We also indicated 
that we were particularly interested in receiving comments on the 
degree to which contrast-induced acute kidney injury is reasonably 
preventable through the application of evidence-based guidelines.
    Comment: One commenter supported CMS' proposal to add contrast-
induced acute kidney injury as a HAC under section 1886(d)(4)(D) of the 
Act. The commenter applauded the inclusion of contrast-induced acute 
kidney injury to the HAC policy for FY 2012, and encouraged CMS to 
continue to expand and refine the HACs and categories.
    Response: We appreciate the commenter's support.
    Comment: Many commenters discussed their concerns regarding the 
specificity and sensitivity of the ICD-9-CM codes proposed to identify 
the proposed new contrast-induced acute kidney injury HAC. The 
commenters believed that these codes would not solely capture contrast-
induced acute kidney injury and would capture other conditions as well. 
The commenters expressed concern about the specificity of the current 
ICD-9-CM code 584.9 in reliably identifying cases of acute kidney 
injury that occurred due to a specific diagnosis instead of acute 
kidney injury that is believed to occur secondary to being correlated 
with exposure to contrast. The commenter stated that, for example, a 
patient admitted to a hospital could experience drug-induced kidney 
injury that has resolved; later during that hospital stay, the patient 
has a subsequent angiographic procedure. Under our proposed 
methodology, the commenter added, this patient would be erroneously 
identified as having contrast-induced acute kidney injury.
    Some commenters suggested that CMS use E-codes, which identify 
injuries, while others did not support the use of E-codes because they 
are not consistently coded for Medicare billing purposes. Commenters 
further noted that the list of ICD-9-CM procedure codes proposed to 
assist in identifying the use of contrast as the reason for the acute 
kidney injury occurring are often not reported on hospital claims. The 
commenters explained that most of the codes do not represent procedures 
affecting payment, are not required, and, therefore, are not reported.
    Other commenters recommended waiting to finalize this proposed 
candidate condition until the ICD-10 code set is implemented. The 
commenters suggested that a unique code to identify and describe 
contrast-induced acute kidney injury could be proposed in ICD-10, and 
this would eliminate the coding limitations that currently exist for 
this condition in ICD-9-CM.
    Response: We acknowledge the commenters' concerns regarding the 
current ICD-9-CM coding issues surrounding contrast-induced acute 
kidney injury, and that our proposal could inadvertently include claims 
for beneficiaries who experience acute kidney injury that may not be 
contrast-induced. We note that, as discussed in the FY 2008 IPPS final 
rule with comment period (72 FR 47216), under 42 CFR 412.60(d), a 
hospital has 60 days after the date of the notice of the initial

[[Page 51509]]

assignment of a discharge to a DRG to request a review of that 
assignment. The hospital may submit additional information as a part of 
its request. A hospital that believes a discharge was assigned to the 
incorrect DRG as a result of application of the payment adjustment for 
HACs may request review of the DRG assignment by its fiscal 
intermediary or MAC. However, we also recognize that it is important to 
be as precise as possible in specifying which codes to use to identify 
a HAC, and that a lack of precision could increase hospitals' 
administrative burden in pursuing these appeals.
    In addition, we recognize that E-codes do capture injuries and 
could offer more precision in identifying contrast-induced acute kidney 
injury than our proposal. We also agree with the commenters who pointed 
out that E-codes are currently not required for Medicare billing 
purposes and, therefore, are inconsistently reported on claims. We note 
further that because these codes are not required for Medicare IPPS 
payment purposes, MS-DRG assignments do not currently take E-codes into 
account.
    We also appreciate the comments that pointed out that the procedure 
codes identified in our proposal are often not reported. We note that 
commenters asserted that these codes were not reported because they did 
not affect payment. We are concerned that the potential for reduced 
payment would create a further disincentive to include these procedure 
codes on Medicare claims. As we stated earlier, we recognize that it is 
important to be as precise as possible in the interest of payment 
accuracy in specifying which codes to use to identify a HAC.
    We also agree that ICD-10 will offer a greater degree of 
specificity. Currently, no code exists within ICD-10 that would 
exclusively capture contrast-induced acute kidney injury. We note that, 
as discussed in the FY 2012 IPPS/LTCH proposed rule (76 FR 25843), and 
in section II.G.13.b. of this final rule, a partial code freeze was 
discussed at multiple meetings of the ICD-9-CM Coordination and 
Maintenance Committee, and public comment was actively solicited. At 
the September 15-16, 2010 meeting, an announcement was made that the 
ICD-9-CM Coordination and Maintenance Committee will implement a 
partial freeze of the ICD-9-CM and ICD-10 (ICD-10-CM and ICD-10-PCS) 
codes prior to the implementation of ICD-10 on October 1, 2013. There 
was considerable support for this partial freeze. The partial freeze 
will be implemented as follows:
     The last regular, annual updates to both ICD-9-CM and ICD-
10 code sets will be made on October 1, 2011.
     On October 1, 2012, there will be only limited code 
updates to both the ICD-9-CM and ICD-10 code sets to capture new 
technologies and diseases as required by section 503(a) of Public Law 
108-173.
     On October 1, 2013, there will be only limited code 
updates to ICD-10 code sets to capture new technologies and diagnoses 
as required by section 503(a) of Public Law 108-173. There will be no 
updates to ICD-9-CM, as it will no longer be used for reporting.
     On October 1, 2014, regular updates to ICD-10 will begin.
    The ICD-9-CM Coordination and Maintenance Committee will continue 
to meet twice a year during the partial freeze. At these meetings, the 
public will be asked to comment on whether or not requests for new 
diagnosis or procedure codes should be created based on the criteria of 
the need to capture a new technology or disease. Any code requests that 
do not meet the criteria will be evaluated for implementation within 
ICD-10 on and after October 1, 2014, once the partial freeze has ended.
    In summary, we agree with the commenters' recommendations regarding 
coding and are deferring decision making regarding the inclusion of 
contrast-induced acute kidney injury as a HAC until such a time when 
improved coding is available.
    Comment: Several commenters submitted comments pertaining to the 
sufficiency or strength of the evidence-based guidelines in terms of 
providing information or direction that would lead to the prevention of 
contrast-induced acute kidney injury 100 percent of the time. The 
commenters stated that evidence-based guidelines are based on varying 
levels of evidence, from expert consensus based on opinion (the 
``weakest'' level) to expert consensus based on data produced in 
randomized controlled trials (the ``strongest'' level). According to 
the commenters, in many cases, the guidelines do not address all 
patient populations. Commenters also stated that current evidence-based 
guidelines for decreasing the incidence of contrast-induced acute 
kidney injury are limited. The commenters also noted that new 
guidelines addressing the topic of contrast-induced acute kidney injury 
are being published in late summer of 2011 by an international 
organization, Kidney Disease Improving Global Outcomes (KDIGO), after a 
multiyear development process. They noted that CMS should take these 
guidelines into consideration when they become available.
    Response: We acknowledge that different types of evidence-based 
guidelines exist. However, we believe that the inclusion of contrast-
induced acute kidney injury in the current evidence-based guidelines 
for Acute Kidney Injury supports the inclusion of contrast-induced 
acute kidney injury as a condition on the HAC list. We agree that any 
new evidence-based guidelines for contrast-induced acute kidney injury 
should be considered when they become available.
    Comment: A few commenters expressed concern about the proposal 
potentially creating an incentive for practitioners to avoid necessary 
contrast use in patients with high risk of acute kidney disease.
    Response: We acknowledge and are sensitive to the theoretical 
possibility of patient access to care being restricted. We are unaware 
of significant data supporting this assertion, but we will continue to 
monitor the situation for potential unintended consequences with regard 
to this concern.
    Comment: Some commenters recommended that CMS not reduce payment 
for this condition, but to instead develop a quality measure that would 
track it. The commenters noted that such a measure could track whether 
the appropriate evidence-based steps to prevent contrast-induced acute 
kidney injury have been performed and documented.
    Response: We appreciate the commenters' recommendation. We note 
that we did not propose to develop a quality measure for contrast-
induced acute kidney injury in the proposed rule. Thus, we consider 
this comment to be outside of the scope of the provisions discussed in 
the proposed rule. However, this subject area represents an area of 
continued interest and opportunity for the agency, and we will take 
this recommendation into consideration during the development of future 
rulemaking.
    In conclusion, after consideration of the public comments we 
received, we are deferring the decision making on the addition of 
contrast-induced acute kidney injury as a HAC until future rulemaking, 
and such a time when improved coding is available for the reasons 
described above. We note that the reduction of contrast-induced acute 
kidney injury represents an area of continued interest for the agency, 
and we believe that substantial opportunity exists for hospitals to 
improve quality in this area.

[[Page 51510]]

b. Additional New Diagnosis Codes for Existing HACs
    As we discussed in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
25814), as changes to diagnosis codes and new diagnosis codes are 
proposed and finalized for the list of CCs and MCCs, we modify the list 
of selected HACs to reflect these changes. We included in Table 6A of 
the proposed rule (which was made available via the Internet) the five 
new ICD-9-CM diagnosis codes that we proposed to add to three of the 
current HAC categories. We proposed to add two new codes for the Falls 
and Trauma HAC category, two new codes for the Surgical Site Infection 
(SSI) Following Certain Bariatric Procedures HAC category, and one new 
code for the Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) 
Following Certain Orthopedic Procedures HAC category. The two new 
diagnosis codes that we proposed to add to the Falls and Trauma HAC 
category were code 808.44 (Multiple closed pelvic fractures without 
disruption of pelvic circle) and code 808.54 (Multiple open pelvic 
fractures without disruption of pelvic circle). These codes fall within 
the range of the fracture code subcategory (800 through 829). The two 
new diagnosis codes that we proposed to add to the Surgical Site 
Infection (SSI) Following Certain Bariatric Procedures HAC category 
were code 539.01 (Infection due to gastric band procedure) and code 
539.81 (Infection due to other bariatric procedure). We stated our 
belief that these diagnosis codes are appropriate for inclusion in the 
existing category when reported as a secondary diagnosis with the 
specified principal diagnosis code of morbid obesity (code 278.01) and 
one of the designated bariatric procedure codes (code 44.38, 44.39, or 
44.95). Lastly, the one new diagnosis code that we proposed to add to 
the Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) Following 
Certain Orthopedic Procedures HAC category was code 415.13 (Saddle 
embolus of pulmonary artery). Diagnosis code 415.13 would be applicable 
when reported along with one of the following procedures codes 
describing certain orthopedic procedures: 00.85 through 00.87, 81.51, 
81.52, or 81.54. Shown in the table below are these five new diagnosis 
codes with their corresponding descriptions and their proposed CC/MCC 
designations.

------------------------------------------------------------------------
                                                        Proposed CC/MCC
         ICD-9-CM code             Code descriptor        designation
------------------------------------------------------------------------
539.01........................  Infection due to       CC
                                 gastric band
                                 procedure.
539.81........................  Infection due to       CC
                                 other bariatric
                                 procedure.
415.13........................  Saddle embolus of      MCC
                                 pulmonary artery.
808.44........................  Multiple closed        CC
                                 pelvic fractures
                                 without disruption
                                 of pelvic circle.
808.54........................  Multiple open pelvic   MCC
                                 fractures without
                                 disruption of pelvic
                                 circle.
------------------------------------------------------------------------

    We invited public comments on the proposed adoption of these five 
new ICD-9-CM diagnosis codes as CC/MCCs that are listed above, which, 
if finalized, would be added to the current Falls and Trauma HAC 
category, Surgical Site Infection (SSI) Following Certain Bariatric 
Procedures HAC category and Deep Vein Thrombosis and Pulmonary Embolism 
(DVT/PE) Following Certain Orthopedic Procedures HAC category and would 
be subject to the HAC payment provision for FY 2012.
    Comment: Several commenters supported CMS' proposal to adopt the 
five new ICD-9-CM diagnosis codes with their proposed CC/MCC 
designations for addition to the current Falls and Trauma HAC category, 
Surgical Site Infection (SSI) Following Certain Bariatric Procedures 
HAC category, and Deep Vein Thrombosis and Pulmonary Embolism (DVT/PE) 
Following Certain Orthopedic Procedures HAC category and to subject 
them to the HAC payment provision for FY 2012.
    Response: We appreciate the commenters' support.
    Comment: One commenter expressed concern regarding the 
appropriateness of adding ICD-9-CM diagnosis code 415.13 as a condition 
that, when reported along with the designated procedure codes 
describing certain orthopedic procedures (00.85 through 00.87, 81.51, 
81.52, or 81.54) in the Deep Vein Thrombosis and Pulmonary Embolism 
(DVT/PE) Following Certain Orthopedic Procedures HAC category, be 
subject to the HAC payment provision. The commenter stated that HAC 
selection should be based on conditions considered to be reasonably 
preventable with adherence to evidence-based practice guidelines. The 
commenter further believed that a saddle embolus of the pulmonary 
artery, when reported with the cited orthopedic procedure codes, is not 
a condition that is ``reasonably preventable'' and that patients 
undergoing total knee replacement and total hip replacement in the 
Medicare population are at the highest risk for developing a DVT/PE.
    The commenter also stated that the current structure of the MS-DRG 
system does not specifically risk-adjust for these conditions in the 
MS-DRGs related to primary total hip replacement (code 81.51) or 
primary total knee replacement (code 81.54). The commenter believed 
that risk adjustment is an indispensible component of an equitable HAC 
policy. The commenter suggested that CMS account for the patient-
specific risk factors that affect preventability and reported that many 
hospitalized patients have comorbidities and other patient 
characteristics that put them at an increased risk of complications. 
The commenter suggested that CMS take these factors into account in 
creating a policy that is reasonable and equitable, in order to 
minimize incentives for limiting access for patients who are at higher 
risk for complications.
    This same commenter also expressed support of CMS' efforts to 
encourage the adoption of evidence-based treatment guidelines that 
could improve the quality of care for patients. However, while the 
commenter noted that evidence-based guidelines can reduce events, the 
commenter asserted that CMS selected one of the patient populations at 
highest risk for DVT/PE, diverging from the concept of ``reasonably 
preventable.''
    Response: We appreciate the commenter's detailed comments on the 
proposal to add diagnosis code 415.13 as a condition that, when 
reported along with the designated procedure codes described above, is 
subject to the HAC payment provision. In the FY 2008 IPPS final rule 
with comment period (72 FR 47200 through 47218), we discussed the 
evidence based guidelines regarding DVT/PE and agreed with commenters 
that this is reasonably preventable. In the FY 2009 IPPS final rule (73 
FR 48481), we addressed commenters' concerns regarding the 
preventability of DVT/PE and noted that the statute does not require 
that a condition be ``always preventable''' in order to qualify as an

[[Page 51511]]

HAC, but rather that it be ``reasonably preventable,'' which 
necessarily implies something less than 100 percent.
    With regard to the commenter's assertion that risk adjustment is an 
indispensible component of an equitable HAC policy, we refer readers to 
the FY 2009 IPPS final rule and the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule. In the FY 2009 IPPS final rule (73 FR 48487 through 48488), we 
discussed risk adjustment of payments related to HACs. We addressed 
this issue again in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43785), where we noted that a risk adjustment methodology may lead to 
greater precision of HAC payment determinations. As part of the RTI 
evaluation of the HAC-POA program, the concept of risk adjustment 
continues to be an important area of interest and study for the agency. 
We will consider the results of RTI's evaluation when it is complete 
and, if appropriate, make a proposal and solicit public comment in 
future rulemaking.
    After consideration of the public comments we received, we are 
finalizing the adoption of the five new ICD-9-CM diagnosis codes 
described above as CC/MCCs to be added to their respective HAC 
categories as proposed. Therefore, effective October 1, 2011 (FY 2012), 
procedure codes 808.44 and 808.54 describing multiple pelvic fractures 
will be added to the Falls and Trauma HAC category, procedure codes 
539.01 and 539.81 describing infections related to gastric procedures 
will be added to the Surgical Site Infection (SSI) Following Certain 
Bariatric Procedures HAC category, and procedure code 415.13 describing 
a type of pulmonary embolus will be added to the Deep Vein Thrombosis 
and Pulmonary Embolism (DVT/PE) Following Certain Orthopedic Procedures 
HAC category. All of these conditions will be subject to the HAC 
payment provision for FY 2012.
c. Revision to HAC Subcategory Title
    After publication of the FY 2011 IPPS/LTCH PPS final rule, we 
received a comment stating that the subcategory title ``Electric 
Shock'' that is included in the Falls and Trauma HAC category was 
misleading. The commenter stated that this subcategory title did not 
accurately describe the CC/MCC ICD-9-CM diagnoses codes (991 through 
994) contained within this subcategory. The commenter requested that 
CMS develop a new title that would more accurately describe this group 
of codes.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25814), we stated 
that we agreed with the commenter that the HAC subcategory title 
``Electric Shock'' is potentially misleading because the codes included 
within these ranges contain a variety of injuries, including the 
following:

 Category 991 (Effects of Reduced Temperature)
 Category 992 (Effects of Heat and Light)
 Category 993 (Effects of Air Pressure)
 Category 994 (Effects of Other External Causes)

    We proposed to change the title of this HAC subcategory from 
``Electric Shock'' to ``Other Injuries'' because it includes a variety 
of injury codes. The subcategory will continue to include the codes 
within the 991 through 994 code ranges appearing on the CC/MCC list. We 
did not propose any changes to the list of codes in this subcategory; 
we simply proposed to rename the subcategory title. We invited public 
comments on the proposed title change to the HAC subcategory from 
``Electric Shock'' to ``Other Injuries'' for FY 2012.
    Comment: Several commenters supported CMS' proposal to change the 
title of this HAC subcategory from ``Electric Shock'' to ``Other 
Injuries'' because it includes a variety of injury codes. The 
commenters stated that this title change would better describe the 
conditions included in the range of codes.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to change the title of the HAC subcategory from 
``Electric Shock'' to ``Other Injuries.'' The subcategory will continue 
to include the codes within the 991 through 994 code ranges appearing 
on the CC/MCC list. In addition, we are not making any changes to the 
list of codes in this subcategory; the subcategory title will simply be 
renamed effective FY 2012.
d. Conclusion
    In the FY 2012 IPPS/LTCH PPS proposed rule, we listed the current 
HAC categories and the ICD-9-CM codes that identify the conditions and 
have been finalized through FY 2011. For FY 2012, we proposed that 
these conditions continue to be subject to the HAC payment provision, 
along with the creation of a new HAC category for contrast-induced 
acute kidney injury. (We note that, as discussed in section II.F.2.a. 
of the preamble of the proposed rule and this final rule, we are not 
adopting our proposal to add a new HAC category for contrast-induced 
acute kidney injury for FY 2012.) In addition, we proposed to add five 
new ICD-9-CM diagnosis codes and to revise the title of the ``Electric 
Shock'' subcategory in the Falls and Trauma HAC category.
    Comment: Several commenters supported maintaining the current HAC 
categories and the ICD-9-CM codes that identify those conditions. These 
commenters agreed that the conditions should continue to be subject to 
the HAC payment provision for FY 2012.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
adopting the following list of HAC categories and the ICD-9-CM codes 
that identify the conditions that have been finalized through FY 2011 
and that we are finalizing in this final rule for FY 2012.

------------------------------------------------------------------------
                  HAC                         CC/MCC (ICD-9-CM Code)
------------------------------------------------------------------------
Foreign Object Retained After Surgery..  998.4 (CC)
                                         998.7 (CC)
Air Embolism...........................  999.1 (MCC)
Blood Incompatibility..................  999.60 (CC)
                                         999.61 (CC)
                                         999.62 (CC)
                                         999.63 (CC)
                                         999.69 (CC)
Pressure Ulcer Stages III & IV.........  707.23 (MCC)
                                         707.24 (MCC)
Falls and Trauma:                        Codes within these ranges on
                                          the CC/MCC list:
    --Fracture.........................     800-829
    --Dislocation......................     830-839

[[Page 51512]]

 
    --Intracranial Injury..............     850-854
    --Crushing Injury..................     925-929
    --Burn.............................     940-949
    --Other Injuries...................     991-994
Catheter-Associated Urinary Tract        996.64 (CC)
 Infection (UTI).                        Also excludes the following
                                          from acting as a CC/MCC:
                                            112.2 (CC)
                                            590.10 (CC)
                                            590.11 (MCC)
                                            590.2 (MCC)
                                            590.3 (CC)
                                            590.80 (CC)
                                            590.81 (CC)
                                            595.0 (CC)
                                            597.0 (CC)
                                            599.0 (CC)
Vascular Catheter-Associated Infection.  999.31 (CC)
Manifestations of Poor Glycemic Control  250.10-250.13 (MCC)
                                         250.20-250.23 (MCC)
                                            251.0 (CC)
                                            249.10-249.11 (MCC)
                                            249.20-249.21 (MCC)
------------------------------------------------------------------------
                        Surgical Site Infections
------------------------------------------------------------------------
Surgical Site Infection, Mediastinitis,  519.2 (MCC)
 Following Coronary Artery Bypass Graft  And one of the following
 (CABG).                                  procedure codes:
                                            36.10-36.19
Surgical Site Infection Following        996.67 (CC)
 Certain Orthopedic Procedures.          998.59 (CC)
                                         And one of the following
                                          procedure codes: 81.01-81.08,
                                          81.23-81.24, 81.31-81.38,
                                          81.83, 81.85
Surgical Site Infection Following        Principal Diagnosis--278.01
 Bariatric Surgery for Obesity.          539.01 (CC)
                                         539.81 (CC)
                                         998.59 (CC)
                                         And one of the following
                                          procedure codes: 44.38, 44.39,
                                          or 44.95
Deep Vein Thrombosis and Pulmonary       415.11 (MCC)
 Embolism Following Certain Orthopedic   415.13 (MCC)
 Procedures.                             415.19 (MCC)
                                            453.40-453.42 (CC)
                                         And one of the following
                                          procedure codes: 00.85-00.87,
                                          81.51-81.52, or 81.54
------------------------------------------------------------------------

    We refer readers to section II.F.6. of the FY 2008 IPPS final rule 
with comment period (72 FR 47202 through 47218) and to section II.F.7. 
of the FY 2009 IPPS final rule (73 FR 48474 through 48486) for detailed 
analyses supporting the selection of each of the HACs selected through 
FY 2012.
3. RTI Program Evaluation Summary
a. Background
    On September 30, 2009, a contract was awarded to Research Triangle 
Institute, International (RTI) to evaluate the impact of the Hospital-
Acquired Condition-Present on Admission (HAC-POA) provisions on the 
changes in the incidence of selected conditions, effects on Medicare 
payments, impacts on coding accuracy, unintended consequences, and 
infection and event rates. This is an intra-agency project with funding 
and technical support coming from CMS, OPHS, AHRQ, and CDC. The 
evaluation will also examine the implementation of the program and 
evaluate additional conditions for future selection.
    RTI's evaluation of the HAC-POA provisions is divided into several 
parts. In the FY 2011 IPPS/LTCH PPS final rule (50085 through 50101), 
we summarized the analyses by RTI that had been completed at that time. 
These RTI analyses of POA indicator reporting, frequencies and net 
savings associated with current HACs, and frequencies of previously 
considered candidate HACs reflected MedPAR claims from October 2008 
through September 2009.
b. FY 2009 Data Analysis
    As we describe in section II.F.1.f. of this preamble, we have 
provided instructions to IPPS hospitals and non-IPPS hospitals 
regarding the submission of POA indicator data for all diagnosis codes 
on Medicare claims and the processing of non-PPS claims (75 FR 23381) 
and note that specific instructions on how to select the correct POA 
indicator for each diagnosis code were included in the ICD-9-CM 
Official Guidelines for Coding and Reporting, available on the CDC Web 
site at: http://www.cdc.gov/nchs/data/icd9/icdguide10.pdf. After 
publication of the FY 2011 IPPS/LTCH PPS final rule, we identified a 
discrepancy between the claims data that hospitals submitted and the 
CMS data file used to calculate the HAC measures. Specifically, this 
error led to incorrect HAC assignments in cases where a hospital 
reported an external cause of injury (E-code). Since then, we have 
corrected this error in the data file.
    As a result, the RTI analysis of the HAC-POA program that was 
conducted using FY 2009 claims data was updated using the corrected 
data file. The corrected data do not appear to have a

[[Page 51513]]

material impact on our previous findings for FY 2009. Revised data 
tables were made publicly available on the CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and the RTI Web site at 
http://www.rti.org/reports/cms/ after publication of the FY 2012 IPPS/
LTCH PPS proposed rule.
c. FY 2010 Data Analysis
    RTI's analysis of the FY 2010 MedPAR data file for the HAC-POA 
program evaluation was prepared for publication in the FY 2012 IPPS/
LTCH PPS proposed rule. We indicated in the proposed rule that we would 
provide the results from the study on the CMS Web site at http://www.cms.gov/HospitalAcqCond/01_Overview.asp and on the RTI Web site at 
http://www.rti.org/reports/cms/ when it became available. We also 
stated that we anticipated that the examination of FY 2010 MedPAR data 
would be completed soon after publication of the proposed rule. We 
invited public comment on RTI's analysis of the FY 2010 MedPAR data for 
the HAC-POA program.
    Since publication of the FY 2012 IPPS/LTCH proposed rule, we 
determined that it would be beneficial to the public if we provided a 
summary of the results of RTI's HAC-POA program evaluation of the FY 
2010 MedPAR data in this FY 2012 IPPS/LTCH final rule, in addition to 
making these results available on both the CMS and RTI Web sites 
mentioned above. Below we present a summary of these results.
d. FY 2010 RTI Analysis on POA Indicator Reporting of Current HACs.
    To better understand the impact of HACs on the Medicare program, it 
is necessary to first examine the incidence of POA indicator reporting 
across all eligible Medicare discharges. As mentioned previously, only 
IPPS hospitals are required to submit POA indicator data for all 
diagnosis codes on Medicare claims. Therefore, all non-IPPS hospitals 
were excluded, as well as providers in waiver States (Maryland) and 
territories other than Puerto Rico.
    Using MedPAR claims data from October 2009 through September 2010, 
RTI found a total of approximately 74.38 million secondary diagnoses 
across approximately 10.2 million discharges. As shown in Chart A 
below, the majority of all secondary diagnoses (80.94 percent) were 
reported with a POA indicator of ``Y,'' meaning the condition was POA.

      Chart A--POA Code Distribution Across All Secondary Diagnoses
------------------------------------------------------------------------
                                           Number          Percentage
------------------------------------------------------------------------
Total Discharges in Final File                                10,189,168
------------------------------------------------------------------------
 Total Number of Secondary Diagnoses        74,382,681            100.00
       Across Total Discharges
------------------------------------------------------------------------
POA Indicator Description:
Y Condition present on admission....        60,206,593             80.94
W Status cannot be clinically                   13,145              0.02
 determined.........................
N Condition not present on admission         5,001,138              6.72
U Documentation not adequate to              2,223,318              2.99
 determine if condition was present
 on admission.......................
1 Exempted ICD-9-CM code............         6,938,487              9.33
------------------------------------------------------------------------
Source: RTI Analysis of MedPAR IPPS Claims, October 2009 through
  September 2010.

    Following the initial analysis of POA indicator reporting for all 
secondary diagnoses, RTI then evaluated POA indicator reporting for 
specific HAC-associated secondary diagnoses. The term ``HAC-associated 
secondary diagnosis'' refers to those diagnoses that are on the 
selected HAC list and were reported as a secondary diagnosis. Chart B 
below shows a summary of the HAC categories with the frequency in which 
each HAC was reported as a secondary diagnosis and the corresponding 
POA indicators assigned on the claims. It is important to note that, 
because more than one HAC-associated diagnosis code can be reported per 
discharge (that is, on a single claim), the frequency of HAC-associated 
diagnosis codes may be more than the actual number of discharges that 
have a HAC-associated diagnosis code reported as a secondary diagnosis. 
Below we discuss the frequency of each HAC-associated diagnosis code 
and the POA indicators assigned to those claims.
    RTI analyzed the frequency of each reported HAC-associated 
secondary diagnosis (across all approximately 10.2 million discharges) 
and the POA indicator assigned to the claim. Chart B below shows that 
the most frequently reported conditions were in the Falls and Trauma 
HAC category, with a total of 189,231 HAC-associated diagnosis codes 
being reported for that HAC category. Of these 189,231 diagnoses, 5,762 
reported a POA indicator of ``N'' and 326 reported a POA indicator of 
``U'' for not POA. Similarly, 183,048 diagnoses reported a POA 
indicator of ``Y'' for POA and 95 diagnoses reported a POA indicator of 
``W.'' The lowest frequency appears in the Surgical Site Infection 
(SSI) Following Bariatric Surgery for Obesity HAC category with only 18 
HAC-associated secondary diagnosis codes (and procedure codes) 
reported, where 17 diagnoses were reported with a POA indicator of 
``N'' and 1 diagnosis was reported with a POA indicator of ``Y.''

                                        Chart B--POA Status of Current HACS: October 2009 Through September 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                               Treated as hospital acquired          Not treated as Hospital acquired
                                                                                        conditions                              conditions
                                                         Frequency as a  -------------------------------------------------------------------------------
                     Selected HAC                          secondary            POA = N             POA = U             POA = Y             POA = W
                                                           diagnosis     -------------------------------------------------------------------------------
                                                                           Number    Percent   Number    Percent   Number    Percent   Number    Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Foreign Object Retained After Surgery (CC)........                565       278      49.2         1       0.2       286      50.6         0       0.0
2. Air Embolism (MCC)................................                 42        29      69.0         0       0.0        13      31.0         0       0.0
3. Blood Incompatibility (CC)........................                 35        12      34.3         0       0.0        23      65.7         0       0.0
4. Pressure Ulcer Stages III & IV (MCC)..............            120,582     1,407       1.2        81       0.1   119,065      98.7        29       0.0

[[Page 51514]]

 
5. Falls and Trauma (MCC & CC).......................            189,231     5,762       3.0       326       0.2   183,048      96.7        95       0.1
6. Catheter-Associated UTI (CC)......................             18,247     3,877      21.2        24       0.1    14,319      78.5        27       0.1
7. Vascular Catheter-Associated Infection (CC).......             10,066     4,346      43.2        25       0.2     5,673      56.4        22       0.2
8. Poor Glycemic Control (MCC).......................             16,468       565       3.4        14       0.1    15,888      96.5         1       0.0
9A. Surgical Site Infection Mediastinitis CABG (CC)..                 40        36      90.0         0       0.0         4      10.0         0       0.0
9B. Surgical Site Infection Following Certain                        365       220      60.3         1       0.3       144      39.5         0       0.0
 Orthopedic Procedures (CC)..........................
9C. Surgical Site Infection Following Bariatric                       18        17      94.4         0       0.0         1       5.6         0       0.0
 Surgery for Obesity (CC)............................
10. Pulmonary Embolism & DVT Orthopedic (MCC)........              3,820     3,132      82.0        16       0.4       648      17.0        24       0.6
                                                      --------------------------------------------------------------------------------------------------
    Total*...........................................            359,479    19,681       5.5       488       0.1   339,112      94.3       198       0.1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As described in section II.F.1.f. of this preamble, in the FY 2009 
IPPS final rule (73 FR 48486 through 48487), we adopted final payment 
policies to: (1) Pay the CC/MCC MS-DRGs for those HACs coded with ``Y'' 
and ``W'' indicators; and (2) not pay the CC/MCC MS-DRGs for those HACs 
coded with ``N'' and ``U'' indicators. We also discussed the comments 
we received urging CMS to consider changing the policy and to pay for 
those HACs assigned a POA indicator of ``U'' (documentation is 
insufficient to determine if the condition was present at the time of 
admission). We stated we would monitor the extent to which and under 
what circumstances the ``U'' POA reporting option is used. In the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43784 and 43785), we also 
discussed and responded to comments regarding HACs coded with the ``U'' 
indicator. As shown in Chart B above, RTI's analysis provides data on a 
total of 488 HAC-associated secondary diagnoses reported with a POA 
indicator of ``U.'' These 488 diagnoses represented 2.4 percent of the 
20,169 diagnoses that were considered not POA (that is, POA indicator 
of ``N'' or ``U''). Approximately 3 of the 10 conditions reported no 
diagnoses with POA indicators of ``U'': Air embolism, Blood 
Incompatibility, and two of the three surgical site infections 
(Mediastinitis after CABG and SSI after bariatric surgery for obesity). 
For the two most frequently occurring conditions, the Falls and Trauma 
HAC category and Stage III and/or IV Pressure Ulcers, diagnoses with a 
POA indicator of ``U'' represented a small proportion of diagnoses that 
were considered not POA (that is, POA indicator of ``N'' or ``U''). For 
the Falls and Trauma HAC category, 5.7 percent of diagnoses (326 cases) 
considered not POA were reported with a POA indicator of ``U.'' For 
Stage III and/or IV Pressure Ulcers, 5.4 percent of diagnoses (81 
cases) considered not POA were reported with a POA indicator of ``U.'' 
These two categories also represented the conditions where diagnoses 
with a POA indicator of ``U'' were the highest proportion of diagnoses 
considered not POA. We consider the range of 0 to 5.7 percent to 
indicate that ``U'' is not used with great frequency for these 10 
conditions. In the proposed rule, we stated that we did not contemplate 
a proposal to change our policy under which CMS does not pay at the 
higher CC/MCC amount when a selected HAC diagnosis code is reported 
with a POA indicator of ``U.'' The data analysis described above 
continues to support our policy.
    We encourage readers to further review the RTI detailed report 
which demonstrates the frequency of each individual HAC-associated 
diagnosis code within the HAC categories. As an example, we note that 
in the Foreign Object Retained After Surgery HAC category, there are 
two unique ICD-9-CM diagnosis codes used to identify that condition: 
diagnosis code 998.4 (Foreign body accidentally left during a 
procedure) and diagnosis code 998.7 (Acute reaction to foreign 
substance accidentally left during a procedure). In the detailed RTI 
report, readers can view that diagnosis code 998.4 was reported 547 
times and diagnosis code 998.7 was reported 18 times, across all MS-
DRGs, for a total of 565 times. The RTI detailed report is available at 
the following Web site: http://www.rti.org/reports/cms/.
e. FY 2010 RTI Analysis of Frequency of Discharges and POA Indicator 
Reporting for Current HACs
    RTI further analyzed the effect of the HAC provision by studying 
the frequency with which a HAC-associated diagnosis was reported as a 
secondary diagnosis with a POA indicator of ``N'' or ``U'' and, of that 
number, how many resulted in MS-DRG reassignment. In Chart C below, 
Column A shows the number of discharges for each HAC category where the 
HAC-associated diagnosis was reported as a secondary diagnosis. Column 
B shows the percent of discharges reporting a HAC-associated diagnosis 
code relative to the total discharges ``at risk'' in each HAC category. 
For HAC categories 1 through 8, both medical and surgical MS-DRGs are 
included in the total discharges ``at risk'' so this equates to 
10,189,168 discharges. The remaining HAC categories are defined by the 
combination of diagnosis and procedure codes; therefore, only the 
surgical MS-DRGs that include the designated procedure codes are 
included in the total discharges ``at risk.'' For HAC 9a, the total 
discharges ``at risk'' equates to 97,341. For HAC 9b, the total 
discharges ``at risk'' equates to 118,815 and for HAC 9c, the total 
discharges ``at risk'' equates to 15,698. Lastly, for HAC 10, the total 
discharges ``at risk'' equates to 440,571.
    Column C shows the number of discharges for each HAC reported with 
a POA indicator of ``N'' or ``U.'' For example, there were 42 
discharges that reported Air Embolism as a secondary diagnosis. The 
chart shows that, of these 42 reported discharges, 29 discharges (69.05 
percent) had a POA indicator of ``N'' or ``U'' and was identified as a 
HAC discharge. The HAC policy applied to these 29 discharges, and they 
could, therefore, have had an MS-DRG reassignment. Column E shows the 
number of discharges where an actual MS-DRG reassignment occurred. For 
the Air Embolism HAC, Column E shows that the number of discharges that 
resulted in actual MS-DRG reassignments is 15 (51.72 percent of the 29 
discharges with a POA indicator of ``N'' or ``U''). Thus, while there 
were 29 discharges (69.05 percent of the original

[[Page 51515]]

42 that had air embolism reported as a secondary diagnosis) with an air 
embolism reported with a POA indicator of ``N'' or ``U'' identified as 
a HAC discharge that could have caused MS-DRG reassignment, 15 
discharges (51.72 percent) experienced MS-DRG reassignments. There are 
a number of reasons why a selected HAC reported with a POA indicator of 
``N'' or ``U'' will not result in MS-DRG reassignment. These reasons 
were illustrated with the diagram in section II.F.1.c. of this preamble 
and will be discussed in further detail in section II.F.3.e. of this 
preamble.
    Chart C below also shows that, of the 317,644 discharges with a 
HAC-associated diagnosis as a secondary diagnosis, 3,587 discharges 
ultimately resulted in MS-DRG reassignment. As we discuss below, there 
were 15 claims that resulted in MS-DRG reassignment where 2 HACs were 
reported on the same admission. The four HAC categories that had the 
most discharges resulting in MS-DRG reassignment were: (1) Falls and 
Trauma; (2) Pulmonary Embolism and DVT Orthopedic (Orthopedic PE/DVT); 
(3) Pressure Ulcer Stages III & IV; and (4) Catheter-Associated Urinary 
Tract Infection (UTI).
    Codes falling under the Falls and Trauma HAC category were the most 
frequently reported secondary diagnoses with 154,371 discharges. Of 
these 154,371 discharges, 5,454 (3.53 percent) were coded as not POA 
and identified as HAC discharges. This category also contained the 
greatest number of discharges that resulted in an MS-DRG reassignment. 
Of the 5,454 discharges within this HAC category that were not POA, 
1,672 (30.66 percent) resulted in an MS-DRG reassignment.
    Of the 317,644 total discharges reporting HAC-associated diagnoses 
as a secondary diagnosis, 3,494 discharges were coded with a secondary 
diagnosis of PE/DVT Orthopedic. Of these 3,494 discharges, 2,876 (82.31 
percent) were coded as not POA and identified as HAC discharges. This 
category contained the second greatest number of discharges resulting 
in an MS-DRG reassignment. Of the 2,876 discharges in this HAC category 
that were not POA, 1,206 discharges (41.93 percent) resulted in an MS-
DRG reassignment.
    The Pressure Ulcer Stages III & IV category had the second most 
frequently coded secondary diagnoses, with 114,138 discharges. Of these 
discharges, 1,444 (1.27 percent) were coded as not POA and identified 
as HAC discharges. This category contained the third greatest number of 
discharges resulting in an MS-DRG reassignment. Of the 1,444 discharges 
in this HAC category that were not POA, 292 discharges (20.22 percent) 
resulted in an MS-DRG reassignment.
    The Catheter-Associated UTI category had the third most frequently 
coded secondary diagnoses, with 18,247 discharges. Of these discharges, 
3,885 (21.29 percent) were coded as not POA and identified as HAC 
discharges. This category contained the fourth greatest number of 
discharges resulting in an MS-DRG reassignment. Of the 3,885 discharges 
in this HAC category that were not POA, 223 discharges (5.74 percent) 
resulted in a MS-DRG reassignment.
    The remaining 6 HAC categories only had 194 discharges that 
ultimately resulted in MS-DRG reassignment. We note that, even in cases 
where a large number of HAC-associated secondary diagnoses were coded 
as not POA, this finding did not necessarily translate into a large 
number of discharges that resulted in MS-DRG reassignment. For example, 
only 22 of the 4,366 Vascular Catheter-Associated Infection secondary 
diagnoses that were coded as not POA and identified as HAC discharges 
resulted in a MS-DRG reassignment.
    There were a total of 364 discharges with a HAC-associated 
secondary diagnosis reporting a POA indicator of ``N'' or ``U'' that 
were excluded from acting as a HAC discharge (subject to MS-DRG 
reassignment) due to the CC Exclusion List logic within the GROUPER. 
The CC Exclusion List identifies secondary diagnosis codes designated 
as a CC or MCC that are disregarded by the GROUPER logic when reported 
with certain principal diagnoses. For example, a claim with the 
principal diagnosis code of 250.83 (Diabetes with other specified 
manifestations, type 1 [juvenile type], uncontrolled) and a secondary 
diagnosis code of 250.13 (Diabetes with ketoacidosis, type 1, [juvenile 
type], uncontrolled) with a POA indicator of ``N'' would result in the 
HAC-associated secondary diagnosis code 250.13 being ignored as a CC. 
According to the CC Exclusion List, code 250.13 is excluded from acting 
as a CC when code 250.83 is the principal diagnosis. As a result, the 
HAC logic would not be applicable to that case. For a detailed 
discussion on the CC Exclusion List, we refer readers to section 
II.G.9. of this preamble.
    Discharges where the HAC logic was not applicable due to the CC 
Exclusion List occurred among the following 6 HAC categories: Pressure 
Ulcer Stages III and IV (29 cases); Falls and Trauma (263 cases); 
Catheter-Associated UTI (16 cases); Vascular Catheter-Associated 
Infection (5 cases); Manifestations of Poor Glycemic Control (50 
cases); and Surgical Site Infection Following Certain Orthopedic 
Procedures (1 case). Further information regarding the specific number 
of cases that were excluded for each HAC-associated secondary diagnosis 
code within each of the above mentioned HAC categories is also 
available in the RTI detailed report, which can be found at: http://www.rti.org/reports/cms/.
    In summary, Chart C below demonstrates that there were a total of 
317,644 discharges with a reported HAC-associated secondary diagnosis. 
Of the total 317,644 discharges, 6.0 percent, or 19,143 discharges, 
were HACs reported with a POA indicator of ``N'' or ``U'' that were 
identified as a HAC discharge. Approximately 18.7 percent, or 3,587 
discharges, of these 19,143 discharges resulted in MS-DRG 
reassignments.

             Chart C--Discharge Frequencies of Current CMS HACS October 2009 Through September 2010
----------------------------------------------------------------------------------------------------------------
                                      Discharges with this    Discharges identified as   Discharges that change
                                     condition as secondary             a HAC               MS-DRG due to HAC
                                            diagnosis        ---------------------------------------------------
       Selected HAC category       --------------------------
                                       Number    Percent \2\     Number    Percent \3\     Number    Percent \4\
                                     (column a)   (column b)   (column c)   (column d)   (column e)   (column f)
----------------------------------------------------------------------------------------------------------------
1. Foreign Object Retained After            563         0.01          278        49.38           44        15.83
 Surgery..........................
2. Air Embolism...................           42         0.00           29        69.05           15        51.72
3. Blood Incompatibility..........           35         0.00           12        34.29            0         0.00
4. Pressure Ulcer Stages III & IV.      114,138         1.12        1,444         1.27          292        20.22
5. Falls and Trauma...............  ...........  ...........  ...........  ...........  ...........  ...........
a. Fracture.......................      137,888         1.35        4,700         3.41        1,439        30.62

[[Page 51516]]

 
b. Dislocation....................        1,105         0.01           35         3.17            4        11.43
c. Intracranial Injury............       15,844         0.16          706         4.46          234        33.14
d. Crushing Injury................           41         0.00            2         4.88            1        50.00
e. Burn...........................        2,297         0.02           39         1.70            6        15.38
f. Electric Shock.................          818         0.01            9         1.10            0         0.00
Less: Discharges with multiple           -3,622        -0.04          -37        -1.02          -12       -32.43
 Falls & Trauma...................
5. Falls and Trauma: Unduplicated       154,371         1.52        5,454         3.53        1,672        30.66
 Total............................
6. Catheter-Associated UTI........       18,247         0.18        3,885        21.29          223         5.74
7. Vascular Catheter-Associated          10,066         0.10        4,366        43.37           22         0.50
 Infection........................
8. Poor Glycemic Control..........       16,267         0.16          526         3.23          107        20.34
9a. SSI Mediastinitis CABG........           40         0.04           36        90.00            4        11.11
9b. SSI Orthopedic................          363         0.31          220        60.61            2         0.91
9c. SSI Bariatric.................           18         0.11           17        94.44            0         0.00
10. Pulmonary Embolism & DVT              3,494         0.79        2,876        82.31        1,206        41.93
 Orthopedic.......................
                                   -----------------------------------------------------------------------------
    Total \1\.....................      317,644  ...........       19,143  ...........        3,587  ...........
----------------------------------------------------------------------------------------------------------------
\1\ Discharges can appear in more than one row. The total figure is not adjusted for the 94 discharges with more
  than one HAC that appear as secondary diagnoses (15 of these resulted in MS-DRG reassignment).
\2\ Percent computed relative to total discharges ``at risk'' for this HAC. For HACs 1-8, this is 10,189,168.
  For HAC 9a, this is 97,341. For HAC 9b, this is 118,815. For HAC 9c, this is 15,698. For HAC 10, this is
  440,571.
\3\ Percent computed relative to discharges with condition as a secondary diagnosis.
\4\ Percent computed relative to discharges with this HAC (Column C).
Source: RTI Analysis of MedPAR IPPS Claims, October 2009 through September 2010.

    An extremely small number of discharges had multiple HACs reported 
during the same stay. In reviewing the approximately 10.2 million 
claims, RTI found approximately 94 cases in which 2 HACs were reported 
on the same discharge. Chart D below summarizes these cases. Thirty-two 
of the cases with 2 HACs involved Pressure Ulcer Stages III & IV, and 
31 cases involved Falls or Trauma. Other multiple HAC cases included 27 
Catheter-Associated UTI cases, 3 Vascular Catheter-Associated Infection 
cases and 1 Foreign Object Retained After Surgery case. There were 
eight cases in which a Falls and Trauma HAC was reported together with 
a Pressure Ulcer Stages III & IV HAC.
    Some of these cases with multiple HACs reported had both HAC codes 
ignored in the MS-DRG assignment. Of these 66 claims, 49 did not 
receive higher payments based on the presence of these reported HACs, 
and we describe these claims in section II.F.3.f.(2) of this preamble. 
Depending on the MS-DRG to which the cases were originally assigned, 
ignoring the HAC codes would have led to a MS-DRG reassignment if there 
were no other MCCs or CCs reported, if the MS-DRG was subdivided into 
severity levels, and if the case were not already in the lowest 
severity level prior to ignoring the HAC codes.

         Chart D--Claims With More Than One HAC Secondary Diagnosis October 2009 Through September 2010
----------------------------------------------------------------------------------------------------------------
                                                                                                    7. Vascular
                                    1. Foreign      4. Pressure    5. Falls and    6. Catheter-      catheter-
               HAC                  object--CC     ulcer stages    trauma--MCC &    associated      associated
                                                   III & IV--MCC        CC            UTI--CC      infection--CC
----------------------------------------------------------------------------------------------------------------
5. Falls and trauma--MCC & CC...  ..............               8  ..............  ..............  ..............
6. Catheter-Associated UTI--CC..  ..............               8              12  ..............  ..............
7. Vascular Catheter-Associated   ..............              12               6              21  ..............
 Infection--CC..................
8. Poor Glycemic Control--MCC...  ..............               1               2  ..............               1
9B. Surgical Site Infection                    1  ..............  ..............  ..............               2
 Following Certain Orthopedic
 Procedures--CC.................
10. Pulmonary Embolism & DVT      ..............               3              11               6  ..............
 Orthopedic--MCC................
                                 -------------------------------------------------------------------------------
    Total.......................               1              32              31              27               3
----------------------------------------------------------------------------------------------------------------

f. RTI Analysis of Circumstances When Application of HAC Provisions 
Would Not Result in MS-DRG Reassignment for Current HACs
    As discussed in section II.F.1. and illustrated in the diagram in 
section II.F.1.c. of this preamble, there are instances when the MS-DRG 
assignment does not change even when there is a HAC as a secondary 
diagnosis (meaning a HAC-associated secondary diagnosis has a POA 
indicator of either ``N'' or ``U.'') In analyzing our claims data, RTI 
identified four main reasons why a MS-DRG assignment would not change 
despite the presence of a HAC. Those four reasons are described below 
and are shown in Chart E below. Column A shows the frequency of 
discharges that included a HAC-associated secondary diagnosis. Column

[[Page 51517]]

B shows the frequency of discharges where the HAC-associated secondary 
diagnosis was coded as not POA and, therefore, identified as a HAC 
discharge. Column C shows the frequency of discharges in which the HAC-
associated secondary diagnosis coded as not POA resulted in a change in 
MS-DRG. Columns D, E, F, and G show the frequency of discharges in 
which the HAC-associated secondary diagnosis coded as not POA did not 
result in a change in MS-DRG assignment. Columns D, E, F, and G are 
explained in more detail below.
(1) Other MCCs/CCs Prevent Reassignment
    Column D (Other MCC/CCs that Prevent Reassignment) in Chart E below 
indicates the number of cases reporting a HAC (cases with HAC-
associated diagnosis codes with a POA of ``N'' or ``U'') that did not 
have a MS-DRG reassignment because of the presence of other secondary 
diagnoses on the MCC or CC list. A claim that is coded with a HAC-
associated secondary diagnoses and a POA status of either ``N'' or 
``U'' may have other secondary diagnoses that are classified as an MCC 
or a CC. In such cases, the presence of these other MCC and CC 
diagnoses will still lead to the assignment of a higher severity level, 
despite the fact that the GROUPER software is disregarding the ICD-9-CM 
code that identifies the selected HAC in making the MS-DRG assignment 
for that claim. For example, there were 156 cases in which the ICD-9-CM 
codes for the Foreign Object Retained After Surgery HAC category were 
present, but the presence of other secondary diagnoses that were MCCs 
or CCs resulted in no change to the MS-DRG assignment. Chart E shows 
that a total of 11,818 cases with HACs did not have a change in the MS-
DRG assignment because of the presence of other reported MCCs and CCs. 
This represents approximately 76 percent of the 15,556 cases with HACs 
that did not have a change in MS-DRG assignment.
(2) Two Severity Levels Where HAC Does Not Impact MS-DRG Assignment
    Column E (Number of MS-DRGs with Two Severity Levels Where HAC Does 
Not Impact MS-DRG Assignment) shows the frequency with which discharges 
with a HAC (cases with HAC-associated diagnosis codes with a POA of 
``N'' or ``U'') did not result in an MS-DRG change because the MS-DRG 
is subdivided solely by the presence or absence of an MCC. A claim with 
a HAC and a POA indicator of either ``N'' or ``U'' may be assigned to 
an MS-DRG that is subdivided solely by the presence or absence of an 
MCC. In such cases, removing a HAC ICD-9-CM CC code will not lead to 
further changes in the MS-DRG assignment. Examples of these MS-DRG 
subdivisions are shown in the footnotes to the chart and include the 
following examples:

 MS-DRGs 100 and 101 (Seizures with or without MCC, 
respectively)
 MS-DRGs 102 and 103 (Headaches with or without MCC, 
respectively)

    The codes that fall under the HAC category of Foreign Object 
Retained After Surgery are CCs. If this case were assigned to a MS-DRG 
with an MCC subdivision such as MS-DRGs 100 and 101, the presence of 
the HAC code would not affect the MS-DRG severity level assignment. In 
other words, if the Foreign Object Retained After Surgery code were the 
only secondary diagnosis reported, then the case would be assigned to 
MS-DRG 101 (Seizure without MCC). If the POA indicator was ``N,'' the 
HAC Foreign Object Retained After Surgery code would be ignored in the 
MS-DRG assignment logic. Despite the fact that the code was ignored, 
the case would still be assigned to the same, lower severity level MS-
DRG. Therefore, there would be no impact on the MS-DRG assignment.
    Column E in Chart E below shows that there were 2,282 cases where 
the HAC code was reported with an ``N'' or ``U'' and the MS-DRG 
assignment did not change because the case was already assigned to the 
lowest severity level. This represents approximately 15 percent of the 
15,556 cases with HACs that did not have a change in MS-DRG assignment.
(3) No Severity Levels
    Column F (Number of MS-DRGs with No Severity Levels) shows the 
frequency with which discharges with an HAC (cases with HAC-associated 
diagnosis codes with a POA of ``N'' or ``U'') did not result in an MS-
DRG change because the MS-DRG that the case was assigned to is not 
subdivided by severity levels. For instance, MS-DRG 311 (Angina 
Pectoris) has no severity level subdivisions; this MS-DRG is not split 
based on the presence of an MCC or a CC. If a patient assigned to this 
MS-DRG develops a secondary diagnosis such as a Stage III pressure 
ulcer after admission, the condition would be considered a HAC. The 
code for the Stage III pressure ulcer would be ignored in the MS-DRG 
assignment because the condition developed after the admission (the POA 
indicator was ``N''). Despite the fact that the ICD-9-CM code for the 
HAC Stage III pressure ulcer was ignored, the MS-DRG assignment would 
not change. The case would still be assigned to MS-DRG 311. Chart E 
below shows that 1,449 cases reporting a HAC (cases with HAC-associated 
diagnosis codes with a POA of ``N'' or ``U'') did not undergo a change 
in the MS-DRG assignment based on the fact that the case was assigned 
to a MS-DRG that had no severity subdivisions (that is, the MS-DRG is 
not subdivided based on the presence or absence of an MCC or a CC, 
rendering the presence of the HAC irrelevant for payment purposes). 
This represents approximately 9 percent of the 15,556 cases with HACs 
that did not have a change in MS-DRG assignment.
(4) MS-DRG Logic
    Column G (MS-DRG Logic Issues) shows the frequency with which a HAC 
(cases with HAC-associated diagnosis codes with a POA of ``N'' or 
``U'') did not result in an MS-DRG change because of MS-DRG assignment 
logic. There were seven discharges where the HAC criteria were met and 
the HAC logic was applied. However, due to the structure of the MS-DRG 
logic, these cases did not result in MS-DRG reassignment. These cases 
may appear similar to those discharges where the MS-DRG is subdivided 
into two severity levels by the presence or absence of an MCC and did 
not result in MS-DRG reassignment. However, these discharges differ 
slightly in that the MS-DRG logic also considers specific procedures 
that were reported on the claim. In other words, for certain MS-DRGs, a 
procedure may be considered the equivalent of an MCC or a CC. The 
presence of the procedure code dictates the MS-DRG assignment despite 
the presence of the HAC-associated secondary diagnosis code with a POA 
indicator of ``N'' or ``U.''
    For example, a claim with the principal diagnosis code of 441.1 
(Thoracic aneurysm, ruptured) with HAC-associated secondary diagnosis 
code of 996.64 (Infection and inflammatory reaction due to indwelling 
urinary catheter) and non-HAC secondary diagnosis code 599.0 (Urinary 
tract infection, site not specified), having POA indicators of ``Y,'' 
``N,'' and ``N,'' respectively, and procedure code 39.73 (Endovascular 
implantation of graft in thoracic aorta) currently results in an 
assignment to MS-DRG 237 (Major Cardiovascular Procedures with MCC or 
Thoracic Aortic Aneurysm Repair). In this case, the thoracic aortic 
aneurysm repair is what dictated the MS-DRG assignment, and the 
presence of the HAC-associated secondary diagnosis code, 996.64, did 
not affect the MS-DRG assignment. Other examples of MS-

[[Page 51518]]

DRGs that are subdivided in this same manner are as follows:

 MS-DRG 029 (Spinal procedures with CC or Spinal 
Neurostimulators)
 MS-DRG 129 (Major Head & Neck Procedures with CC/MCC or Major 
Device)
 MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug-
Eluting Stent with MCC or 4+ Vessels/Stents)

    Column G in the chart below shows that three of the seven cases 
that did not result in MS-DRG reassignment due to the MS-DRG logic were 
in the Falls and Trauma HAC category, two cases were in the Catheter 
Associated UTI HAC category and two cases were in the Vascular 
Catheter-Associated Infection HAC Category.
    In conclusion, a total of 15,556 cases (11,818 + 2,282 +1,449 + 7) 
did not have a change in MS-DRG assignment, regardless of the presence 
of a HAC. The reasons described above explain why only 3,587 cases had 
a change in MS-DRG assignment despite the fact that there were 19,143 
HACs (cases with HAC-associated diagnosis codes with a POA of ``N'' or 
``U'').

                                Chart E--Reasons HAC Did Not Change MS-DRG Assignment October 2009 Through September 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     HAC discharges that do not change MS-DRG
                                                                                         ---------------------------------------------------------------
                                             Number of                     Number of HAC                   Number of MS-
                                            discharges       Number of      discharges                     DRGs with two
                                             with this      discharges    that change MS-    Number of       severity      Number of MS-
          Selected HAC category            condition as    identified as  DRG due to HAC  other MCCs/CCs   levels where    DRGs with no    Other MS-DRG
                                             secondary    a HAC  (Column     (Column C)    that prevent    HAC does not      severity      logic issues
                                             diagnosis          B)                         reassignment    affect MS-DRG      levels      **  (Column G)
                                            (Column A)                                      (Column D)     assignment *     (Column F)
                                                                                                            (Column E)
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Foreign Object Retained After                     563             278              44             156              67              11               0
 Surgery--CC............................
2. Air Embolism--MCC....................              42              29              15              14               0               0               0
3. Blood Incompatibility--CC............              35              12               0               9               0               3               0
4. Pressure Ulcer Stages III & IV--MCC..         114,138           1,444             292             895               0             257               0
5. Falls and Trauma--MCC & CC...........         154,371           5,454           1,672           2,858             570             351               3
6. Catheter-Associated UTI--CC..........          18,247           3,885             223           2,930             490             240               2
7. Vascular Catheter-Associated                   10,066           4,366              22           3,656             189             497               2
 Infection--CC..........................
8. Poor Glycemic Control--MCC & CC......          16,267             526             107             364               3              52               0
9A. Surgical Site Infection,                          40              36               4              24               0               8               0
 Mediastinitis, Following Coronary
 Artery Bypass Graft (CABG)--MCC........
9B. Surgical Site Infection Following                363             220               2             136              79               3               0
 Certain Orthopedic Procedures--CC......
9C. Surgical Site Infection Following                 18              17               0              17               0               0               0
 Bariatric Surgery for Obesity--CC......
10. Pulmonary Embolism & DVT Orthopedic--          3,494           2,876           1,206             759             884              27               0
 MCC & CC...............................
                                         ---------------------------------------------------------------------------------------------------------------
    Total \1\...........................         317,644          19,143           3,587          11,818           2,282           1,449               7
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Discharges can appear in more than one row. The total figure is not adjusted for the approximately 94 discharges with more than one HAC that appear
  as secondary diagnoses (15 of these discharges resulted in MS-DRG reassignment).
* Examples where an HAC classified as a CC would not affect the DRG assignment if it were removed. The MS-DRG is subdivided by the presence or absence
  of an MCC. A CC would not impact this DRG assignment.
[dec221]MS-DRGs 100 and 101 (Seizures with or without MCC, respectively).
[dec221]MS-DRGs 102 and 103 (Headaches with or without MCC, respectively).
** Examples where HAC did not change MS-DRG assignment because of the MS-DRG logic.
[dec221]MS-DRG 029 (Spinal Procedures with CC or Spinal Neurostimulators).
[dec221]MS-DRG 120 (Major Head & Neck Procedures with CC/MCC or Major Device).
Source: RTI Analysis of MedPAR IPPS Claims, October 2009 through September 2010.

[[Page 51519]]

g. RTI Analysis of Coding Changes for HAC-Associated Secondary 
Diagnoses for Current HACs
    In addition to studying claims from October 2009 through September 
2010, RTI evaluated claims data from 3 years prior to determine if 
there were significant changes in the number of discharges with a HAC-
associated code being reported as a secondary diagnosis. To provide 
consistency with the FY 2010 data studied, RTI examined claims using 
discharge dates from October 2006 through September 2007 (for FY 2007), 
October 2007 through September 2008 (for FY 2008), October 2008 through 
September 2009 (FY 2009) and compared these data to the FY 2010 data.
    We refer readers to the RTI detailed report for further information 
regarding all the conditions in each fiscal year (FY 2007 through FY 
2010) as described above at the Web site: http://www.rti.org/reports/cms/.
h. RTI Analysis of Estimated Net Savings for Current HACs
    RTI determined estimates of the net savings generated by the HAC 
payment policy based on MedPAR claims for FY 2010, from October 2009 
through September 2010.
(1) Net Savings Estimation Methodology
    The payment impact of a HAC is the difference between the IPPS 
payment amount under the initially assigned MS-DRG and the amount under 
the reassigned MS-DRG. The amount for the reassigned MS-DRG appears on 
the MedPAR files. To calculate this payment impact, RTI modeled the 
IPPS payments for each MS-DRG following the same approach that we use 
to model the impact of IPPS annual rule changes. Specifically, RTI 
replicated the payment computations carried out in the IPPS PRICER 
program using payment factors for IPPS providers as identified in 
various CMS downloaded files. The files used are as follows:
     Version 27 of the Medicare Severity GROUPER software 
(applicable to discharges between October 1, 2009 and September 30, 
2010). IPPS MedPAR claims were run through this file to obtain needed 
HAC-POA output variables.
     The FY 2010 MS-DRG payment weight file. This file includes 
the weights, geometric mean length of stay (GLOS), and the postacute 
transfer payment indicators.
     CMS standardized operating and capital rates. Tables 1A 
through 1C, as downloaded from the Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/IPPS2010, include the full update and reduced update 
amounts, as well as the information needed to compute the blended 
amount for providers located in Puerto Rico.
     The IPPS impact file for FY 2010, as downloaded from the 
Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/IPPS2010/. This 
file includes the wage index and geographic adjustment factors plus the 
provider type variable to identify providers qualifying for alternative 
hospital-specific amounts and their respective hospital-specific 
payment rates.
     The IPPS impact file for FY 2011, as downloaded from the 
Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/11FR/. This file 
includes indirect medical education (IME) and disproportionate share 
(DSH) percent adjustments as well as the operating and capital CCRs 
that were in effect as of March 2010.
     CMS historical provider-specific files (PSFs). These files 
include the indicator to identify providers subject to the full or 
reduced standardized rates and the applicable operating and capital 
CCRs. A SAS version was downloaded from the Web site at: http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/04_psf_SAS.asp. There were 
50 providers with discharges in the final HAC analysis file that did 
not appear in the FY 2010 impact file, of which 11 also did not appear 
in the FY 2011 impact file. For these providers, we identified the 
geographic CBSA from the historical PSF and assigned the wage index 
using values from Tables 4A and 4C as downloaded from the Web site at: 
http://www.cms.hhs.gov/AcuteInpatientPPS/IPPS2010/. For providers in 
the FY 2011 file but not the FY 2010 file, we used IME and DSH rates 
from FY 2011. The 11 providers in neither impact file were identified 
as non-IME and non-DSH providers in the historical PSF file.
    The steps for estimating the HAC payment impact are as follows:
    Step 1: Re-run the Medicare Severity GROUPER on all records in the 
analysis file. This is needed to obtain information on actual HAC-
related MS-DRG reassignments in the file, and to identify the CCs and 
MCCs that contribute to each MS-DRG assignment.
    Step 2: Model the base payment and outlier amounts associated with 
the initial MS-DRG if the HAC were excluded using the computations laid 
out in the CMS file ``Outlier Example FY 2007 new.xls,'' as downloaded 
from the Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage, and modified to accommodate FY 2010 factors. 
RTI's first round of computations treated all claims as though paid 
under standard IPPS rules without adjusting for short-stay transfers or 
hospital-specific payment amounts.
    Step 3: Model the base payment and outlier amounts associated with 
the final MS-DRG where the HAC was excluded using the computations laid 
out in the CMS file ``Outlier Example FY 2007 new.xls,'' as downloaded 
from the Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage and modified to accommodate FY 2010 factors. 
RTI's first round of computations treated all claims as though paid 
under standard IPPS rules without adjusting for short-stay transfers or 
hospital-specific payment amounts.
    Step 4: Compute MS-DRG base savings as the difference between the 
nonoutlier payments for the initial and final MS-DRGs. Compute outlier 
amounts as the difference in outlier amounts due under the initial and 
final reassigned MS-DRG. Compute net savings due to HAC reassignment as 
the sum of base savings plus outlier amounts.
    Step 5: Adjust the model to incorporate short-stay transfer payment 
adjustments.
    Step 6: Adjust the model to incorporate hospital-specific payments 
for qualifying rural providers receiving the hospital-specific payment 
rates.
    It is important to mention that using the methods described above, 
the MS-DRG and outlier payments amounts that are modeled for the final 
assigned MS-DRG do not always match the MS-DRG price and outlier 
amounts that appear in the MedPAR record. There are several reasons for 
this. Some discrepancies are caused by using single wage index, IME, 
and DSH factors for the full period covered by the discharges, when, in 
practice, these payment factors can be adjusted for individual 
providers during the course of the fiscal year. In addition, RTI's 
approach disregards any Part A coinsurance amounts owed by individual 
beneficiaries with greater than 60 covered days in a spell of illness. 
Five percent of all HAC discharges showed at least some Part A 
coinsurance amount due from the beneficiary, although less than 2 
percent of reassigned discharges (55 cases in the analysis file) showed 
Part A coinsurance amounts due. Any Part A coinsurance payments would 
reduce the actual savings incurred by the Medicare program.
    There are also a number of less common special IPPS payment 
situations that are not factored into

[[Page 51520]]

RTI's modeling. These could include new technology add-on payments, 
payments for blood clotting factors, reductions for replacement medical 
devices, adjustments to the capital rate for new providers, and 
adjustments to the capital rate for certain classes of providers who 
are subject to a minimum payment level relative to capital cost.
(2) Net Savings Estimate
    Chart F below summarizes the estimated net savings of current HACs 
based on MedPAR claims from October 2009 through 2010, based on the 
methodology described above. Column A shows the number of discharges 
where a MS-DRG reassignment for each HAC category occurred. For 
example, there were 15 discharges with an air embolism that resulted in 
an actual MS-DRG reassignment. Column B shows the total net savings 
caused by MS-DRG reassignments for each HAC category. Continuing with 
the example of air embolism, the chart shows that the 15 discharges 
with an MS-DRG reassignment resulted in a total net savings of 
$118,785. Column C shows the net savings per discharge for each HAC 
category. For the Air Embolism HAC category, the net savings per 
discharge is $7,919. Because a single discharge can have more than one 
HAC, discharges can appear in more than one row. The total net savings 
shown in the last line of Column B is adjusted to avoid duplicate 
counting and is therefore less than the sum of the net savings from the 
lines above.

               Chart F--Estimated Net Savings of Current HACs October 2009 Through September 2010
----------------------------------------------------------------------------------------------------------------
                                                                Number of
                                                             discharges that   Net savings (in   Net savings per
                       Selected HAC                           change MS-DRG       dollars)        discharge (in
                                                               due to HAC                           dollars)
----------------------------------------------------------------------------------------------------------------
                                                                  (Column A)        (Column B)        (Column C)
1. Foreign Object Retained After Surgery..................                44          $159,841            $3,633
2. Air Embolism...........................................                15           118,785             7,919
3. Blood Incompatibility..................................                 0                 0                 0
4. Pressure Ulcer Stages III & IV.........................               292         1,795,456             6,149
5. Falls and Trauma:
    a. Fracture...........................................             1,439         8,119,308             5,642
    b. Dislocation........................................                 4            13,244             3,311
    c. Intracranial Injury................................               234         1,127,066             4,817
    d. Crushing Injury....................................                 1             7,826             7,826
    e. Burn...............................................                 6            15,594             2,599
    f. Shock..............................................                 0                 0                 0
    Less: Discharges with Multiple Falls & Trauma \1\.....               -12           -82,330            -6,861
                                                           -----------------------------------------------------
        5. Falls and Trauma: Unduplicated Total...........             1,672         9,200,708             5,503
6. Catheter-Associated UTI................................               223           696,662             3,124
7. Vascular Catheter-Associated Infection.................                22            77,690             3,531
8. Poor Glycemic Control..................................               107           604,308             5,648
9a. SSI Mediastinitis CABG................................                 4            32,392             8,098
9b. SSI Orthopedic........................................                 2            15,044             7,522
9c. SSI Bariatric.........................................                 0                 0                 0
10. Pulmonary Embolism & DVT Orthopedic...................             1,206         8,826,912             7,319
                                                           -----------------------------------------------------
    Total.................................................             3,587        21,527,798             6,002
                                                           -----------------------------------------------------
    Less: Discharges with Multiple HACs \2\...............               -15           -77,703            -5,180
                                                           -----------------------------------------------------
        Unduplicated Total................................             3,572        21,450,095             6,005
----------------------------------------------------------------------------------------------------------------
\1\ Discharges can have more than one Falls and Trauma HAC and therefore appear in more than one row.
\2\ Discharges can have more than one HAC and therefore appear in more than one row.
Source: RTI Analysis of MedPAR IPPS Claims, October 2009 through September 2010.

    As shown in Chart F above, the unduplicated total net savings 
calculated for the 12-month period from October 2009 through September 
2010 was approximately $21.5 million. The three HACs with the largest 
number of discharges resulting in MS-DRG reassignment, Falls and 
Trauma, Orthopedic PE/DVT, and Pressure Ulcer Stages III & IV, 
generated approximately $19.83 million of net savings for the 12-month 
period. Estimated net savings for the 12-month period associated with 
the Falls and Trauma category were approximately $9.20 million. 
Estimated net savings associated with Orthopedic PE/DVT for the 12-
month period were approximately $8.83 million. Estimated net savings 
for the 12-month period associated with Pressure Ulcer Stages III & IV 
were approximately $1.80 million.
    The mean net savings per discharge calculated for the 12-month 
period from October 2009 through September 2010 was approximately 
$6,005. The HAC categories of Air Embolism; SSI, Mediastinitis, 
Following Coronary Artery Bypass Graft (CABG); and SSI Following 
Certain Orthopedic Procedures had the highest net savings per 
discharge, but represented a small proportion of total net savings 
because the number of discharges that resulted in MS-DRG reassignment 
for these HACs was low. With the exception of Blood Incompatibility and 
SSI Following Bariatric Surgery for Obesity, where no savings occurred 
because no discharges resulted in MS-DRG reassignment, Catheter-
Associated UTI had the lowest net savings per discharge.
    We refer readers to the RTI detailed report available at the Web 
site: http://www.rti.org/reports/cms/.
    As mentioned previously, an extremely small number of cases in the 
12-month period of FY 2010 analyzed by RTI had multiple HACs during the 
same stay. In reviewing approximately 10.2 million claims, RTI found

[[Page 51521]]

approximately 94 cases where 2 HACs were reported on the same admission 
as noted in section II.F.3.g.(2) of this preamble. Of these 
approximately 94 claims, 15 resulted in MS-DRG reassignment. Chart G 
below summarizes these cases. There were 15 cases that had 2 HACs not 
POA that resulted in an MS-DRG reassignment. Of these, four discharges 
involved Pressure Ulcer Stages III & IV, four discharges involved Falls 
and Trauma, and seven discharges involved Vascular Catheter-Associated 
Infection.

   Chart G--Claims With More Than One HAC Secondary Diagnosis Where MS-DRG Reassignment Occurred October 2009
                                             Through September 2010
----------------------------------------------------------------------------------------------------------------
                                                                                                   7. Vascular
                                                               4. Pressure      5. Falls and        Catheter-
                       Selected HAC                         Ulcer Stages III  Trauma--MCC & CC     Associated
                                                                & IV-MCC                          Infection--CC
----------------------------------------------------------------------------------------------------------------
5. Falls and Trauma--MCC & CC.............................                 2  ................  ................
6. Catheter-Associated Urinary Tract Infection (UTI)--CC..                 1                 2                 6
7. Vascular Catheter-Associated Infection--CC.............                 1                 2  ................
9B. Surgical Site Infection Following Certain Orthopedic    ................  ................                 1
 Procedures--CC...........................................
                                                           -----------------------------------------------------
    Total.................................................                 4                 4                 7
----------------------------------------------------------------------------------------------------------------

    As we discuss in section II.F.1.b. of this preamble, implementation 
of this policy is the part of an array of Medicare VBP tools that we 
are using to promote increased quality and efficiency of care. We point 
out that a decrease over time in the number of discharges where these 
conditions are not POA is a desired consequence. We recognize that 
estimated net savings would likely decline as the number of such 
discharges decline. However, we believe that the sentinel effect 
resulting from CMS identifying these conditions is critical. (We refer 
readers to section IV.A. of this preamble for a discussion of the 
inclusion of the incidence of these conditions in the Hospital IQR 
Program.) It is our intention to continue to monitor trends associated 
with the frequency of these HACs and the estimated net payment impact 
through RTI's program evaluation and possibly beyond.
i. Previously Considered Candidate HACs--RTI Analysis of Frequency of 
Discharges and POA Indicator Reporting
    RTI evaluated the frequency of conditions previously considered, 
but not adopted as HACs in prior rulemaking, that were reported as 
secondary diagnoses (across all approximately 10.2 million discharges), 
as well as the POA indicator assignments for these conditions. Chart H 
below indicates that the four previously considered candidate 
conditions most frequently reported as a secondary diagnosis were: (1) 
Clostridium Difficile-Associated Disease (CDAD), which demonstrated the 
highest frequency, with a total of 90,243 secondary diagnoses codes 
being reported for that condition, of which 29,306 reported a POA 
indicator of ``N''; (2) Methicillin-Resistant Staphylococcus aureus, 
with a total of 72,313 secondary diagnoses codes being reported for 
that condition, with 2,165 of those reporting a POA indicator of ``N''; 
and (3) Staphylococcus aureus Septicemia, with a total of 24,327 
secondary diagnoses codes being reported for that condition, with 5,490 
of those reporting a POA indicator of ``N''; and (4) Iatrogenic 
Pneumothorax, with a total of 22,506 secondary diagnoses codes being 
reported for that condition, with 19,581 of those reporting a POA 
indicator of ``N.'' As these four conditions had the most significant 
impact for reporting a POA indicator of ``N,'' it is reasonable to 
believe that these same three conditions would have the greatest number 
of potential MS-DRG reassignments. The frequency of discharges for the 
previously considered HACs that could lead to potential changes in MS-
DRG assignment is discussed in the next section. We take this 
opportunity to remind readers that because more than one previously 
considered HAC diagnosis code can be reported per discharge (on a 
single claim) that the frequency of these diagnosis codes may be more 
than the actual number of discharges with a previously considered 
candidate condition reported as a secondary diagnosis.

                     Chart H--POA Status of Previously Considered ``Candidate'' HAC Conditions--October 2009 Through September 2010
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Not Present on Admission                  Present on Admission
                                                         Frequency as a  -------------------------------------------------------------------------------
         Previously considered HAC condition               secondary            POA = N             POA = U             POA = Y             POA = W
                                                           diagnosis     -------------------------------------------------------------------------------
                                                                           Number    Percent   Number    Percent   Number    Percent   Number    Percent
--------------------------------------------------------------------------------------------------------------------------------------------------------
1. Clostridium Difficile-Associated Disease (CDAD)...             90,243    29,306     32.47       416      0.46    60,397     66.93       124      0.14
2. Delirium..........................................                757       190     25.10  ........  ........       567     74.90         0      0.00
3. Legionnaire's Disease.............................                426        27      6.34         2      0.47       397     93.19         0      0.00
4. Staphylococcus aureus Septicemia..................             24,327     5,490     22.57        65      0.27    18,738     77.03        34      0.14
5. Methicillin-Resistant Staphylococcus aureus.......             72,313     2,165      2.99       124      0.17    70,008     96.81        16      0.02
6. Iatrogenic Pneumothorax...........................             22,506    19,581     87.00        15      0.07     2,907     12.92         3      0.01
7. Ventilator-Associated Pneumonia...................              4,278     3,159     73.84         5      0.12     1,110     25.95         4      0.09
--------------------------------------------------------------------------------------------------------------------------------------------------------

    In Chart I below, Column A shows the number of discharges for each 
previously considered candidate HAC category when the condition was 
reported as a secondary diagnosis. For example, there were 90,243 
discharges that reported CDAD as a secondary diagnosis. Previously 
considered candidate HACs reported with a POA indicator of ``N'' or 
``U'' may cause MS-DRG reassignment (which would result in reduced 
payment to the facility).

[[Page 51522]]

Column C shows the discharges for each previously considered candidate 
HAC reported with a POA indicator of ``N'' or ``U.'' Continuing with 
the example of CDAD, Chart I shows that, of the 90,243 discharges, 
29,722 discharges (32.94 percent) had a POA indicator of ``N'' or 
``U.'' Therefore, there were a total of 29,722 discharges that could 
potentially have had an MS-DRG reassignment. Column E shows the number 
of discharges where an actual MS-DRG reassignment could have occurred; 
the number of discharges with CDAD that could have resulted in actual 
MS-DRG reassignments is 830 (2.79 percent). Thus, while there were 
29,722 discharges with CDAD reported with a POA indicator of ``N'' or 
``U'' that could potentially have had an MS-DRG reassignment, the 
result was 830 (2.79 percent) potential MS-DRG reassignments. As 
discussed above, there are a number of reasons why a condition reported 
with a POA indicator of ``N'' or ``U'' would not result in a MS-DRG 
reassignment.
    In summary, Chart I below demonstrates there were a total of 
214,785 discharges with a previously considered candidate HACs reported 
as a secondary diagnosis. Of those 60,538 discharges were reported with 
a POA indicator of ``N'' or ``U.'' The total number of discharges that 
could have resulted in MS-DRG reassignments is 3,768.

   Chart I--Previously Considered ``Candidate'' HAC Discharge Frequencies--October 2009 Through September 2010
----------------------------------------------------------------------------------------------------------------
                                      Discharges with this      Discharges with this     Cases that could change
                                     condition as secondary   condition not present on        MS-DRG due to
                                          diagnosis \2\         Admission (POA = ``N''    previously considered
     Previously considered HAC     --------------------------       or ``U'') \3\           candidate HAC \4\
             condition                                       ---------------------------------------------------
                                       Number      Percent       Number      Percent       Number      Percent
                                     (Column A)   (Column B)   (Column C)   (Column D)   (Column E)   (Column F)
----------------------------------------------------------------------------------------------------------------
1. Clostridium Difficile-                90,243         0.89       29,722        32.94          830         2.79
 Associated Disease (CDAD)........
2. Delirium.......................          757         0.01          190        25.10           14         7.37
3. Legionnaire's Disease..........          426         0.00           29         6.81            3        10.34
4. Staphylococcus aureus                 24,288         0.24        5,549        22.85           97         0.02
 Septicemia.......................
5. Methicillin-Resistant                 72,287         0.71        2,288         3.17            0         0.00
 Staphylococcus aureus............
6. Iatrogenic Pneumothorax........       22,506         0.22       19,596        87.07        2,821        14.40
7. Ventilator-Associated Pneumonia        4,278         0.04        3,164        73.96            3         0.09
                                   -----------------------------------------------------------------------------
    Total \1\.....................      214,785  ...........       60,538  ...........        3,768  ...........
----------------------------------------------------------------------------------------------------------------
\1\ Discharges can appear in more than one row.
\2\ Percent computed relative to total cases ``at risk,'' which is 10,189,168 for all candidate conditions.
\3\ Percent computed relative to discharges with condition as a secondary diagnosis.
\4\ Percent computed relative to discharges with condition as a secondary diagnosis and identified as a
  previously considered HAC (that is, coded as not present on admission).
Source: RTI Analysis of MedPAR IPPS Claims, October 2009 through September 2010.

j. Current and Previously Considered Candidate HACs--RTI Report on 
Evidence-Based Guidelines
    The RTI program evaluation includes an annual report that provides 
references for all evidence-based guidelines available for each of the 
selected and previously considered candidate HACs that provide 
recommendations for the prevention of the corresponding conditions. 
Guidelines were primarily identified using the AHRQ National Guidelines 
Clearing House (NGCH) and the CDC, along with relevant professional 
societies. Guidelines published in the United States were used, if 
available. In the absence of U.S. guidelines for a specific condition, 
international guidelines were included.
    Evidence-based guidelines that included specific recommendations 
for the prevention of the condition were identified for each of the 10 
selected conditions. In addition, evidence-based guidelines were also 
found for the previously considered candidate conditions.
    RTI prepared the annual report to summarize its findings regarding 
evidence-based guidelines, which can be found on the Web site at: 
http://www.rti.org/reports/cms.
k. Final Policy Regarding Current HACs and Previously Considered 
Candidate HACs
    We believe that the RTI analysis summarized above does not provide 
additional information that would require us to change our previous 
determinations regarding either current HACs (as described in section 
II.F.2. of this preamble) or previously considered candidate HACs in 
the FY 2008 IPPS final rule with comment period (72 FR 47200 through 
47218), the FY 2009 IPPS final rule (73 FR 48471 through 48491), and 
the FY 2010 IPPS/RY 2010 LTCH final rule (74 FR 43782 through 43785). 
We note that we are finalizing revisions to the Falls and Trauma HAC 
category, Surgical Site Infection Following Certain Bariatric 
procedures and DVT/PE Following Certain Orthopedic Procedures HAC 
categories as discussed in section II.F.2. of this preamble. (We also 
note that, as discussed in section II.F.3.b. of this preamble, we are 
not contemplating changing our current policy regarding the treatment 
of the ``U'' POA indicator.) However, we continue to encourage public 
dialogue about refinements to the HAC list.
    We refer readers to section II.F.6. of the FY 2008 IPPS final rule 
with comment period (72 FR 47202 through 47218) and to section II.F.7. 
of the FY 2009 IPPS final rule (73 FR 48474 through 48491) for detailed 
discussion supporting our determination regarding each of these 
conditions.

G. Changes to Specific MS-DRG Classifications

    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25816), we 
invited public comment on each of the MS-DRG classification proposed 
changes described below, as well as our proposals to maintain certain 
existing MS-DRG classifications, which are also discussed below. In 
some cases, we proposed changes to the MS-DRG classifications based on 
our analysis of claims data. In other cases, we proposed to maintain 
the existing MS-DRG classification based on our analysis of

[[Page 51523]]

claims data. Below, we summarize the public comments that we received, 
if any, on our proposals, present our responses, and state our final 
policies.
1. Pre-Major Diagnostic Categories (Pre-MDCs)
a. Noninvasive Mechanical Ventilation
    We received a request from the National Association for Medical 
Direction of Respiratory Care (NAMDRC) which suggested that we create a 
new MS-DRG for patients with certain respiratory conditions who receive 
noninvasive mechanical ventilation (NIV). The requestor stated that 
patients who receive NIV are almost always placed within an intensive 
care unit (ICU) or an emergency department and use the resources 
available in those areas. The requestor recommended that this new MS-
DRG recognize current practice and allow for appropriate reimbursement 
for the technical complexity and monitoring required for NIV as a form 
of acute life support. According to the requestor, NIV has evolved to 
become first-line supportive therapy for several forms of acute 
respiratory failure. Lastly, the requestor recommended that the new MS-
DRG identify NIV usage of approximately 6 to 12 hours to account for 
the ``legitimate but very short term use of this therapy.''
    Historically, the concept of mechanical ventilation for critically 
ill patients included establishment of an artificial airway, 
invasively, through endotracheal intubation or a tracheostomy. 
According to the requestor, a significant portion of these patients can 
now be treated through noninvasive mechanical ventilation with the use 
of a face or nasal mask. In the ICD-9-CM classification system, NIV is 
described by procedure code 93.90 (Noninvasive mechanical ventilation), 
while invasive mechanical ventilation is described by procedure codes 
96.70 (Continuous invasive mechanical ventilation of unspecified 
duration), 96.71 (Continuous invasive mechanical ventilation for less 
than 96 consecutive hours), and 96.72 (Continuous invasive mechanical 
ventilation for 96 consecutive hours or more). The requestor submitted 
external data to illustrate trends in NIV use over the past decade. 
These data were derived from a survey conducted during 2002-2003 of 
several hospitals located in Massachusetts and Rhode Island. The 
requestor believed that these data indicate patients with exacerbation 
of chronic obstructive pulmonary disease (COPD), acute pulmonary edema, 
or worsening congestive heart failure are successfully managed with 
NIV.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed FY 2010 
MedPAR claims data that are representative of the respiratory 
conditions the requestor identified when reported with NIV. We found 14 
MS-DRGs reporting procedure code 93.90 using the above specifications. 
The MS-DRGs are as follows:

Pre-MDC MS-DRGs:

 MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 
96+ Hrs or PDX Except Face, Mouth & Neck with Major O.R.)
 MS-DRG 004 (Tracheostomy with Mechanical Ventilation 96+ Hrs 
or PDX Except Face, Mouth & Neck without Major O.R.)

 MS-DRGs:

 MS-DRG 189 (Pulmonary Edema & Respiratory Failure)
 MS-DRG 190 (Chronic Obstructive Pulmonary Disease with MCC)
 MS-DRG 191 (Chronic Obstructive Pulmonary Disease with CC)
 MS-DRG 192 (Chronic Obstructive Pulmonary Disease without CC/
MCC)
 MS-DRG 204 (Respiratory Signs & Symptoms)
 MS-DRG 207 (Respiratory System Diagnosis with Ventilator 
Support 96+ Hours)
 MS-DRG 208 (Respiratory System Diagnosis with Ventilator 
Support  MS-DRG 222 (Cardiac Defibrillator Implant with Cardiac 
Catheterization with AMI/HF/Shock with MCC)
 MS-DRG 223 (Cardiac Defibrillator Implant with Cardiac 
Catheterization with AMI/HF/Shock without MCC)
 MS-DRG 291 (Heart Failure & Shock with MCC)
 MS-DRG 292 (Heart Failure & Shock with CC)
 MS-DRG 293 (Heart Failure & Shock without CC/MCC)

    As shown in the list above and in the chart below, the MS-DRGs 
identified also include those that describe invasive mechanical 
ventilation. The ICD-9-CM coding convention instructs the reporting of 
both types of mechanical ventilation when patients are admitted on 
noninvasive mechanical ventilation that subsequently requires invasive 
mechanical ventilation therapy.
    The data demonstrate that, in certain MS-DRGs, for example, MS-DRGs 
003, 004, and 222 that the cases with NIV primarily have shorter 
lengths of stay and lower average costs compared to all the cases in 
those MS-DRGs. Alternatively, the data for MS-DRGs 189, 190, 191, and 
192 demonstrate that the cases with NIV have an increased length of 
stay and higher average costs, but a relatively low volume compared to 
all the cases in those MS-DRGs. Combining the current surgical and 
medical MS-DRGs into a single, new MS-DRG would include noninvasive 
mechanical ventilation cases with a wide range of costs for several 
indications with varying levels of severity. The average costs for 
these cases range from a low of $5,794 in MS-DRG 293 to a high of 
$95,940 in MS-DRG 003. In the proposed rule, we indicated that we 
believe the cases are more appropriately assigned and reimbursed in the 
MS-DRGs to which they are currently assigned.

----------------------------------------------------------------------------------------------------------------
                                                                               Average length
                          MS-DRG                             Number of cases       of stay        Average costs
----------------------------------------------------------------------------------------------------------------
MS-DRG 003--All cases.....................................            18,223              34.7          $103,492
MS-DRG 003--Cases with code 93.90 without code 96.70,                     58              33.3            95,940
 96.71, or 96.72..........................................
MS-DRG 004--All cases.....................................            19,599             25.79            63,022
MS-DRG 004--Cases with code 93.90 without code 96.70,                    170             25.43            58,500
 96.71, or 96.72..........................................
MS-DRG 189--All cases.....................................            87,668              5.36             8,317
MS-DRG 189--Cases with code 93.90 without code 96.70,                 22,023              6.07            10,383
 96.71, or 96.72..........................................
MS-DRG 190--All cases.....................................           130,731              5.30             7,140
MS-DRG 190--Cases with code 93.90 without code 96.70,                  8,450              6.78            11,207
 96.71 or 96.72...........................................
MS-DRG 191--All cases.....................................           135,851              4.49             6,236
MS-DRG 191--Cases with code 93.90 without code 96.70,                  4,563              5.41             8,819
 96.71 or 96.72...........................................
MS-DRG 192--All cases.....................................           115,153              3.52             4,621
MS-DRG 192--Cases with code 93.90 without code 96.70,                  2,334              4.25             6,803
 96.71 or 96.72...........................................
MS-DRG 204--All cases.....................................            21,049              2.61             4,310
MS-DRG 204--Cases with code 93.90 without code 96.70,                    265              4.17             7,591
 96.71 or 96.72...........................................
MS-DRG 207--All cases.....................................            32,752             14.61            32,897

[[Page 51524]]

 
MS-DRG 207--Cases with code 93.90 without code 96.70,                      0                 0                 0
 96.71 or 96.72...........................................
MS-DRG 208--All cases.....................................            67,724              6.98            14,742
MS-DRG 208--Cases with code 93.90 without code 96.70,                      0                 0                 0
 96.71 or 96.72...........................................
MS-DRG 222--All cases.....................................             2,279             11.98            57,478
MS-DRG 222--Cases with code 93.90 without code 96.70,                     52             11.79            55,011
 96.71 or 96.72...........................................
MS-DRG 223--All cases.....................................             3,230              6.17            41,754
MS-DRG 223--Cases with code 93.90 without code 96.70,                     19             11.05            47,064
 96.71 or 96.72...........................................
MS-DRG 291--All cases.....................................           170,399              6.05             9,585
MS-DRG 291--Cases with code 93.90 without code 96.70,                 14,274              6.95            12,320
 96.71 or 96.72...........................................
MS-DRG 292--All cases.....................................           220,031              4.72             6,584
MS-DRG 292--Cases with code 93.90 without code 96.70,                  5,171              5.58             9,180
 96.71 or 96.72...........................................
MS-DRG 293--All cases.....................................            98,134              3.20             4,410
MS-DRG 293--Cases with code 93.90 without code 96.70,                  1,381              3.43             5,794
 96.71 or 96.72...........................................
----------------------------------------------------------------------------------------------------------------

    As mentioned in the requestor's comments, and our clinical advisors 
agree, NIV encompasses a broad range of interventions and utilizes 
periods of time that range from a few hours to a few days of continuous 
chronic use. Resource requirements are vastly different for the various 
intended indications. For example, as also noted by the requestor, 
respiratory failure can have many forms. Our clinical advisors provided 
three subsets of patients as an example: Those that are given oxygen 
support, those that are given pressure (rate) support, and those that 
are intubated. There is overlap between the three subsets in that a 
patient may require one, two, or all three types of therapy and there 
are multiple options for any given patient. Our clinical advisors 
stated that these various subsets of patients can require significantly 
different resources. Lastly, respiratory failure reflects the severity 
of the diagnosis (it is a complication) while NIV is a therapeutic 
option. Unlike a major surgical intervention where the intervention 
creates morbidity, NIV merely reflects the severity of the underlying 
respiratory failure.
    The requestor further noted in its comments that a significant 
number of patients who receive NIV fail this therapy and must be 
intubated and subsequently placed on a ventilator. However, those 
patients who require both noninvasive and invasive mechanical 
ventilation are already accounted for in the invasive mechanical 
ventilation MS-DRGs. Similar to patients with respiratory failure, 
patients with heart failure and shock have a comparable severity of 
illness where each condition reflects the severity of the diagnosis (it 
is a complication). Therefore, the cost is already reflected in the 
high resource expenditure estimates for MS-DRGs 222, 223, 291, 292, and 
293, as are all other severity-correlated resource costs.
    In conclusion, we indicated in the proposed rule that we believe 
that the data do not support the creation of a single MS-DRG to 
identify NIV cases. As stated previously, the average costs for the NIV 
cases range from a low of $5,794 in MS-DRG 293 to a high of $95,940 in 
MS-DRG 003. If created, this single MS-DRG would include patients with 
a wide range in average costs. We believe the cases are more 
appropriately captured in their current MS-DRGs. In addition to the 
clinical points raised by our clinical advisors and outlined above, the 
volume and length of stay data for cases where NIV was reported with 
the specified respiratory conditions further support their present MS-
DRG assignments. Therefore, we did not propose to create a new MS-DRG 
for patients receiving NIV. We invited public comment on our proposal 
not to create a new MS-DRG for patients receiving NIV for FY 2012.
    Comment: Several commenters agreed with CMS' proposal to not create 
a new MS-DRG for patients receiving NIV for FY 2012. One commenter did 
not have a position on whether or not a new MS-DRG should be created 
for patients receiving noninvasive mechanical ventilation. However, the 
commenter was concerned that reported hospital data may be incomplete. 
The commenter indicated that procedure code 93.90 (Noninvasive 
mechanical ventilation) is most likely underreported or not reported 
consistently because it is not required for reporting purposes. Another 
commenter stated that the data analysis performed on patients receiving 
NIV appeared to be supported by the current MS-DRG assignment. 
Therefore, the commenter agreed with the proposal not to create a new 
MS-DRG. This commenter also urged CMS to consider the Uniform Hospital 
Discharge Data Set (UHDDS) definition of a ``reportable condition'' in 
future analyses. This commenter noted that the UHDDS requires all 
significant procedures to be reported and that Medicare requires the 
reporting of any procedure that affects payment, whether or not it 
meets the definition of significant procedure. This commenter further 
noted that procedure code 93.90 is not considered significant by the 
UHDDS definition nor does it affect payment.
    Response: We appreciate the commenters' support of our proposal to 
not create a new MS-DRG for patients receiving NIV for FY 2012. We 
agree with the commenters that procedure code 93.90 is likely not 
reported consistently and, therefore, the data included in evaluating 
the request may be incomplete. We encourage complete and accurate 
reporting of ICD-9-CM codes on each admission. As discussed in section 
II.G.13.b. of this final rule, we have expanded our ability to accept 
and process up to 25 diagnosis codes and 25 procedure codes with the 
implementation of 5010. We agree with the commenters who state that the 
current data do not support a new MS-DRG for patients receiving NIV.
    We also agree with the commenter that NIV (procedure code 93.90) is 
not considered to be a significant procedure under UHDDS definitions 
and does not affect payment under Medicare policy. UHDDS definitions 
are used by hospitals to report inpatient data elements in a 
standardized manner. For further information regarding UHDDS data 
elements and their definitions, we refer readers to the July 31, 1985 
Federal Register (50 FR 31038 through 31040) and the Internet Web site 
at: http://www.ncvhs.hhs.gov/ncvhsr1.htm.
    Comment: The organization that submitted the original request to 
create a new MS-DRG for NIV expressed appreciation to CMS for 
considering their request and for providing data that was unavailable 
to them at the time they submitted their original request. The 
commenter also acknowledged the potential for underreporting of NIV 
(procedure code 93.90). However, the commenter specifically asked to 
further

[[Page 51525]]

refine their original request based on the data that were displayed in 
the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25818). The commenter 
suggested that CMS now limit consideration of a new MS-DRG for NIV to 
only the data that were displayed for 4 of the 14 MS-DRGS analyzed in 
response to their original request. The commenter asked CMS to now only 
focus on the data that was provided for the following MS-DRGs:

 MS-DRG 189 (Pulmonary Edema & Respiratory Failure)
 MS-DRG 190 (Chronic Obstructive Pulmonary Disease with MCC)
 MS-DRG 191 (Chronic Obstructive Pulmonary Disease with CC)

     MS-DRG 192 (Chronic Obstructive Pulmonary Disease without 
CC/MCC)

    The commenter recommended that CMS utilize respiratory failure, 
pulmonary edema, and chronic obstructive pulmonary disease as diagnoses 
that, when present with NIV, define the structure of a new NIV MS-DRG.
    Response: We acknowledge the commenter's request that we now 
consider a refined request that focuses on only 4 of the 14 MS-DRGs 
originally analyzed. However, due to time constraints, we were unable 
to conduct the necessary analysis for evaluation. We would need to 
perform a new and separate analysis with exact specifications that were 
not provided by the commenter in their modified request before we could 
make a final determination. For example, there are numerous ICD-9-CM 
codes that describe respiratory failure, pulmonary edema, and chronic 
obstructive pulmonary disease. The commenter did not specify the exact 
codes they believe would warrant this modified MS-DRG when reported 
with procedure code 93.90 (NIV) for us to conduct a thorough analysis 
in time to include our evaluation in this final rule.
    Therefore, after consideration of public comments we received, we 
are finalizing our proposal to not create a new MS-DRG for NIV for FY 
2012.
b. Debridement With Mechanical Ventilation Greater Than 96 Hours With 
Major Operating Room (O.R.) Procedure
    We received a comment concerning the use of excisional debridement 
in cases with complications that lead to the need for extended 
mechanical ventilation. The commenter stated that patients undergoing 
procedures such as excisional debridement may also develop extensive 
complications such as respiratory failure and sepsis. The commenter 
indicated that these patients tend to use significant resources. The 
commenter stated that these cases are currently assigned to MS-DRG 207 
(Respiratory System Diagnosis with Ventilator Support 96+ Hours) or MS-
DRG 870 (Septicemia with or Severe Sepsis with Mechanical Ventilation 
96+ Hours). The commenter expressed a concern that the operating room 
(OR) procedure of the excisional debridement was not fully recognized 
through either of these two medical MS-DRGs. The commenter requested 
that a new MS-DRG be created that would include mechanical ventilation 
of greater than 96 hours with the presence of an additional major OR 
procedure.
    We agree that patients with long-term mechanical ventilation 
greater than 96 hours and a major OR procedure utilize extensive 
resources. However, we point out that these patient cases are not 
currently assigned to MS-DRG 207 or MS-DRG 870 as the commenter stated. 
Many of these long-term mechanical ventilation patient cases are 
instead assigned to MS-DRG 003 (ECMO or Tracheostomy with Mechanical 
Ventilation 96+ Hours or PDX, Excluding Face, Mouth & Neck with Major 
Operating Room Procedure). Cases that require mechanical ventilation 
for greater than 96 hours, that have a tracheostomy performed, and that 
have a procedure on the major O.R. list (including excisional 
debridement) are assigned to MS-DRG 003. We specifically created MS-DRG 
003 to capture these complicated patients on long-term mechanical 
ventilation who also have a major O.R. procedure. Therefore, in the FY 
2012 IPPS/LTCH PPS proposed rule, we did not propose to create a second 
MS-DRG to capture these patients. We welcomed public comments on our 
proposal not to create a new MS-DRG for these patients for FY 2012.
    Comment: Several commenters supported our proposal not to create a 
second MS-DRG to capture patients with mechanical ventilation of 
greater than 96 hours with the presence of an additional major OR 
procedure. One commenter stated that the limited data and documentation 
from the requestor for the creation of a second MS-DRG prohibited them 
from evaluating the need for this new MS-DRG.
    Response: We agree with the commenters that CMS should not create a 
second MS-DRG to capture patients with mechanical ventilation of 
greater than 96 hours with the presence of an additional major OR 
procedure. MS-DRG 003 (ECMO or Tracheostomy with Mechanical Ventilation 
96+ Hours or PDX, Excluding Face, Mouth & Neck with major Operating 
Room Procedure) appropriately captures these patients.
    After consideration of the public comments we received, we are not 
creating a new MS-DRG to capture patients on mechanical ventilation of 
greater than 96 hours who also have an additional major OR procedure 
for FY 2012.
c. Autologous Bone Marrow Transplant
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50101), effective 
October 1, 2011, we deleted MS-DRG 009 (Bone Marrow Transplant) and 
created two new MS-DRGs: MS-DRG 014 (Allogeneic Bone Marrow Transplant) 
and MS-DRG 015 (Autologous Bone Marrow Transplant). We created new MS-
DRGs 014 and 015 because of differences in costs associated with these 
procedures. During the comment period for the FY 2011 IPPS/LTCH PPS 
proposed rule, two commenters who supported the proposed 
reclassification of the bone marrow transplant MS-DRGs requested 
further refinement to account for severity of illness. At that time, we 
did not subdivide MS-DRG 014 and MS-DRG 015 based on severity of 
illness because they did not meet our criteria for subdivision (75 FR 
50102).
    As we outlined in our FY 2008 IPPS/LTCH PPS final rule with comment 
period (72 FR 47169), in designating an MS-DRG as one that would be 
subdivided into subgroups based on the presence of a CC or an MCC, we 
developed a set of criteria to facilitate our decision-making process. 
The original criteria were based on average charges; we now use average 
costs (FY 2007 IPPS final rule, 71 FR 47882). In order to warrant 
creation of a CC or an MCC subgroup within a base MS-DRG, the subgroup 
must meet all of the following five criteria:
     A reduction in variance of cost of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average cost 
between subgroups.
     There is a $2,000 difference in average cost between 
subgroups.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we examined FY 2010 
MedPAR claims data for these newly created MS-DRGs, and based on these 
criteria, we identified MS-DRG 015 as a possible MS-DRG that would 
require further subdivision. MS-DRG 014 was not identified, as this MS-
DRG did not meet the criteria stated above for possible subdivision. 
Autologous bone

[[Page 51526]]

marrow transplantation utilizes the patient's own bone marrow or stem 
cells in the treatment of certain cancers and bone marrow diseases. 
These procedures restore stem cells that have been destroyed either by 
chemotherapy and/or radiation treatment.
    In our analysis, we found 1,338 total cases assigned to MS-DRG 015 
with average costs of approximately $38,608 and an average length of 
stay of approximately 18.8 days. There were 1,092 cases that had a 
secondary diagnosis code reported on the claim that was designated as a 
CC or an MCC with average costs of approximately $40,974 and an average 
length of stay of approximately 19.7 days. There were 246 cases without 
a secondary diagnosis code reported on the claim that had a CC or an 
MCC designation with average cost of approximately $28,105 and an 
average length of stay of approximately 14.6 days. The following table 
illustrates our findings:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 015--All cases............        1,338         18.8      $38,608
MS-DRG 015--Cases with MCC/CC....        1,092         19.7       40,974
MS-DRG 015--Cases without MCC/CC.          246         14.6       28,105
------------------------------------------------------------------------

    We found that the cases reported with a secondary diagnosis code of 
a CC or an MCC were more costly and had a longer average length of stay 
than both the overall cases assigned to MS-DRG 015 and the cases 
without a CC or an MCC. The cases without a CC or an MCC were less 
costly and had a shorter average length of stay than both the cases 
with a CC or an MCC and the overall cases assigned to that MS-DRG. 
Based on our analysis, all five criteria for a subgroup division were 
met, thereby supporting a 2-level severity split for MS-DRG 015. 
Therefore, for FY 2012, we proposed to delete MS-DRG 015 and create two 
new MS-DRGs:
     Proposed MS-DRG 016 (Autologous Bone Marrow Transplant 
with MCC/CC); and
     Proposed MS-DRG 017 (Autologous Bone Marrow Transplant 
without MCC/CC).
    We invited public comment on our proposal to delete MS-DRG 015 and 
create two new MS-DRGs 016 and 017 for autologous bone marrow 
transplant for FY 2012.
    Comment: Several commenters supported our proposed changes for a 2-
level severity split for autologous bone marrow transplant cases. One 
commenter stated that it appreciated CMS' further refinement to account 
for severity of illness as it reflects current experience with 
transplant eligible patients who present with a range of comorbidities 
and other complicating factors.
    Response: We appreciate the support of the commenters.
    Comment: One commenter disagrees with our proposed refinement of 
MS-DRG 014 to account for severity of illness. The commenter contended 
that the recipient patient population for both autologous and 
allogeneic transplants is similar and that recognition of the variation 
in the patient population for both is warranted. The commenter 
requested a re-review of the cost variances for MS-DRG 014 because 
allogeneic transplant patients are often treated for similar 
comorbidities as autologous transplant patients prior to transplant and 
during post transplant care.
    Response: As we outlined in the proposed rule (76 FR 25819), to 
warrant creation of a CC or MCC subgroup within a base MS-DRG, the 
subgroup must meet all of the five criteria. MS-DRG 014 did not meet 
the criteria for possible subdivision because at least 500 cases were 
not in the CC or MCC subgroup.
    After consideration of the public comments we received, we are 
finalizing our proposal to delete MS-DRG 015 and to create two new MS-
DRGs: MS-DRG 016 (Autologous Bone Marrow Transplant with CC/MCC); and 
MS-DRG 017 (Autologous Bone Marrow Transplant without CC/MCC). We note 
that we have amended the final titles of new MS-DRGs 015 and 016 to 
place ``CC'' before ``MCC.''
2. MDC 1 (Diseases and Disorders of the Nervous System): Rechargeable 
Dual Array Deep Brain Stimulation System
    We received a public comment in response to the FY 2011 IPPS/LTCH 
PPS proposed rule regarding the MS-DRG assignment for rechargeable dual 
array deep brain neurostimulators. In the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50128), we indicated that we considered this comment 
outside of the scope of the proposed rule as we did not propose any 
changes for these procedures for FY 2011. However, we addressed this 
issue in the FY 2012 IPPS/LTCH PPS proposed rule.
    Deep brain stimulation is a surgical treatment that involves the 
implantation of a neurostimulator, used in the treatment of essential 
tremor, Parkinson's disease, dystonia, and chronic pain. The commenter 
recommended that CMS assign the combination of procedure codes 
representing rechargeable systems for deep brain stimulation therapy, 
procedure code 02.93 (Implantation or replacement of intracranial 
neurostimulator lead(s)) and procedure code 86.98 (Insertion or 
replacement of dual array rechargeable neurostimulator pulse generator) 
to MS-DRG 023 (Craniotomy with Major Device Implant/Acute Complex CNS 
PDX with MCC or Chemo Implant) and MS-DRG 024 (Craniotomy with Major 
Device Implant/Acute Complex CNS PDX without MCC).
    The commenter stated that this recommendation would allow all full 
system dual array deep brain stimulation cases to be appropriately 
grouped to the same MS-DRGs. Currently, procedure codes 02.93 and 86.98 
are assigned to MS-DRG 025 (Craniotomy and Endovascular Intracranial 
Procedures with MCC), MS-DRG 026 (Craniotomy and Endovascular 
Intracranial Procedures with CC), and MS-DRG 027 (Craniotomy and 
Endovascular Intracranial Procedures without CC/MCC), while the 
procedure codes for the nonrechargeable dual array systems, procedure 
codes 02.93 and 86.95 (Insertion or replacement of dual array 
neurostimulator pulse generator, not specified as rechargeable), are 
already assigned to MS-DRGs 023 and 024. The commenter stated that the 
procedures to implant the rechargeable and nonrechargeable dual array 
systems are similar clinically as well as comparable in resource 
utilization.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed FY 2010 
MedPAR data and found a total of 16 full system rechargeable dual array 
deep brain stimulation systems reported with procedure codes 02.93 and 
86.98 assigned to MS-DRGs 025 through 027. We found one case assigned 
to MS-DRG 025 and one case assigned to MS-DRG

[[Page 51527]]

026. The majority of the cases, 14, were assigned to MS-DRG 027, with 
average costs of approximately $23,870 and an average length of stay of 
approximately 2.2 days. We found that the deep brain stimulation cases 
assigned to MS-DRG 027 had higher average costs than the overall cases 
assigned to MS-DRG 027 of approximately $14,200. However, the average 
length of stay was shorter for these cases than the overall length of 
stay for MS-DRG 027 cases of approximately 3.7 days.
    We also examined the data for the nonrechargeable dual array 
systems to assess the commenter's assumption that both the rechargeable 
and nonrechargeable dual array systems are similar in resource use. We 
found 155 total nonrechargeable dual array systems (procedure codes 
02.93 and 86.95) assigned to MS-DRGs 023 and 024. There were 5 cases 
assigned to MS-DRG 023, with average costs of approximately $36,159 and 
an average length of stay of approximately 10 days. We found that the 
majority of the cases, 150, were assigned to MS-DRG 024, with average 
costs of approximately $25,855 and an average length of stay of 
approximately 2.2 days. We believe that these data support the 
commenter's statement that, for the majority of these cases, the 
resource use is similar for both systems.
    For comparison purposes, if we proposed the changes that the 
commenter suggested, those deep brain stimulation cases currently 
assigned to MS-DRG 027 and the one case assigned to MS-DRG 026 (with 
average costs of approximately $27, 836) would be reassigned to MS-DRG 
024. The average costs of approximately $23,870 of these deep brain 
stimulation cases assigned to MS-DRG 027 are similar to the overall 
average costs of approximately $23,249 for MS-DRG 024. The one case 
assigned to MS-DRG 025 (with average costs of approximately $29,361) 
would be reassigned to MS-DRG 023 (with average costs of approximately 
$34,168). The following table illustrates our findings:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 023--All cases............        4,238         11.8      $34,168
MS-DRG 023--Cases with codes                 5         10.0       36,159
 02.93 and 86.95.................
MS-DRG 024--All cases............        1,592          7.6      23, 249
MS-DRG 024--Cases with codes               150          2.2       25,855
 02.93 and 86.95.................
MS-DRG 025--All cases............       11,505         11.0       29,524
MS-DRG 025--Cases with codes                 1          2.0      29, 361
 02.93 and 86.98.................
MS-DRG 026--All cases............        9,782          7.0       19,125
MS-DRG 026--Cases with codes                 1          3.0       27,836
 02.93 and 86.98.................
MS-DRG 027--All cases............       10,936          3.7       14,200
MS-DRG 027--Cases with codes                14          2.2       23,870
 02.93 and 86.98.................
------------------------------------------------------------------------

    Based on our findings, in the proposed rule, we indicated that we 
believe that the data support reassigning the combination of procedure 
codes representing rechargeable systems for deep brain stimulation 
therapy, code 02.93 and code 86.98, to MS-DRGs 023 and 024. Our 
clinical advisors support this reassignment. Therefore, we proposed to 
assign rechargeable dual array systems for deep brain stimulation cases 
identified by reporting both procedure codes 02.93 and 86.98 to MS-DRGs 
023 and 024 for FY 2012. We invited public comment on our proposal to 
assign these cases to MS-DRG 023 and 024 for FY 2012.
    Comment: Several commenters supported our proposal to reassign 
rechargeable dual array deep brain stimulation cases.
    Response: We appreciate the support of the commenters. As stated 
above, we believe that the assignment of these cases to MS-DRG 023 and 
024 is appropriate.
    After consideration of public comments we received, we are adopting 
as final our proposal to assign rechargeable dual array systems for 
deep brain stimulation cases identified by reporting both procedure 
codes 02.93 and 86.98 to MS-DRGs 023 and 024 for FY 2012.
3. MDC 3 (Diseases and Disorders of the Ear, Nose, Mouth, and Throat): 
Skull Based Surgeries
    We received a request from a commenter recommending that CMS 
reclassify skull-based surgical procedures that are currently assigned 
to MS-DRGs 135 and 136 (Sinus and Mastoid Procedures with CC/MCC and 
without CC/MCC, respectively) and reassign them to MS-DRGs 025, 026, 
and 027 (Craniotomy and Endovascular Intracranial Procedures with MCC, 
with CC, and without CC/MCC, respectively). The commenter stated that 
the current MS-DRG assignment does not reflect the resource utilization 
and technical complexity of these difficult procedures when performed 
for anterior skull base tumors.
    Skull (or cranial) based surgery is performed for a variety of 
serious medical conditions including esthesioneuroblastomas, which are 
rare, malignant tumors that arise from the epithelium overlying the 
olfactory bulb; sinonasal melanomas, which are malignant melanomas that 
may develop in the mucosa of the nose and sinuses; and sinonasal 
undifferentiated carcinomas, which are rapidly growing malignant tumors 
arising in the nasal cavity and/or sinuses. These types of conditions 
are generally identified by the following ICD-9-CM diagnosis codes:

 160.0 (Malignant neoplasm of nasal cavities)
 160.1 (Malignant neoplasm of auditory tube, middle ear, and 
mastoid air cells)
 160.2 (Malignant neoplasm of maxillary sinus)
 160.3 (Malignant neoplasm of ethmoidal sinus)
 160.4 (Malignant neoplasm of frontal sinus)
 160.5 (Malignant neoplasm of sphenoidal sinus)
 160.8 (Malignant neoplasm of other accessory sinuses)
 160.9 (Malignant neoplasm of accessory sinus, unspecified)
 210.7 (Benign neoplasm of nasopharynx)
 212.0 (Benign neoplasm of nasal cavities, middle ear, and 
accessory sinuses)

    According to the commenter, procedure code 22.63 (Ethmoidectomy) 
describes the type of surgery being performed for these patients and is 
currently assigned to MS-DRGs 135 and 136.
    For the FY 2012 IPPS/LTCH PPS proposed rule, using the FY 2010 
MedPAR file, we examined data on

[[Page 51528]]

cases identified by procedure code 22.63 when reported with one of the 
above listed diagnosis codes in MS-DRGs 135 and 136. We found a total 
of 402 cases in MS-DRG 135 with an average length of stay of 6.30 days 
and average costs of $12,869. We found only 23 cases in MS-DRG 135 
identified by procedure code 22.63 with one of the diagnosis codes 
listed above with an average length of stay of 3.96 days and average 
costs of $10,510. In MS-DRG 136, there were a total of 320 cases with 
an average length of stay of 2.36 days and average costs of $6,683. We 
found only 27 cases in MS-DRG 136 identified by procedure code 22.63 
with one of the diagnosis codes listed above with an average length of 
stay of 2.04 days and average costs of $6,844. As shown in the table 
below, the cases reporting procedure code 22.63 in MS-DRGs 135 and 136 
have a lower volume, a shorter length of stay, and primarily lower 
average costs compared to all cases in MS-DRGs 135 and 136. As we 
indicated in the proposed rule, the data demonstrated that these cases 
are appropriately assigned to their current MS-DRG classifications.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 135--All cases............          402         6.30      $12,869
MS-- DRG 135--Cases with                    23         3.96       10,510
 procedure code 22.63 and
 diagnosis code 160.0 through
 160.9 or 210.7 or 212.0.........
MS-DRG 136--All cases............          320         2.36        6,683
MS-DRG 136--Cases with procedure            27         2.04        6,844
 code 22.63 and diagnosis code
 160.0 through 160.9 or 210.7 or
 212.0...........................
------------------------------------------------------------------------

    We also analyzed claims data for MS-DRGs 25 through 27. We 
determined that if the cases identified by procedure code 22.63 were to 
be reassigned to MS-DRGs 25-27, they would be significantly overpaid. 
As shown in the table below, we found that the average costs for these 
MS-DRGs range from $14,200 to $29,524.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 025--All cases............       11,505        10.95      $29,524
MS-DRG 026--All cases............        9,782         7.00       19,125
MS-DRG 027--All cases............       10,936         3.71       14,200
------------------------------------------------------------------------

    In summary, we indicated in the proposed rule that the data did not 
support moving cases with procedure code 22.63 when reported with one 
of the previously listed diagnosis codes from MS-DRGs 135 and 136 to 
MS-DRGs 25, 26 and 27. We invited public comment on our proposal not to 
make any MS-DRG modifications for these codes for FY 2012.
    Comment: Several commenters supported our proposal to not make any 
revisions to reclassify skull-based surgical procedures that are 
currently assigned to MS-DRGs 135 and 136 and reassign them to MS-DRGs 
025, 026, and 027.
    Response: We appreciate the commenters' support.
    After consideration of the public comment we received, we are 
finalizing our proposal to not make any modifications for skull-based 
surgeries for FY 2012.
4. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Percutaneous Mitral Valve Repair With Implant
    Procedure code 35.97 (Percutaneous mitral valve repair with 
implant) was created for use beginning October 1, 2010 (FY 2011) after 
the concept of a percutaneous valve repair was presented and approved 
at the February 2010 ICD-9-CM Coordination and Maintenance Committee 
Meeting. Procedure code 35.97 was created at that time to describe the 
MitraClip\TM\ device and any other percutaneous mitral valve repair 
devices currently on the market. This procedure code is assigned to the 
following MS-DRGs: 231 and 232 (Coronary Bypass with PTCA with MCC and 
without MCC, respectively); 246 (Percutaneous Cardiovascular Procedure 
with Drug-Eluting Stent with MCC or 4+ Vessels/Stents); 247 
(Percutaneous Cardiovascular Procedure with Drug-Eluting Stent without 
MCC); 248 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting 
Stent with MCC or 4+ Vessels/Stents); 249 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent without MCC); 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or AMI with 
MCC); and 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent or AMI without MCC).
    According to the Food and Drug Administration's (FDA's) terms of 
the clinical trial for MitraClip\TM\, the device is to be implanted in 
patients without any additional surgeries performed. Therefore, based 
on these terms, we believe that the most likely MS-DRG assignments 
would be MS-DRGs 250 and 251, as described above. However, because 
procedure code 35.97 has only been in use since October 1, 2010, there 
are no claims data in the most recent MedPAR update file with which to 
evaluate any alternative MS-DRG assignments. Therefore, we did not 
propose to make any MS-DRG changes for procedure code 35.97 for FY 
2012. We proposed to keep procedure code 35.97 in its current MS-DRG 
assignments. We invited public comment on this proposal.
    Comment: Several commenters addressed our proposal. One commenter 
supported our proposal not to make any MS-DRG changes in the current 
assignment of procedure code 35.97, but also recommended that CMS 
review the MS-DRG assignment for FY 2013 when more claims data become 
available. In addition, one commenter indicated that it ``* * * has no 
objections to CMS' proposed changes to the MS-DRG classifications and 
the Medicare Code Editor, which seem reasonable, given the data and 
information provided.''
    Response: We appreciate the commenters' support and suggestion.
    After consideration of the public comments we received, we are 
adopting as final without modification our

[[Page 51529]]

proposal to keep procedure code 35.97 (Percutaneous mitral valve repair 
with implant) in its current MS-DRG assignments of 231 and 232 
(Coronary Bypass with PTCA with MCC and without MCC, respectively); 246 
(Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with MCC 
or 4+ Vessels/Stents); 247 (Percutaneous Cardiovascular Procedure with 
Drug-Eluting Stent without MCC); 248 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent with MCC or 4+ Vessels/Stents); 
249 (Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent 
without MCC); 250 (Percutaneous Cardiovascular Procedure without 
Coronary Artery Stent or AMI with MCC); and 251 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or AMI without 
MCC).
    In addition, we plan to conduct a review of the MedPAR data for 
code 35.97 in our next annual IPPS update cycle (that is, for FY 2013) 
to determine if the MS-DRG assignments as listed above are the most 
appropriate MS-DRGs for this procedure.
b. Aneurysm Repair Procedure Codes
    Thoracic aorta defects, such as aneurysm, dissection, or injury, 
are uncommon but serious conditions that may arise from a disease or an 
accident. Some patients can be medically managed but most are treated 
with surgery. Often these defects result in death if they are not 
diagnosed and treated promptly. Currently, there are two techniques 
used for repair of aortic defects; both are O.R. procedures performed 
in an inpatient hospital setting. These two procedures are described by 
ICD-9-CM procedure codes 38.45 (Resection of vessel with replacement, 
thoracic vessel) and 39.73 (Endovascular implantation of graft in 
thoracic aorta). Both procedure codes 38.45 and 39.73 are currently 
assigned to MS-DRGs 237 (Major Cardiovascular Procedures with MCC or 
Thoracic Aortic Aneurysm Repair) and 238 (Major Cardiovascular 
Procedures without MCC).
    We received a request that we consider the reassignment of 
procedure codes 38.45 and 39.73 within the MS-DRG structure by removing 
the procedure codes from MS-DRGs 237 and 238 and adding them to a more 
clinically coherent set of MS-DRGs reflecting higher resource 
consumption. The requestors believed that, based on their analysis of 
MedPAR claims data of MS-DRGs 237 and 238, the resource utilization of 
both the endovascular and open repairs of the abdominal and thoracic 
aortas are higher than the overall average resource utilization for the 
MS-DRGs to which these procedures are currently assigned. The 
requestors also believed that an unusually high number of cases 
probably fall into cost outlier status.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we reviewed the MedPAR 
claims data for these two procedure codes. Our findings are shown in 
the following two tables.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 237--All cases............       20,680        10.03      $34,268
MS-DRG 237--Cases with procedure         1,851         7.73       41,033
 code 39.73......................
MS-DRG 237--Cases without               18,829        10.26       33,603
 procedure code 39.73............
MS-DRG 238--All cases............       35,705         4.08       20,597
MS-DRG 238--Cases with procedure             0            0            0
 code 39.73......................
MS-DRG 238--Cases without               35,705         4.08       20,597
 procedure code 39.73............
------------------------------------------------------------------------

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 237--All cases............       20,680        10.03      $34,268
MS-DRG 237--Cases with procedure           448        13.29       51,953
 code 38.45......................
MS-DRG 237--Cases without               20,234         9.96       33,878
 procedure code 38.45............
MS-DRG 238--All cases............       35,705         4.08       20,597
MS-DRG 238--Cases with procedure           466         7.29       30,219
 code 38.45......................
MS-DRG 238--Cases without               35,239         4.03       20,465
 procedure code 38.45............
------------------------------------------------------------------------

    Our findings of the analysis of the cases with procedure code 39.73 
showed that the average costs are substantially higher than those costs 
for the cases overall in both MS-DRGs 237 and 238. We found that the 
average length of stay for the 1,851 cases identified in MS-DRG 237 is 
somewhat lower at 7.73 days than the average length of stay of 10.26 
days in cases not containing procedure code 39.73.
    Our findings of the analysis of the cases with procedure code 38.45 
showed that both the average costs and the average length of stay are 
considerably higher than the average costs and the average length of 
stay for those cases without procedure code 38.45.
    In addition, we reviewed the cases in which both procedure codes 
38.45 and 39.73 were documented during the same admission. As can be 
seen in the charts below, we found 22 cases in which both procedure 
codes 38.45 and 39.73 were reported. Therefore, the sum of the values 
in the next two charts below will differ from the charts above because 
the cases containing both procedure codes have been removed and the 
data have been reworked.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 237--All cases............       20,680        10.03      $34,268
MS-DRG 237--Cases with procedure         1,829         7.68       40,862
 code 39.73 and without procedure
 code 38.45......................
MS-DRG 237--Cases with procedure           424        13.36       51,783
 code 38.45 and without procedure
 code 39.73......................
MS-DRG 238--All cases............       35,705         4.08       20,597

[[Page 51530]]

 
MS-DRG 238--Cases with procedure             0            0            0
 code 39.73 and without procedure
 code 38.45......................
MS-DRG 238--Cases with procedure           466         7.29       30,219
 code 38.45 and without procedure
 code 39.73......................
------------------------------------------------------------------------

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 237--All cases............       20,680        10.03      $34,268
MS-DRG 237--Cases with procedure            22        11.86       55,243
 code 38.45 and with procedure
 code 39.73......................
MS-DRG 237--Cases without               18,405        10.19       33,184
 procedure code 38.45 or
 procedure code 39.73............
MS-DRG 238--All cases............       35,705         4.08       20,597
MS-DRG 238--Cases with procedure             0            0            0
 code 38.45 and with procedure
 code 39.73......................
MS-DRG 238--Cases without               35,239         4.03       20,465
 procedure code 38.45 or
 procedure code 39.73............
------------------------------------------------------------------------

    We found in our analysis of the claims data for cases with both 
procedure codes 38.45 and 39.73 that the average costs are 
substantially higher than those costs for the cases overall in MS-DRG 
237. In addition, we found that the average length of stay for the 22 
cases with both procedure codes 38.45 and 39.73 is higher at 11.86 days 
than the average length of stay of 10.03 days for all cases in MS-DRG 
237.
    Our analysis of the claims data for the procedure codes in MDC 5 
showed that procedure code 38.45 is also assigned to MS-DRGs 228 (Other 
Cardiothoracic Procedures with MCC), 229 (Other Cardiothoracic 
Procedures with CC), and 230 (Other Cardiothoracic Procedures without 
CC/MCC) when it occurs in combination with procedure code 38.44 
(Resection of vessel with replacement, aorta, abdominal). Procedure 
code 39.73 is not assigned to MS-DRGs 228 through 230, and review of 
the data showed that there were no cases that had been reported in 
these MS-DRGs.
    The table below shows our findings of the average costs and the 
average length of stay for procedure code 38.45 reported in combination 
with procedure code 38.44 in MS-DRGs 228 through 230 and the average 
costs and the average length of stay in all cases in MS-DRGs 228 
through 230 when both procedure codes 38.45 and 38.44 are not assigned.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 228--All cases............        2,084        13.79      $49,488
MS-DRG 228--Cases with procedure           276        15.18       56,246
 code 38.45 and procedure code
 38.44...........................
MS-DRG 228--Cases without                1,808        13.58       48,456
 procedure code 38.45 and without
 procedure code 38.44............
MS-DRG 229--All cases............        2,354         8.31       31,148
MS-DRG 229--Cases with procedure           157        10.68       37,723
 code 38.45 and procedure code
 38.44...........................
MS-DRG 229--Cases without                2,197         8.14       30,678
 procedure code 38.45 and without
 procedure code 38.44............
MS-DRG 230--All cases............          628         5.45       24,236
MS-DRG-230--Cases with procedure            34         7.18       27,054
 code 38.45 and procedure code
 38.44...........................
MS-DRG 230--Cases without                  594         5.35       24,075
 procedure code 38.45 and without
 procedure code 38.44............
------------------------------------------------------------------------

    Our findings show that both the average length of stay and average 
costs are higher in those cases containing procedure code 38.45 than 
those cases without this procedure code in MS-DRGs 228 through 230.
    We then analyzed the 1,851 cases containing procedure code 39.73 in 
MS-DRGs 237 and 238 and the 912 cases containing procedure code 38.45 
in MS-DRGs 237 and 238 to determine if they would meet the established 
criteria for a 3-way severity of illness split. This criterion is 
described in section III.G.1.c. of this preamble. The chart below shows 
our findings, with MS-DRG 237 acting as a severity of illness proxy for 
all cases, as there were no cases in MS-DRG 238. In the chart, the 
extensions ``-1,'' ``-2,'' and ``-3'' correspond to severity levels, 
with ``-1'' representing cases with MCC, ``-2'' representing cases with 
CC, and ``-3'' representing cases without CC/MCC.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 237-1--All cases..........       20,680        10.03      $34,268
MS-DRG 237-1--Cases with                   637        12.14       57,834
 procedure code 39.73............
MS-DRG 237-1--Cases with                   446        13.29       51,954
 procedure code 38.45............
MS-DRG 237-2--All cases..........       17,356         5.73       22,083
MS-DRG 237-2--Cases with                   659         6.89       38,673
 procedure code 39.73............
MS-DRG 237-2--Cases with                   353         8.14       31,480
 procedure code 38.45............
MS-DRG 237-3--All cases..........       18,349         2.52       19,183
MS-DRG 237-3--Cases with                   555         3.65       27,993
 procedure code 39.73............
MS-DRG 237-3--Cases with                   113         6.30       26,280
 procedure code 38.45............
------------------------------------------------------------------------

[[Page 51531]]

    Our next step was to analyze the claims data for the cases in the 
clinically coherent MS-DRGs to which we proposed to move these cases. 
These six MS-DRGs are: 216 (Cardiac Valve & Other Major Cardiothoracic 
Procedures with Cardiac Catheterization with MCC); 217 (Cardiac Valve & 
Other Major Cardiothoracic Procedures with Cardiac Catheterization with 
CC); 218 (Cardiac Valve & Other Major Cardiothoracic Procedures with 
Cardiac Catheterization without CC/MCC); 219 (Cardiac Valve & Other 
Major Cardiothoracic Procedures without Cardiac Catheterization with 
MCC), 220 (Cardiac Valve & Other Major Cardiothoracic Procedures 
without Cardiac Catheterization with CC); and 221 (Cardiac Valve & 
Other Major Cardiothoracic Procedures without Cardiac Catheterization 
without CC/MCC). For the sake of the grouping algorithm, procedure 
codes 39.73 and 38.45 must also be added to MS-DRGs 216 through 219. 
However, if these codes are documented in cases in which a cardiac 
catheterization occurs, they will be ``trumped'' by those 
catheterizations. Therefore, when we reviewed the data in order to make 
length of stay and cost comparisons, we only used the three MS-DRGs to 
which procedure codes 39.73 and 38.45 would appear without cardiac 
catheterization; that is MS-DRGs 219, 220, and 221. Our findings 
describing these three MS-DRGs are displayed in the following chart:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 219.......................       12,805        12.76      $51,399
MS-DRG 220.......................       15,988         7.65       34,270
MS-DRG 221.......................        4,043         5.90       28,974
------------------------------------------------------------------------

    Our evaluation of the severity levels in the cases containing 
procedure codes 39.73 and 38.45 using the proxy MS-DRGs 237-1, 237-2, 
and 237-3 compared to the claims data in the table above with MS-DRGs 
219 through 221 demonstrates that the cases are similar in resource 
consumption. In addition, the cases are clinically coherent.
    We indicated in the proposed rule that, by moving procedure code 
38.45 to MS-DRGs 216 through 221, we did not believe that there is a 
need for combination codes 38.45 plus 38.44 to be specifically assigned 
to MS-DRGs 228, 229, and 230. Because MS-DRGs 216 through 221 are 
higher in the surgical hierarchy for MDC 5 than MS-DRGs 228 through 
230, the result of the proposal would be that either procedure code 
38.45 by itself or in combination with procedure code 38.44 will always 
be assigned to MS-DRGs 216 through 221. We indicated that when reported 
alone, under this policy, procedure code 38.44 would continue to be 
assigned to MS-DRGs 237 and 238, as it has been in the past.
    Therefore, for FY 2012, we proposed to remove procedure codes 38.45 
and 39.73 from MS-DRGs 237 and 238 and to add these codes to MS-DRGs 
216, 217, 218, 219, 220, and 221 based on our findings of similar 
resource consumption and clinical coherence. To conform to this 
proposed change, we also proposed to revise the title of MS-DRG 237 
(Major Cardiovascular Procedures with MCC or Thoracic Aortic Aneurysm 
Repair) by removing the terms ``or Thoracic Aortic Aneurysm Repair.'' 
Therefore, the new proposed title of MS-DRG 237 was ``Major 
Cardiovascular Procedures with MCC.'' We invited public comment on 
these proposals.
    Comment: Several commenters supported the proposed changes.
    Response: We appreciate the commenters' support.
    Therefore, as we proposed, we are adopting our proposed changes as 
final. In summary, we are removing procedure codes 38.45 and 39.73 from 
MS-DRGs 237 and 238 and adding these two codes to the following six MS-
DRGs: 216; 217; 218; 219; 220; and 221. In addition, we are revising 
the title of MS-DRG 237 to read ``Major Cardiovascular Procedures with 
MCC.'' The title of MS-DRG 238 (Major Cardiovascular Procedures without 
MCC) will remain the same.
5. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue)
a. Artificial Discs
    In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 
a public comment that was outside of the scope of any proposal in that 
proposed rule. The commenter urged CMS to reassign procedure code 84.62 
(Insertion of total spinal disc prosthesis, cervical) from MS-DRG 490 
(Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc 
Device/Neurostimulator) into MS-DRGs 471 through 473 (Cervical Spinal 
Fusion with MCC, with CC, and without CC/MCC, respectively). In 
addition, the commenter requested that CMS reassign procedure code 
84.65 (Insertion of total spinal disc prosthesis, lumbosacral) from MS-
DRG 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or 
Disc Device/Neurostimulator) to MS-DRGs 459 and 460 (Spinal Fusion 
Except Cervical with MCC and without MCC, respectively). However, the 
commenter also provided an alternative option to reassigning the 
procedure codes to different MS-DRGs. The commenter suggested the 
creation of a new, separate MS-DRG for the two artificial disc 
procedures if reassignment to the fusion MS-DRGs was not feasible.
    We refer the reader to the FY 2008 IPPS proposed rule and final 
rule with comment period (72 FR 24731 through 24735 and 47226 through 
47232) for discussion on the comprehensive evaluation of all the spinal 
DRGs in the development of the MS-DRG classification system. The 
modifications made to the spinal DRGs for FY 2008 recognized the 
similar utilization of resources, differences in levels of severity, 
and the complexity of the services being performed on patients 
undergoing the various types of spinal procedures.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed FY 2010 
MedPAR claims data for procedure codes 84.62 and 84.65 in MS-DRG 490 
and compared those results to the claims data for MS-DRGs 459, 460, 
471, 472, and 473. We found a total of 19,840 cases in MS-DRG 490 with 
an average length of stay of 4.24 days and average costs of $11,940. As 
displayed in the chart below, we found 97 cases reporting procedure 
code 84.62, with an average length of stay of 1.80 days and average 
costs of $13,194 in MS-DRG 490. We also found 35 cases reporting 
procedure code 84.65, with an average length of stay of 2.91 days and 
average costs of $20,753. While average costs for the artificial disc 
cases were slightly higher ($1,254 for procedure code 84.62 and $8,813 
for procedure code 84.65) compared to the average cost for all cases in 
MS-DRG 490, the artificial disc cases were of extremely low volume and 
reflected shorter lengths of stay

[[Page 51532]]

compared to all the cases in MS-DRG 490.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 459--All cases............        3,650         8.92      $40,218
MS-DRG 460--All cases............       60,865         3.75       25,268
MS-DRG 471--All cases............        2,686         8.92       29,837
MS-DRG 472--All cases............        8,586         3.78       18,494
MS-DRG 473--All cases............       24,323         1.80       13,775
MS-DRG 490--All cases............       19,840         4.24       11,940
MS-DRG 490--Cases with code 84.62           97         1.80       13,194
MS-DRG 490--Cases with code 84.65           35         2.91       20,753
------------------------------------------------------------------------

    We recognized the disparity in average costs for cases reporting 
the insertion of a cervical or lumbar artificial disc in MS-DRG 490 
compared to all the cases in that MS-DRG. However, we did not believe 
this supports reassignment of procedure codes 84.62 and 84.65 to the 
MS-DRGs for spinal fusion as the commenter requested. Even with the 
disparity in costs, clinically, the insertion of an artificial disc is 
not a spinal fusion. Therefore, reassignment of the artificial disc 
cases to the fusion MS-DRGs would be clinically inappropriate. In 
addition, for certain Medicare populations, the insertion of an 
artificial disc is considered a noncovered procedure.
    As stated earlier, the commenter also provided an alternative 
option to reassigning procedure codes 84.62 and 84.65. The commenter 
suggested the creation of a new, separate MS-DRG for the two artificial 
disc procedures if reassignment to the fusion MS-DRGs was not feasible. 
In our evaluation of the claims data and as shown above in the data 
chart, the artificial disc cases are of extremely low volume; 
therefore, we do not believe the findings warrant the creation of a 
separate MS-DRG.
    We invited public comment on our proposal not to reassign procedure 
code 84.62 from MS-DRG 490 to MS-DRGs 471 through 473 and procedure 
code 84.65 from MS-DRG 490 to MS-DRGs 459 and 460. We also invited 
public comment on our proposal not to create a new, separate MS-DRG for 
artificial disc procedures (codes 84.62 and 84.65) for FY 2012.
    Comment: Several commenters supported our proposal not to create a 
new MS-DRG for artificial disc procedures, as well as not to reassign 
the procedure codes for insertion of a cervical or lumbar artificial 
disc (codes 84.62 and 84.65) to the fusion MS-DRGs (459 and 460 and 471 
through 473). One commenter agreed with our statement that the 
insertion of an artificial disc is not the same as a fusion and should 
not be included in the fusion MS-DRGs. Another commenter agreed that 
reassignment of the artificial discs to the fusion MS-DRGs does not 
appear to be a clinically appropriate classification despite 
comparative costs. This commenter believed that limitations in the 
data, such as the low volume of cases, may be due to artificial discs 
being a noncovered procedure for certain Medicare populations and 
recommended revisiting our analysis for a new separate MS-DRG if the 
coverage policy is revised in the future.
    Response: We appreciate the commenters' support for our proposals. 
We also acknowledge the commenters recommendation to conduct further 
analysis for total disc replacement procedures should the coverage 
policy pertaining to certain Medicare populations be modified in the 
future.
    Comment: One commenter expressed appreciation to CMS for reviewing 
the current MS-DRG assignment for total disc replacement (TDR) 
procedures involving the cervical and lumbar areas. However, the 
commenter disagreed with the proposed rule analysis, stating it was 
limited to only the MedPAR database. The commenter believed that 
information from two publicly available databases, the Healthcare Cost 
and Utilization Project (HCUP) database and the California Patient 
Discharge database, support modifications to the TDR procedures. 
According to the commenter, ``CMS' current MS-DRG assignment and 
resulting reimbursement at thirty to fifty percent (30-50%) of fusion 
procedures is well below the average eighty-eight percent (88%) ratio 
of TDR to fusion charges observed in the two additional databases 
analyzed.''
    The commenter acknowledged that procedure code 84.62 and procedure 
code 84.65 are currently assigned to MS-DRG 490, regardless of whether 
or not the patient has a CC or MCC. The commenter also acknowledged the 
evaluation of the spinal procedure MS-DRGs in the FY 2008 IPPS proposed 
and final rules (72 FR 24731 through 24735 and 47226 through 47232), 
respectively. However, according to the commenter, the MS-DRG 
assignment for TDR procedures requires a more recent and thorough 
evaluation.
    The commenter provided a comparison of how TDR procedures differ 
from other procedures assigned to MS-DRG 490. The commenter also stated 
that TDR procedures are more complex than other procedures in the MS-
DRG. For example, the commenter noted that MS-DRG 490 includes 
procedure codes 84.58 and 84.59, representing spinal disc devices such 
as the X-Stop, Coflex, Dynesys, and M-Brace which do not involve 
removal of a disc. The commenter also noted that procedure code 80.51 
(Excision of intervertebral disc), which comprises only one aspect of 
the total surgery required for TDR, is assigned to the same MS-DRG. The 
commenter further noted that because the two procedures are in the same 
MS-DRG, the hospital payment is the same for both procedures.
    In addition, the commenter included a comparison of TDR cases and 
fusion cases, noting that there appeared to be greater similarity in 
resource use between fusion and TDR procedures than between TDR and 
other procedures in MS-DRG 490. The commenter reported that TDR is an 
alternative treatment option to spinal fusion and that patients 
receiving TDR have the same diagnosis as those receiving spinal fusion. 
In terms of similarity, the commenter stated that during both a TDR and 
spinal fusion surgery, the affected disc is removed, allowing normal 
disc height to be restored by the use of an implant. In spinal fusion, 
stability of the spinal segment is accomplished by the use of an 
implant and instrumentation such as plates, rods or screws and use of 
bone graft promotes osseous fusion of the vertebrae. For TDR 
procedures, an implant that allows motion is inserted into the disc 
space. According to the

[[Page 51533]]

commenter, these factors demonstrate clinical homogeneity and resource 
utilization for both TDR and spinal fusion.
    The commenter did not dispute our findings that TDR procedures have 
shorter lengths of stay and are higher in costs compared to other 
procedures within MS-DRG 490. The commenter also acknowledged that TDR 
procedures are low volume and represent a fraction of all the 
procedures assigned to the MS-DRG.
    Response: We appreciate and acknowledge the commenter's provision 
of data related to the HCUP database and the California Patient 
Discharge database. However, we point out that the commenter failed to 
identify the data related to each specified type of artificial disc 
replacement procedure in its analysis. We do not consider the data to 
be reliable for purposes of determining MS-DRG reclassifications in the 
form provided, as the data do not identify the number of cases, average 
length of stay, or average costs associated with a cervical versus a 
lumbar disc replacement. Further, in its own submitted comments, the 
commenter notes that the data provided were based on charges, not 
costs. In addition, as stated in the FY 2012 IPPS proposed rule (76 FR 
25800), in order for us to consider using particular non-MedPAR data, 
we must have sufficient time to evaluate and test the data. This allows 
us time to test the data and make a preliminary assessment as to the 
feasibility of using the data. We evaluate patient care costs using 
average charges and lengths of stay as proxies for costs and rely on 
the judgment of our medical advisors to decide whether patients are 
clinically distinct or similar to other patients in the MS-DRG. We also 
consider variations and whether observed average differences are 
consistent across patients or attributable to cases that were extreme 
in terms of charges, length of stay, or both. Lastly, we consider the 
number of patients who will have a given set of characteristics and 
generally prefer not to create a new MS-DRG unless it would include a 
substantial number of cases.
    In response to the commenter's comparison of how TDR procedures 
differ from other procedures in MS-DRG 490, we point out that procedure 
code 84.58 (Implantation of interspinous process decompression device), 
which previously identified the X-Stop device, was deleted effective 
October 1, 2007 (FY 2008). In addition, the other spinal disc devices 
that were noted by the commenter (Coflex, Dynesys, and M-Brace) were 
reassigned from procedure code 84.59 (Insertion of other spinal 
devices) to unique codes that were created in response to industry 
requests to describe a newer category of devices identified as motion 
preserving technologies. This new procedure code category, 84.8 
(Insertion, replacement and revision of posterior spinal motion 
preservation device(s)), also became effective as of October 1, 2007 
(FY 2008). As discussed above, the commenter recommended that CMS 
conduct a more recent and thorough evaluation of the spinal procedures 
in MS-DRG 490. However, in its own submitted comments, the commenter 
referred to outdated, deleted codes for its comparison to TDR.
    With regard to clinical homogeneity and resource utilization, 
spinal fusion, TDR and a subset of the motion preserving technologies 
utilizing implant devices that allow motion in the spinal column were 
discussed extensively as noted above in the FY 2008 IPPS proposed rule 
and final rule with comment period (72 FR 24731 through 24735 and 47226 
through 47232), respectively.
    We will continue to evaluate the MS-DRGs on an annual basis and to 
respond to requests for code reassignments and MS-DRG 
reclassifications. We performed an analysis of the cervical and lumbar 
artificial disc replacement procedures in comparison to the fusion MS-
DRGs in response to the commenter's request, as described above. Our 
data did not support reassignment of the artificial disc replacement 
codes, nor did our clinical advisors agree that these procedures are 
clinically coherent to be grouped in the same MS-DRGs. In addition, the 
data did not support the creation of a new, separate MS-DRG for total 
disc replacement procedures.
    As mentioned previously, we performed a comprehensive analysis of 
all the spinal DRGs in our FY 2008 rulemaking process and we recognized 
the costs of procedures involving insertion of a disc device. As a 
result, we modified MS-DRG 490 (the higher severity level) to include 
those procedures with disc devices. The data analysis conducted at that 
time supported that modification.
    We will continue to monitor the resource utilization of procedure 
codes 84.62 and 84.65 to determine if future MS-DRG reassignments are 
warranted.
    After consideration of the public comments we received, we are 
finalizing our proposal to not create a new, separate MS-DRG for 
cervical or lumbar total disc replacement procedures and to not 
reassign procedure code 84.62 from MS-DRG 490 to MS-DRGs 471 through 
473 and procedure code 84.65 from MS-DRG 490 to MS-DRGs 459 and 460 for 
FY 2012.
b. Major Joint Replacement or Reattachment of Lower Extremities
    We received a request to add an additional severity level for MS-
DRG 469 (Major Joint Replacement or Reattachment of Lower Extremity 
with MCC) and MS-DRG 470 Major Joint Replacement or Reattachment of 
Lower Extremity without MCC). For the FY 2012 IPPS/LTCH PPS proposed 
rule, we examined FY 2010 MedPAR claims data to determine if we could 
subdivide the base MS-DRG into three severity levels: with MCC, with 
CC, and without CC/MCC. We applied the criteria used in the development 
of the MS-DRGs included in the FY 2008 IPPS final rule with comment 
period (72 FR 47169). We refer readers to this final rule with comment 
period for a complete description of these criteria. As discussed 
earlier, the original criteria were based on average charges. However, 
subsequent to the FY 2007 IPPS final rule (71 FR 47882), we now use 
average costs. The five criteria using costs are listed below. In order 
to warrant creation of a CC or an MCC subgroup within a base MS-DRG, 
the subgroup must meet all of the following five criteria:
     A reduction in variance of costs of at least 3 percent.
     At least 5 percent of the patients in the MS-DRG fall 
within the CC or MCC subgroup.
     At least 500 cases are in the CC or MCC subgroup.
     There is at least a 20-percent difference in average costs 
between subgroups.
     There is a $2,000 difference in average costs between 
subgroups
    The following table shows our determination of the number of cases 
and average costs by MCC, CC, and non-CC levels.

------------------------------------------------------------------------
                                                  Average
       MS-DRGs 469 and 470          Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
Cases with MCC...................       25,717         7.72      $21,016

[[Page 51534]]

 
Cases with CC....................      179,116         3.99       14,233
Cases without CC/MCC.............      220,739         3.21       13,250
                                  --------------------------------------
    Total........................      425,572          3.8       14,133
------------------------------------------------------------------------

    We determined that these cases do not meet our five criteria for 
adding a new severity level. The cases failed to meet criterion four 
(requiring at least a 20-percent difference in average costs between 
subgroups) and criterion five (requiring a $2,000 difference in average 
costs between subgroups). Therefore, we did not propose the addition of 
a new severity level for the base MS-DRG. Instead, we proposed to 
maintain the two existing severity levels for MS-DRGs 469 and 470. We 
welcomed public comments on our proposal not to add an additional 
severity level to MS-DRGs 469 and 470.
    Comment: Several commenters supported our proposal to maintain the 
two existing severity levels for MS-DRGs 469 and 470 and not to add a 
third severity level. The commenters stated that the proposal seemed 
reasonable, given the data and information provided.
    One commenter opposed our proposal. The commenter acknowledged the 
five criteria used to evaluate the establishment of a new severity 
level and the fact that this set of MS-DRGs did not meet the criterion 
requiring at least a 20-percent difference in average costs between 
subgroups or the criterion requiring a $2,000 difference in average 
costs between subgroups. However, the commenter stated that the large 
number of ``with CC'' cases that are currently classified in the 
``without CC/MCC'' group places an unfair burden on providers who treat 
these patients and presents a distorted picture of the actual severity 
level of cases assigned to those providers. The commenter believed that 
adding an additional severity level to MS-DRGs 469 and 470 would better 
identify those conditions that lead to higher severity of illness and 
resource use relative to the average Medicare patient.
    Another commenter opposed our proposal of maintaining the current 
two severity levels. The commenter stated that while the data appear to 
show that there is not a significant average cost difference between 
cases without CC/MCC compared to cases with CC, the commenter believed 
the data are biased. The commenter believed that diagnoses that do not 
affect DRG assignment are less likely to be reported on claims. The 
commenter speculated that it was reasonable to assume that, for cases 
assigned to these MS-DRGs, complications and comorbidities are 
underreported, as hospitals know that coding complications and 
comorbidities do not result in higher reimbursement. The commenter 
stated that a more reasonable approach would be to establish a third 
severity level for major joint replacement, with the intent of 
analyzing the data over the next 2 years to determine whether this was 
an appropriate MS-DRG modification. The commenter stated that the fact 
that ``Revision of a Hip or Knee Replacement'' has three levels 
strongly suggests that three levels would be appropriate for major 
joint replacement also.
    Response: We agree with the commenters' statements that the data 
analysis shows that two of the five established criteria for creating a 
new severity level were not met. The cases failed to meet criterion two 
requiring at least a 20-percent difference in average costs between 
subgroups and criterion five requiring a $2,000 difference in average 
costs between subgroups. The criteria were developed to evaluate the 
need for severity levels across all MS-DRGs. We applied the criteria 
used in the development of the MS-DRGs included in the FY 2008 IPPS 
final rule with comment period (72 FR 47169). We refer readers to that 
final rule with comment period for a complete description of these 
criteria. As discussed earlier, the original criteria were based on 
average charges. However, subsequent to the FY 2007 IPPS final rule (71 
FR 47882), we now use average costs. We believe it is important to 
apply these criteria consistently as requests are evaluated to create 
new severity levels. The cases in MS-DRGs 469 and 470 failed to meet 
the five criteria for adding a new severity level. We agree with the 
commenters who supported our proposal to maintain the two existing 
severity levels for MS-DRGs 469 and 470 and not creating a third 
severity level.
    We disagree with the commenters who stated that CMS should ignore 
the criteria and add the additional severity level. One commenter 
suggested that we could retroactively review this new severity level by 
examining claims data 2 years after the update is made. We believe it 
is inappropriate to make an exception to the severity level criteria 
based on an assumption that hospitals may be under reporting secondary 
diagnoses that are on the CC list for certain types of cases. We 
encourage hospitals to code and report accurately. We will continue to 
review data to determine if additional severity levels are needed for 
specific MS-DRGs based on our published criteria. We do not believe it 
is appropriate to make exceptions for certain MS-DRGs.
    After consideration of the public comments we received, as we 
proposed, we are maintaining MS-DRGs 469 and 470 with the current two 
severity levels for FY 2012.
c. Combined Anterior/Posterior Spinal Fusion
    A manufacturer requested that CMS reassign spinal fusion cases 
utilizing the AxiaLIF technology from MS-DRGs 459 and 460 (Spinal 
Fusion Except Cervical with MCC and without MCC, respectively) to MS-
DRGs 453, 454, and 455 (Combined Anterior/Posterior Spinal Fusion with 
MCC, with CC, and without CC/MCC, respectively). The commenter stated 
that an anterior lumbar interbody spinal fusion performed with a 
lateral approach, the extreme lateral interbody fusion (XLIF[supreg]), 
with posterior spinal fixation, can report two codes resulting in 
assignment to the combined fusion MS-DRGs. The commenter also stated 
that the AxiaLIF technology, which is also utilized in an anterior 
lumbar interbody spinal fusion and uses a pre-sacral approach, can only 
report one code, resulting in assignment to the single fusion MS-DRGs. 
The commenter expressed concern that the payment incentives are not 
properly aligned for the recently available minimally invasive spinal 
fusion technologies. The commenter compared the XLIF[supreg] to the 
AxiaLIF and urged CMS to consider the AxiaLIF technology similar to the 
XLIF[supreg] for purposes of MS-DRG assignment.
    Spinal fusion is a surgical procedure that joins two or more 
vertebrae by the use of bone graft (or bone graft substitute), with the 
goal of maintaining

[[Page 51535]]

alignment, providing stability, decreasing pain, and restoring the 
function of the spinal nerves. Routinely, a spinal fusion also utilizes 
internal fixation devices (instrumentation) to assist in stabilizing 
the spine. These fixation devices may include pedicle screws, cages, 
rods, or plates. Effective October 1, 2010, ICD-9-CM procedure code 
81.06 (Lumbar and lumbosacral fusion of the anterior column, anterior 
technique) describes the XLIF[supreg] procedure, and code 81.08 (Lumbar 
and lumbosacral fusion of the anterior column, posterior technique) 
describes the AxiaLIF technology.
    The spinal fusion codes and their corresponding MS-DRG assignment 
include the use of bone graft and internal fixation. The requestor's 
comment regarding the assignment of one procedure code for one 
technology versus assigning two procedure codes for another technology 
indicates that the commenter may not fully understand the MS-DRG 
GROUPER logic for spinal fusions. For example, if an anterior lumbar 
interbody fusion is performed and posterior spinal fixation (or 
instrumentation) is also utilized, this requires one code and results 
in a single fusion MS-DRG assignment. However, if a posterior spinal 
fusion (procedure code 81.07 (Lumbar and lumbosacral fusion of the 
posterior column, posterior technique) was performed in addition to an 
anterior fusion, for example, the XLIF[reg] procedure (procedure code 
81.06), that scenario would necessitate the assignment of both codes, 
resulting in assignment to the combined spinal fusion MS-DRGs (453, 
454, or 455). MS-DRGs 453, 454, and 455 were created to capture 
patients who have both an anterior and posterior fusion. We believe the 
requestor may have confused the terms ``fixation'' and ``fusion'' for 
MS-DRG assignment in its request.
    For the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed the FY 
2010 MedPAR data to evaluate claims reporting procedure codes 81.06, 
81.07, and 81.08 in MS-DRGs 456 through 458 (Spinal Fusion Except 
Cervical with Spinal Curvature/Malignancy/Infection or 9+ Fusions with 
MCC, with CC and without CC/MCC, respectively) and MS-DRGs 459 and 460. 
We found a total of 1,115 cases in MS-DRG 456, with an average length 
of stay of 13.14 days and average costs of $63,856. We found 278 cases 
reporting procedure code 81.08, with an average length of stay of 12.04 
days and average costs of $56,585. Similar results can be seen for 
procedure code 81.08 in the remaining MS-DRGs as shown in the chart 
below in terms of volume, length of stay, and average cost. Clearly, 
the data demonstrate that the AxiaLIF technology (procedure code 81.08) 
is appropriately assigned to its current MS-DRG assignments, as is the 
XLIF[supreg] procedure (procedure code 81.06).

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 456--All cases............        1,115        13.14      $63,856
MS-DRG 456--Cases with code 81.06           54        14.37       52,392
MS-DRG 456--Cases with code 81.07           22        12.32       46,828
MS-DRG 456--Cases with code 81.08          278        12.04       56,585
MS-DRG 457--All cases............        3,079         6.74       41,500
MS-DRG 457--Cases with code 81.06          119         6.42       36,468
MS-DRG 457--Cases with code 81.07           98         6.49       36,532
MS-DRG 457--Cases with code 81.08        1,194         5.73       35,272
MS-DRG 458--All cases............        1,389         3.91       32,946
MS-DRG 458--Cases with code 81.06          115         3.49       29,089
MS-DRG 458--Cases with code 81.07           76         3.16       30,551
MS-DRG 458--Cases with code 81.08          827         3.60       30,570
MS-DRG 459--All cases............        3,650         8.92       40,218
MS-DRG 459--Cases with code 81.06          164         9.12       40,150
MS-DRG 459--Cases with code 81.07          165         8.65       37,970
MS-DRG 459--Cases with code 81.08        2,468         8.25       38,010
MS-DRG 460--All cases............       60,865         3.75       25,268
MS-DRG 460--Cases with code 81.06        2,681         3.27       26,464
MS-DRG 460--Cases with code 81.07        3,709         3.67       23,334
MS-DRG 460--Cases with code 81.08       46,565         3.66       24,571
------------------------------------------------------------------------

    We also analyzed data for combinations of the spinal fusion codes 
that result in assignment to MS-DRGs 453, 454, and 455. We evaluated 
the following combinations:
     81.06 (Lumbar and lumbosacral fusion of the anterior 
column, anterior technique) and 81.07 (Lumbar and lumbosacral fusion of 
the posterior column, posterior technique).
     81.06 (Lumbar and lumbosacral fusion of the anterior 
column, anterior technique) and 81.08 (Lumbar and lumbosacral fusion of 
the anterior column, posterior technique).
    We further analyzed data with the following combination of spinal 
fusion codes in MS-DRGs 456, 457, and 458 and MS-DRGs 459 and 460:
     81.07 (Lumbar and lumbosacral fusion of the posterior 
column, posterior technique) and 81.08 (Lumbar and lumbosacral fusion 
of the anterior column, posterior technique).
    The chart below shows the results of the data analysis for the 
combination of procedure codes listed above where an anterior and 
posterior spinal fusion was performed in the same episode of care. 
There were a total of 1,190 cases in MS-DRG 453, with an average length 
of stay of 13.08 days and average costs of $71,693. The cases reporting 
the combination of procedure codes 81.06 and 81.08 in this same MS-DRG 
totaled 431, with an average length of stay of 11.59 days and average 
costs of $69,859. Results for the procedure code combination (81.06 and 
81.08) in MS-DRGs 454 and 455 with regard to volume of cases, length of 
stay, and average costs data also support that these spinal fusion 
procedure code combinations are appropriately placed in their current 
MS-DRG assignments. Likewise, for MS-DRGs 456, 457, and 458, the data 
support that the spinal fusion procedure code combinations of 81.07 and 
81.08 are appropriately placed in their current MS-DRG assignments. 
There were a total of 1,115 cases in MS-DRG 456 with an average length 
of stay of 13.14 days and average

[[Page 51536]]

costs of $68,856. The cases reporting the combination of procedure 
codes 81.07 and 81.08 in this same MS-DRG totaled 54, with an average 
length of stay of 14.37 days and average costs of $52,392. Results for 
the procedure code combination (81.07 and 81.08) in MS-DRGs 457 and 458 
with regard to volume of cases and average length of stay were lower 
compared to all the cases in those two MS-DRGs. While the data show 
higher average costs for the procedure code combination of 81.07 and 
81.08 in MS-DRGs 457 and 458, as stated previously, the volume was 
extremely low.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 453--All cases............        1,190        13.08      $71,693
MS-DRG 453--Cases with codes                 8        14.00      109,089
 81.06 and 81.07.................
MS-DRG 453--Cases with codes               431        11.59       69,859
 81.06 and 81.08.................
MS-DRG 454--All cases............        3,052         6.38       48,311
MS-DRG 454--Cases with codes                47         6.83       60,743
 81.06 and 81.07.................
MS-DRG 454--Cases with codes             1,825         5.71       47,144
 81.06 and 81.08.................
MS-DRG 455--All cases............        2,747         3.63       37,378
MS-DRG 455--Cases with codes                40         4.28       47,794
 81.06 and 81.07.................
MS-DRG 455--Cases with codes             2,053         3.43       37,793
 81.06 and 81.08.................
MS-DRG 456--All cases............        1,115        13.14       63,856
MS-DRG 456--Cases with codes                54        14.37       52,392
 81.07 and 81.08.................
MS-DRG 457--All cases............        3,079         6.74       41,500
MS-DRG 457--Cases with codes                29         5.97       60,820
 81.07 and 81.08.................
MS-DRG 458--All cases............        1,389         3.91       32,946
MS-DRG 458--Cases with code 81.07           23         3.22       51,942
 and 81.08.......................
------------------------------------------------------------------------

    As the focus of the analysis was to evaluate procedure code 81.08 
in comparison to procedure code 81.06, we believe the AxiaLIF 
technology (procedure code 81.08) is grouped appropriately in its 
current MS-DRG assignments, as is the XLIF[supreg] procedure (procedure 
code 81.06). The volume, length of stay, and cost data analyzed 
demonstrate that the complexity of services and resources utilized for 
each of these technologies are properly accounted for in their 
respective MS-DRG assignments. Therefore, the data did not support 
making changes for procedure code 81.08. As a result, we did not 
propose to reassign cases reporting this procedure code to the combined 
fusion MS-DRGs. We invited public comment on our proposal to not 
reassign procedure code 81.08 from MS-DRGs 456 through 460 to MS-DRGs 
453 through 455 for FY 2012.
    Comment: Several commenters supported our proposal to not reassign 
procedure code 81.08 to MS-DRGs 453 through 455.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to not reassign procedure code 81.08 to MS-DRGs 
453 through 455.
6. MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue, and 
Breast): Excisional Debridement of Wound, Infection, or Burn
    We received a request that we remove procedure code 86.22 
(Excisional debridement of wound, infection, or burn) from the list of 
codes considered to be O.R. procedures. The commenter stated that many 
inpatient excisional debridements are performed in a patient's room 
instead of in an operating room. The commenter believed that the 
original assignment of procedure code 86.22 to the O.R. list served to 
help reflect the resource intensity required by a patient with wounds 
and ulcers that required an excisional debridement. The commenter 
stated that, by doing so, the code served as a proxy for severity of 
illness in the original CMS DRGs prior to the implementation of MS-DRGs 
in FY 2008. The commenter stated that the creation of the most serious 
pressure ulcer codes for stage 3 and stage 4 pressure ulcers (codes 
707.23 and 707.24) allows these conditions to be classified as MCCs. 
Therefore, the commenter stated that the need to use procedure code 
86.22 to capture severity of illness was no longer needed. The 
commenter also stated that procedure code 86.22 is a non-O.R. code 
under the APR-DRGs and does not affect the DRG assignment. The 
commenter requested that procedure code 86.22 be changed from an O.R. 
procedure code to a non-O.R. procedure code.
    As the commenter stated, excisional debridements are currently 
captured in procedure code 86.22. Procedure code 88.22 is classified as 
an O.R. procedure in the current MS-DRGs and, therefore, leads to a 
surgical MS-DRG assignment. We examined MedPAR claims data on all 
excisional debridement cases and found that these debridement cases use 
appreciably fewer resources than other cases in their current surgical 
DRGs. However, for the proposed rule, we determined that if we were to 
classify debridement cases as non-O.R. cases and assign them to medical 
DRGs, we would significantly underpay these cases. The following chart 
shows differences in average costs for all excisional debridement cases 
compared to other cases within their current MS-DRG and compared to 
medical DRGs to which the patients would be assigned if the procedure 
were reclassified as a non-O.R. procedure.

----------------------------------------------------------------------------------------------------------------
                                                                                 Average costs
                                                                                  in surgical     Average costs
                                               All cases with    Average cost    DRGs to which   in medical DRGs
               Procedure code                   no other OR          (A)         the  patients     to which the
                                                 procedure                       are  assigned    patients would
                                                                                      (B)        be assigned (C)
----------------------------------------------------------------------------------------------------------------
86.22.......................................          32,152          $12,427          $17,332           $8,070
----------------------------------------------------------------------------------------------------------------

[[Page 51537]]

    The chart illustrates that when debridement is the only O.R. 
procedure, it is assigned to MS-DRGs that have an average cost that is 
approximately $5,000 more than the actual cost of the debridement 
($12,427 versus $17,332). Conversely, if the debridement is made a non-
O.R. code, it would, on average, be assigned to MS-DRGs that have an 
average cost that is approximately $4,000 less than the actual cost of 
the debridement ($8,070 versus $12,427). Therefore, we believe it would 
be inappropriate to propose to classify these procedures as a non-O.R. 
procedure.
    For the proposed rule, we explored alternative approaches to 
classifying procedure code 86.22 as a non-O.R. procedure. We evaluated 
the possibility of removing excisional debridements from their current 
MS-DRG assignments within the following skin-related MS-DRGs, where 
they are combined with skin grafts, and creating a new set of 
debridement MS-DRGs. The current MS-DRGs that combine skin grafts and 
debridements into the same MS-DRGs are as follows:
     MS-DRGs 573 through 575 (Skin Graft &/or Debridement for 
Skin Ulcer or Cellulitis with MCC, with CC, and without CC/MCC, 
respectively).
     MS-DRGs 576 through 578 (Skin Graft &/or Debridement 
Except for Skin Ulcer or Cellulitis with MCC, with CC, and without CC/
MCC, respectively).
    We analyzed MedPAR claims data on the severity level of graft cases 
without any debridements in these six MS-DRGs. Our findings are shown 
in the chart below.

                    Skin Grafts Without Debridements
------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRGs 573-575--Cases with                751        14.56      $23,975
 severity level of MCC...........
MS-DRGs 573-575--Cases with              1,720        10.16       14.869
 severity level of CC............
MS-DRGs 573-575--Cases with                540         5.36        8,469
 severity level of without CC/MCC
MS-DRGs 576-578--Cases with                335        10.28       22,996
 severity level of MCC...........
MS-DRGs 576-578--Cases with              1,482         5.28       11,299
 severity level of CC............
MS-DRGs 576-578--Cases with              1,849         3.01        6,986
 severity level of without CC/MCC
------------------------------------------------------------------------

    We compared these data to a proposed new set of skin-related MS-
DRGs that would include only debridements. The results of the findings 
of the severity levels of debridements without skin grafts in these six 
MS-DRGs are shown in the chart below.

                    Debridements Without Skin Grafts
------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
MS-DRG 573-575--Cases with               3,177        11.73      $18,381
 severity level of MCC...........
MS-DRG 573-575--Cases with               6,649         7.67       10,730
 severity level of CC............
MS-DRG 573-575--Cases with               2,555         4.94        6,372
 severity level of without CC/MCC
MS-DRG 576-578--Cases with                 271        11.59       19,429
 severity level of MCC...........
MS-DRG 576-578--Cases with                 638         7.61       11,913
 severity level of CC............
MS-DRG 576-578--Cases with                 285         4.45        6,928
 severity level of without CC/MCC
------------------------------------------------------------------------

    Our findings indicate that the graft procedure cases have higher 
average costs than the excisional debridement cases. The average costs 
for the excisional debridement cases in MS-DRGs 573 through 575 
compared to the debridement cases in MS-DRGs 576 through 578 are very 
similar. We believe that the data support creating a single set of 
skin-related excisional debridement MS-DRGs composed of cases 
previously captured in MS-DRGs 573 through 575 as well as MS-DRGs 576 
through 578. The following chart illustrates those combined average 
costs.

 Excisional Debridements From Ms-Drgs 573 Through 578 Split on Severity
                                  Level
------------------------------------------------------------------------
                                                  Average
         MS-DRGs 573--578           Number of    length of     Average
                                      cases         stay        costs
------------------------------------------------------------------------
Combined Excisional Debridement          3,448        11.71      $18,463
 Cases with Severity Level of MCC
Combined Excisional Debridement          7,287         7.76       10,833
 Cases with Severity Level of CC.
Combined Excisional Debridement          2,840         4.89        6,428
 Cases with Severity Level of
 without CC/MCC..................
------------------------------------------------------------------------

    As we stated in the proposed rule, we believe that the data support 
separating skin graft procedures from excisional debridements by 
creating a new set of MS-DRGs. This would result in more accurate 
payment for both skin grafts and debridement. Therefore, we proposed to 
remove excisional debridements (procedure code 86.22) from their 
current MS-DRG assignments within MS-DRGs 573 through 578 for skin 
grafts and assign them to new excisional debridement MS-DRGs. We 
proposed to maintain MS-DRGs 573 through 578 for skin grafts. The 
following list describes the proposed new and revised MS-DRG titles:

[[Page 51538]]

    Proposed new MS-DRGs based on procedure code 86.22:

 Proposed MS-DRG 570 (Skin Debridement with MCC)
 Proposed MS-DRG 571 (Skin debridement with CC)
 Proposed MS-DRG 572 (Skin Debridement without CC/MCC)

    Proposed Revised MS-DRGs based on codes currently assigned to MS-
DRGs 573 through 578, excluding procedure code 86.22:

 Proposed revised MS-DRG 573 (Skin Graft for Skin Ulcer or 
Cellulitis with MCC)
 Proposed revised MS-DRG 574 (Skin Graft for Skin Ulcer or 
Cellulitis with CC)
 Proposed revised MS-DRG 575 (Skin Graft for Skin Ulcer or 
Cellulitis without CC/MCC)
 Proposed revised MS-DRG 576 (Skin Graft Except for Skin Ulcer 
or Cellulitis with MCC)
 Proposed revised MS-DRG 577 (Skin Graft except for Skin Ulcer 
or Cellulitis with CC)
 Proposed revised MS-DRG 578 (Skin Graft Except for Skin Ulcer 
or Cellulitis without CC/MCC)

    In the proposed rule, we invited public comments on our proposal 
for FY 2012 to create three new debridement MS-DRGs 570, 571, and 572 
for skin debridement and to revise MS-DRGs 573 through 578 to include 
skin grafts only, as indicated above.
    Comment: Several commenters supported our proposal to create three 
new debridement MS-DRGs, MS-DRGs 570, 571, and 572 for skin debridement 
and to revise MS-DRGs 573 through 578 to include skin grafts only, as 
described above. One commenter stated that the proposal seemed 
reasonable, given the data and the information provided. Another 
commenter who supported this MS-DRG modification expressed appreciation 
for the change because the relative weights better reflect resource 
intensive cases with the proposed new and revised MS-DRGs 570 through 
578.
    One commenter supported our recommendation not to remove the code 
for excisional debridement from the O.R. list. However, the commenter 
opposed removing excisional debridements (procedure code 86.22) from 
their current MS-DRG assignments within MS-DRGs 573 through 578 for 
skin grafts and assigning them to new excisional debridement MS-DRGs 
and maintaining MS-DRGs 573 through 578 for skin grafts. The commenter 
stated that excisional debridement is not exclusively a bedside 
procedure. Rather, the commenter noted, it can be performed in or out 
of the operation room, based on the judgment of the surgeon. The 
commenter stated that, in many instances, this procedure cannot be 
performed at the bedside due to variables such as patient anxiety, the 
size of the wound, bleeding risk, among others. The commenter stated 
that removing excisional debridements from their current MS-DRG 
assignments could harm many hospitals that perform procedures such as 
split thickness skin grafts for extensive wound or burns. The commenter 
recommended that, instead of removing excisional debridements from the 
current MS-DRG assignments, CMS create a separate ICD-9-CM code for 
debridement that is performed in the operating room due to anesthesia, 
equipment, or monitoring requirements.
    Another commenter opposed the creation of separate debridement and 
skin graft MS-DRGs out of concern that this would create significant 
confusion among hospital coders. The commenter stated that skin grafts 
and skin debridements are often performed on the same patient. The 
commenter stated that the current descriptions of MS-DRGs 573 through 
575 (Skin Graft and/or Debridement for Skin Ulcer or Cellulitis with 
MCC, with CC, and without CC/MCC, respectively) and MS-DRGs 576 through 
578 (Skin Graft and/or Debridement Except for Skin Ulcer or Cellulitis 
with MCC, with CC, and without CC/MCC, respectively) appropriately 
describe the interrelationship between skin grafts and debridement. The 
commenter expressed concern that de-linking this relationship would 
lead to confusion for coders.
    Response: We agree with the commenters that data support the 
creation of three new debridement MS-DRGs 570, 571, and 572 for skin 
debridement and the revision of MS-DRGs 573 through 578 to include skin 
grafts only.
    We disagree with the commenter who recommends that, instead of 
creating separate MS-DRGs for skin debridements and skin grafts, CMS 
pursue the creation of a new skin debridement code that would be 
limited to those procedures performed in an operating room setting. 
ICD-9-CM codes are not currently subdivided based on the location of 
the procedure such as in an operating room, endoscopy room, 
catheterization room, treatment room, or patient room. ICD-9-CM codes 
are assigned based on the procedure performed, not the location in 
which the procedure was performed. Furthermore, we have just begun a 
period of a partial freeze of both ICD-9-CM and ICD-10 codes. This 
partial freeze is discussed in section II.G.13.b. of this preamble. We 
do not believe it is appropriate to postpone refinements to the MS-DRGs 
until a code update could be made and data on cases reported with the 
new code could be evaluated. We believe the current data support this 
proposed modification. However, as stated earlier, ICD-9-CM codes do 
not indicate the setting in which a procedure is performed. Therefore, 
it is unlikely that such a code would be created even if we were not in 
a period of a code freeze.
    We also disagree with the commenter who stated that creating 
separate MS-DRGs for skin debridements and skin grafts will create 
confusion for coders. We believe that coders clearly understand the 
difference between skin debridements and skin grafts. If both are 
performed, then coders code and report both procedures. The fact that 
the MS-DRGs would be modified would not affect the way in which coders 
assign codes for skin debridements and skin grafts. We also note that 
organizations representing coders, including the American Health 
Information Management Association, supported this proposed MS-DRG 
modification. These organizations did not express concerns about any 
possible confusion for coders.
    After consideration of the public comments we received, we are 
finalizing our proposal to create the following new and revised MS-
DRGs:
    New MS-DRGs based on procedure code 86.22:
 MS-DRG 570 (Skin Debridement with MCC)
 MS-DRG 571 (Skin debridement with CC)
 MS-DRG 572 (Skin Debridement without CC/MCC)
    Revised MS-DRGs based on codes currently assigned to MS-DRGs 573 
through 578, excluding procedure code 86.22:
 Revised MS-DRG 573 (Skin Graft for Skin Ulcer or Cellulitis 
with MCC)
 Revised MS-DRG 574 (Skin Graft for Skin Ulcer or Cellulitis 
with CC)
 Revised MS-DRG 575 (Skin Graft for Skin Ulcer or Cellulitis 
without CC/MCC)
 Revised MS-DRG 576 (Skin Graft Except for Skin Ulcer or 
Cellulitis with MCC)
 Revised MS-DRG 577 (Skin Graft except for Skin Ulcer or 
Cellulitis with CC)
 Revised MS-DRG 578 (Skin Graft Except for Skin Ulcer or 
Cellulitis without CC/MCC)

[[Page 51539]]

7. MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and 
Disorders)
a. Nutritional and Metabolic Diseases: Update of MS-DRG Titles
    We received a request to revise the MS-DRG titles for MS-DRGs 640 
through 642 to more clearly capture the cases that are currently 
assigned to these MS-DRGs. The current titles for these MS-DRGs are: 
MS-DRGs 640 (Nutritional & Miscellaneous Metabolic Disorders with MCC); 
MS-DRG 641 (Nutritional & Miscellaneous Metabolic Disorders without 
MCC); and MS-DRG 642 (Inborn Errors of Metabolism). The requestor 
suggested that we change the titles to: MS-DRG 640 (Miscellaneous 
Disorders of Nutrition, Metabolism, and Fluids and Electrolytes with 
MCC); MS-DRG 641 (Miscellaneous Disorders of Nutrition, Metabolism, and 
Fluids and Electrolytes without MCC); and MS-DRG 642 (Inborn and Other 
Disorders of Metabolism).
    Our clinical advisors supported these suggested changes to the 
titles, as the suggested changes would provide a better description of 
the diagnoses assigned to MS-DRGs 640, 641, and 642. Therefore, in the 
FY 2012 IPPS/LTCH PPS proposed rule, we proposed to revise the MS-DRG 
titles for MS-DRGs 640, 641, and 642 as the requestor suggested. We 
invited public comment on our proposal to change the MS-DRG titles for 
MS-DRGs 640, 641, and 642 for FY 2012.
    Comment: Several commenters supported our proposed changes to the 
titles of MS-DRGs 640 through 642 to better reflect the cases that are 
assigned to these MS-DRGs.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
finalizing our proposal to change the titles for MS-DRGs 640 through 
642. The final tiles are as follows:

 MS-DRG 640 (Miscellaneous Disorders of Nutrition, Metabolism, 
and Fluids and Electrolytes with MCC)
 MS-DRG 641 (Miscellaneous Disorders of Nutrition, Metabolism, 
and Fluids and Electrolytes without MCC)
 MS-DRG 642 (Inborn and Other Disorders of Metabolism).
b. Sleeve Gastrectomy Procedure for Morbid Obesity
    Sleeve gastrectomy is a 70 percent to 80 percent greater curvature 
gastrectomy (sleeve resection of the stomach) with continuity of the 
gastric lesser curve being maintained while simultaneously reducing 
stomach volume. It may be the first step in a two-stage procedure when 
performing Roux-en-Y Gastric Bypass (RYGBP). Sleeve gastrectomy, 
whether open or laparoscopic, is currently coded using ICD-9-CM 
procedure code 43.89 (Other total gastrectomy). Procedure code 43.89 is 
currently assigned to several MS-DRGs. However, the code is not 
assigned to MS-DRG 619, 620, or 621 (O.R. Procedures for Obesity with 
MCC, with CC, and without CC/MCC, respectively).
    We received a request for CMS to review MDC 10 (Endocrine, 
Nutritional, and Metabolic Diseases and Disorders) for consistency. 
Specifically, the requestor questioned why diagnosis code 278.01 
(Morbid obesity), when paired on a claim with procedure code 43.89, 
would be assigned to MS-DRG 981, 982, or 983 (Extensive O.R. Procedure 
Unrelated to Principal Diagnosis with MCC, with CC, or without CC/MCC, 
respectively) instead of MS-DRG 619, 620, or 621.
    Upon review for the FY 2012 IPPS/LTCH PPS proposed rule, we 
determined that diagnosis code 278.01 is assigned to MDC 10. However, 
procedure code 43.89 is not assigned to any MS-DRG set in this MDC. 
Therefore, the cases are assigned to MS-DRGs 981 through 983, 
reflecting procedures not related to the principal diagnosis. This was 
an inadvertent oversight on CMS' part when the MS-DRGs were created. 
Therefore, we proposed to add a procedure code or codes identifying 
sleeve gastrectomy to MS-DRGs 619 through 621 for FY 2012.
    Currently, sleeve gastrectomy is identified in the ICD-9-CM 
procedure code Index as follows: Gastrectomy (partial) (subtotal) NEC 
43.89. At procedure code 43.89 in the ICD-9-CM procedure code Tabular, 
an inclusion note identifies this code as including sleeve resection of 
the stomach.
    In our proposal to add a procedure code or codes to MS-DRGs 619 
through 621, we pointed out that there is an NCD that has precluded 
coverage of sleeve gastrectomy when performed either open or 
laparoscopically. This decision may be found in the Medicare National 
Coverage Determination Manual, Section 100.1, Nationally Noncovered 
Indications for Bariatric Surgery for Treatment of Morbid Obesity, 
effective on February 12, 2009. This manual is available on the CMS Web 
site through a link at: http://www.cms.gov/manuals/downloads/mcd103c1_Part2.pdf. This manual entry affirms that treatment for obesity via use 
of the open or laparoscopic sleeve gastrectomy is determined to be 
noncovered for Medicare beneficiaries.
    Noncoverage of these cases is determined by our Medicare 
contractors, the fiscal intermediary or A-B/MAC, because of the nature 
of procedure code 43.89, which is a code that identifies several 
gastrectomy procedures. To identify a code in the MCE that describes 
many procedures would inappropriately restrict other procedures which 
are also described by that code, but which are covered. We received a 
request to create specific codes uniquely identifying both laparoscopic 
sleeve gastrectomy and the open procedure, vertical sleeve gastrectomy. 
We addressed this request at the ICD-9-CM Coordination and Maintenance 
Committee meeting held on March 9, 2011.
    We had stated that should a code or codes be created as a result of 
this request, we would then be able to add this code or codes to the 
MCE as a conforming noncoverage edit when combined with diagnosis code 
278.01. The background information discussing sleeve gastrectomy coding 
can be accessed on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. A summary of 
the meeting can be found on CMS' Web site for the ICD-9-CM Coordination 
and Maintenance Committee at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage by scrolling 
down to the .pdf zip files containing the meeting agenda and handouts.
    Therefore, for FY 2012, we proposed to add a procedure code or 
codes identifying sleeve gastrectomy to MS-DRGs 619 through 621. 
However, we also indicated that we intended to add any code or codes 
created at the ICD-9-CM Coordination and Maintenance Committee on March 
9, 2011, to the MCE because sleeve gastrectomy, whether open or 
laparoscopic, is not covered for Medicare beneficiaries. The code or 
codes would appear in the ``Noncovered Procedures'' edit of the MCE. As 
the timing of the development of the proposed rule and the date of the 
March 2011 meeting of the ICD-9-CM Coordination and Maintenance 
Committee overlapped, we could not determine if additional sleeve 
gastrectomy codes would be created, to what code number or numbers they 
would be assigned, or how the narrative describing them would read. 
However, we indicated that should a code or codes be created, we 
proposed that they would simultaneously be placed in both MS-DRGs 619 
through 621 and the MCE. This decision may seem to be counterintuitive, 
but CMS realizes that

[[Page 51540]]

our MS-DRGs and the Medicare GROUPER program are used for other 
beneficiaries and by other insurance plans rather than strictly for 
Medicare beneficiaries. Any new code or codes created as a result of 
the ICD-9-CM Coordination and Maintenance Committee meeting are 
included in Table 6B (which is listed in section VI. of the Addendum to 
this final rule and available via the Internet at http://www.cms.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp#TopOfPage); we indicated 
that we did not have a mechanism to make the codes from the March 9, 
2011 meeting available in the proposed rule prior to the final rule's 
publication.
    As a result of the March 9, 2011 ICD-9-CM Coordination and 
Maintenance Committee Meeting, one code was created: Procedure code 
43.82 (Laparoscopic vertical (sleeve) gastrectomy). To address open 
gastrectomies, the title of existing code 43.89 was revised to read 
``Open and other partial gastrectomy''. Both codes can be found in 
Table 6B (New Procedure Codes) and Table 6F (Revised Procedure Code 
Titles), which are listed in the Addendum to this final rule and 
available via the Internet on the CMS Web site.
    Comment: Several commenters addressed both the creation of a code 
or codes for laparoscopic or open sleeve gastrectomy discussed above 
and the proposed changes to the MCE. Several commenters indicated that 
they had no objections to the proposed changes to the MS-DRG 
classifications and the MCE, stating that the proposed changes seemed 
reasonable, given the data and information provided. One commenter 
specifically requested that CMS finalize its proposal to add new 
procedure code 43.82 to the MCE as a noncovered procedure.
    Response: We appreciate the commenters' support of our proposal.
    Comment: One commenter stated that they understood that procedure 
code 43.89 was inadvertently omitted from MS-DRGs 619, 620, and 621 
when the MS-DRGs were created and supported the addition of this code 
to these MS-DRGs. In addition, this commenter stated that because 
procedure code 43.89 is not specific to open sleeve gastrectomy, it 
cannot be incorporated as a ``noncovered procedure'' in the MCE.
    Response: We appreciate the commenter's support for this proposal 
and agree that procedure code 43.89 includes several gastrectomy 
procedures. Therefore, to identify a code describing many procedures in 
an MCE edit would inappropriately restrict other procedures included in 
that code that are covered.
    After consideration of the public comments we received, we are 
adopting as final our proposal to assign both the new procedure code 
43.82 (Laparoscopic vertical (sleeve) gastrectomy) and the existing 
procedure code 43.89 (Other total gastrectomy) to MS-DRGs 619, 620, and 
621 (O.R. Procedures for Obesity with MCC, with CC, and without CC/MCC, 
respectively). In addition, we are adding procedure code 43.82 to the 
``Noncovered Procedures'' edit of the MCE because laparoscopic sleeve 
gastrectomy is not covered for Medicare beneficiaries. Because 
procedure code 43.89 includes several gastrectomy procedures, its 
inclusion in the MCE would be inappropriate. Therefore, it will not be 
placed on the MCE.
8. MDC 15 (Newborns and Other Neonates With Conditions Originating in 
the Perinatal Period): Discharge Status Code 66 (Discharged/Transferred 
to Critical Assess Hospital (CAH))
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50236), we finalized 
our transfer policy regarding transfer of patients from an acute care 
hospital to a CAH. In that final rule, we stated that hospitals are 
required to use patient discharge status code 66 on the IPPS claims to 
identify transfers to CAHs.
    With this new requirement, a discharge from an IPPS hospital to a 
CAH equates to a transfer status. However, discharge status code 66 is 
currently not included in the MS-DRG GROUPER logic for MS-DRG 789 
(Neonate, Died or Transferred to Another Acute Care Facility). 
Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule, we proposed to 
add discharge status code 66 to the MS-DRG GROUPER logic for MS-DRG 
789. We invited public comment on our proposal to add discharge status 
code 66 to the MS-DRG GROUPER logic for MS-DRG 789 for FY 2012.
    Comment: Several commenters supported our proposal to add discharge 
status code 66 to the MS-DRG GROUPER logic for MS-DRG 789.
    Response: We appreciate the support of the commenters.
    After consideration of the public comments we received, we are 
finalizing our proposal to add discharge status code 66 (Discharged/
Transferred to Critical Assess Hospital (CAH)) to the MS-DRG GROUPER 
logic for MS-DRG 789.
9. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this final 
rule, the Medicare Code Editor (MCE) is a software program that detects 
and reports errors in the coding of Medicare claims data. Patient 
diagnoses, procedure(s), and demographic information are entered into 
the Medicare claims processing systems and are subjected to a series of 
automated screens. The MCE screens are designed to identify cases that 
require further review before classification into an MS-DRG. In this 
final rule, we discuss our intention to make the following change to 
the MCE edits.
    In section II.G.7.b. of this preamble, we discuss that the current 
ICD-9-CM procedure code for sleeve gastrectomy (43.89 (Other partial 
gastrectomy, other)) is a noncovered code when performed for resection 
of the stomach in patients with morbid obesity. We also discuss that 
noncoverage for Medicare beneficiaries of cases containing procedure 
code 43.89 is determined by the fiscal intermediaries or A-B/MACs 
because of the nature of procedure code 43.89. This code is imprecise 
and identifies several other gastrectomy procedures in addition to 
sleeve resection. Therefore, to limit coverage by identifying a code 
that describes many procedures through the use of the MCE would 
inappropriately restrict other procedures that are covered by Medicare. 
In that section, we also state that we received a request to create 
specific procedure codes identifying both laparoscopic sleeve 
gastrectomy and open vertical sleeve gastrectomy. As we stated above, 
we addressed this request at the ICD-9-CM Coordination and Maintenance 
Committee meeting held on March 9, 2011. In the FY 2012 IPPS/LTCH PPS 
proposed rule (FR 76 25833 and 25834), we indicated that if a code or 
codes should be created as a result of this request, we would then be 
able to add these codes to the MCE as a conforming noncoverage edit 
when combined with diagnosis code 278.01 (Morbid obesity).
    As the timing of development of the proposed rule and the 
scheduling of the ICD-9-CM Coordination and Maintenance Committee 
meeting on March 9, 2011 overlapped, it was not possible to determine 
what those codes might be, or even if they would be created for FY 
2012. However, we indicated in the proposed rule that should a code or 
codes be created, we proposed that any code or codes for laparoscopic 
or open sleeve resection of the stomach would be added to the MCE as a 
noncovered procedure or

[[Page 51541]]

procedures, in combination with diagnosis code 278.01. The background 
information discussing sleeve gastrectomy coding can be accessed on the 
CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticcodes/03_meetings.asp#TopOfPage. New codes describing sleeve gastrectomy are 
included in Table 6B (which is listed in section VI. of the Addendum to 
this final rule and are also available via the Internet at http://www.cms.gov/ICD9ProviderDiagnosticCodes/04_addendum.asp#TopOfPage). In 
the proposed rule, we indicated that we did not have a mechanism to 
make the codes available prior to the final rule's publication, and 
invited public comments on this proposal.
    As a result of the March 9, 2011 ICD-9-CM Coordination and 
Maintenance Committee Meeting, one code was created: procedure code 
43.82 (Laparoscopic vertical (sleeve) gastrectomy). To address open 
gastrectomies, the title of existing procedure code 43.89 was revised 
to read ``Open and other partial gastrectomy''. Both codes can be found 
in Tables 6B and 6F, which are listed in the Addendum to this final 
rule and available via the Internet.
    Comment: Several commenters indicated that they had no objections 
to the proposed changes to the MS-DRG classifications and the MCE, 
stating that the proposed changes seemed reasonable, given the data and 
information provided. One commenter specifically requested that CMS 
finalize its proposal to add new procedure code 43.82 to the MCE as a 
noncovered procedure.
    Response: We appreciate the commenters' support of our proposals.
    Comment: Several commenters stated that because procedure code 
43.89 is not specific to open sleeve gastrectomy it cannot be 
incorporated as a ``noncovered procedure'' in the MCE.
    Response: We agree that procedure code 43.89 includes several 
gastrectomy procedures, and to identify this code describing many 
procedures in an MCE edit would be inappropriately restricting other 
procedures that are covered.
    Comment: One commenter recognized that procedure codes discussed at 
the ICD-9-CM Coordination and Maintenance Committee Meeting of March 9, 
2011 could not logistically be included in the IPPS proposed rule. The 
commenter urged CMS to apply current logic to code revisions that were 
discussed at the March 2011 ICD-9-CM Coordination and Maintenance 
Committee meeting, but which could not be finalized in time to include 
them in the proposed rule.
    Response: We appreciate that the public understands some of the 
timing constraints under which we must operate. We assure the public 
that the same logic considerations regarding code assignment to 
predecessor MS-DRGs as well as O.R. determinations are applied to newly 
created codes from the March 2011 ICD-9-CM Coordination and Maintenance 
Committee Meeting as were applied to the codes created as a result of 
the September 15, 2010 ICD-9-CM Coordination and Maintenance Committee 
Meeting.
    After consideration of the public comments we received, we are 
adopting as final our proposal to add procedure code 43.82 to the 
``Noncovered Procedures'' edit of the MCE, given that laparoscopic 
sleeve gastrectomy is not covered for Medicare beneficiaries. Because 
procedure code 43.89 includes several gastrectomy procedures, its 
inclusion in the MCE would be inappropriate. Therefore, we are not 
placing it on the MCE.
10. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different MS-DRG within the MDC to which the principal diagnosis 
is assigned. Therefore, it is necessary to have a decision rule within 
the GROUPER by which these cases are assigned to a single MS-DRG. The 
surgical hierarchy, an ordering of surgical classes from most resource-
intensive to least resource-intensive, performs that function. 
Application of this hierarchy ensures that cases involving multiple 
surgical procedures are assigned to the MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more MS-DRGs. For 
example, in MDC 11, the surgical class ``kidney transplant'' consists 
of a single MS-DRG (MS-DRG 652) and the class ``major bladder 
procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, and 655). 
Consequently, in many cases, the surgical hierarchy has an impact on 
more than one MS-DRG. The methodology for determining the most 
resource-intensive surgical class involves weighting the average 
resources for each MS-DRG by frequency to determine the weighted 
average resources for each surgical class. For example, assume surgical 
class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 
3, 4, and 5. Assume also that the average costs of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are 
higher than the average costs of MS-DRG 2. To determine whether 
surgical class A should be higher or lower than surgical class B in the 
surgical hierarchy, we would weigh the average costs of each MS-DRG in 
the class by frequency (that is, by the number of cases in the MS-DRG) 
to determine average resource consumption for the surgical class. The 
surgical classes would then be ordered from the class with the highest 
average resource utilization to that with the lowest, with the 
exception of ``other O.R. procedures'' as discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted MS-DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER search for the procedure in the 
most resource-intensive surgical class, in cases involving multiple 
procedures, this result is sometimes unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average cost is 
ordered above a surgical class with a higher average cost. For example, 
the ``other O.R. procedures'' surgical class is uniformly ordered last 
in the surgical hierarchy of each MDC in which it occurs, regardless of 
the fact that the average costs for the MS-DRG or MS-DRGs in that 
surgical class may be higher than those for other surgical classes in 
the MDC. The ``other O.R. procedures'' class is a group of procedures 
that are only infrequently related to the diagnoses in the MDC, but are 
still occasionally performed on patients in the MDC with these 
diagnoses. Therefore, assignment to these surgical classes should only 
occur if no other surgical class more closely related to the diagnoses 
in the MDC is appropriate.
    A second example occurs when the difference between the average 
costs for two surgical classes is very small. We have found that small 
differences generally do not warrant reordering of the hierarchy 
because, as a result of reassigning cases on the basis of the hierarchy 
change, the average costs are likely to shift such that the higher-

[[Page 51542]]

ordered surgical class has a lower average costs than the class ordered 
below it.
    As we proposed, based on the changes that we are make for FY 2012, 
as discussed in sections II.G.1. and 6. of this preamble, we are 
revising the surgical hierarchy for Pre-MDCs and MDC 9 (Diseases and 
Disorders of the Skin, Subcutaneous Tissue, and Breast) as follows:
    In Pre-MDCs, we are reordering new MS-DRG 016 (Autologous Bone 
Marrow Transplant with CC/MCC) and new MS-DRG 017 (Autologous Bone 
Marrow Transplant without CC/MCC) above MS-DRG 010 (Pancreas 
Transplant).
    In MDC 9, we are reordering--
     MS-DRG 578 (Skin Graft Except for Skin Ulcer or Cellulitis 
without CC/MCC) above new MS-DRG 570 (Skin Debridement with MCC);
     New MS-DRG 570 above new MS-DRG 571 (Skin Debridement with 
CC);
     New MS-DRG 571 above new MS-DRG 572 (Skin Debridement 
without CC/MCC; and
     New MS-DRG 572 above MS-DRG 579 (Other Skin, Subcutaneous 
Tissue, and Breast Procedures with MCC).
    Comment: Commenters generally supported our proposals.
    Response: Based on these public comments and our review of the 
proposed revisions using the March 2011 update of the FY 2010 MedPAR 
file and the revised GROUPER software, we found that the revisions are 
still supported by the data. Therefore, we have incorporated the 
proposed revisions to the surgical hierarchy as final for FY 2012.
11. Complications or Comorbidity (CC) Exclusions List
a. Background
    As indicated earlier in the preamble of this final rule, under the 
IPPS MS-DRG classification system, we have developed a standard list of 
diagnoses that are considered CCs. Historically, we developed this list 
using physician panels that classified each diagnosis code based on 
whether the diagnosis, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. A substantial 
complication or comorbidity was defined as a condition that, because of 
its presence with a specific principal diagnosis, would cause an 
increase in the length of stay by at least 1 day in at least 75 percent 
of the patients. We refer readers to section II.D.2. and 3. of the 
preamble of the FY 2008 IPPS final rule with comment period for a 
discussion of the refinement of CCs in relation to the MS-DRGs we 
adopted for FY 2008 (72 FR 47121 through 47152).
b. CC Exclusions List for FY 2012
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a CC.\2\
---------------------------------------------------------------------------

    \2\ See the FY 1989 final rule (53 FR 38485, September 30, 
1988), for the revision made for the discharges occurring in FY 
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for 
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final 
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the 
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), 
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, 
September 1, 1995), for the FY 1996 revisions; the FY 1997 final 
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the 
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for 
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final 
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the 
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), 
for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule 
(71 FR 47870) for the FY 2007 revisions; the FY 2008 final rule (72 
FR 47130) for the FY 2008 revisions, the FY 2009 final rule (73 FR 
48510), the FY 2010 final rule (74 FR 43799); and the FY 2011 final 
rule (75 FR 50114). In the FY 2000 final rule (64 FR 41490, July 30, 
1999, we did not modify the CC Exclusions List because we did not 
make any changes to the ICD-9-CM codes for FY 2000.
---------------------------------------------------------------------------

(1) Limited Revisions Based on Changes to the ICD-9-CM Diagnosis Codes
    For FY 2012, we proposed to make limited revisions to the CC 
Exclusions List to take into account the changes made in the ICD-9-CM 
diagnosis coding system effective October 1, 2011. (We refer readers to 
section II.G.13. of the preamble of this final rule for a discussion of 
ICD-9-CM changes.) We proposed to make these changes in accordance with 
the principles established when we created the CC Exclusions List in 
1987. In addition, we indicated on the CC Exclusions List some changes 
as a result of updates to the ICD-9-CM codes to reflect the exclusion 
of codes from being MCCs under the MS-DRG system that we adopted in FY 
2008.
    CMS encourages input from our stakeholders concerning the annual 
IPPS updates when that input is made available to us by December of the 
year prior to the next annual proposed rule update. For example, to be 
considered for any updates or changes in FY 2012, comments and 
suggestions should have been submitted by early December 2010. The 
following comments were submitted in a timely manner and, therefore, 
are being discussed in this section.
(A) Pressure Ulcer Diagnosis Codes
    We received a comment recommending that CMS remove diagnosis codes 
707.23 (Pressure ulcer, stage III) and 707.24 (Pressure ulcer, stage 
IV) from the CC Exclusion List when reported as a secondary diagnosis 
code with a principal diagnosis code for the pressure ulcer site: 
Diagnosis code 707.00 (Pressure ulcer, unspecified); diagnosis code 
707.01 (Pressure ulcer,

[[Page 51543]]

elbow); diagnosis code 707.02 (Pressure ulcer, upper back); diagnosis 
code 707.03 (Pressure ulcer, lower back); diagnosis code 707.04 
(Pressure ulcer, hip); diagnosis code 707.05 (Pressure ulcer, buttock); 
diagnosis code 707.06 (Pressure ulcer, ankle); diagnosis code 707.07 
(Pressure ulcer, heel); or diagnosis code 707.09 (Pressure ulcer, other 
site). Currently, when a patient is admitted with a pressure ulcer, the 
CC Exclusion List prevents a pressure ulcer stage diagnosis code from 
being designated as an MCC when reported as a secondary diagnosis. The 
commenter disagreed with this approach and contended that a patient 
admitted for treatment of a stage III or stage IV pressure ulcer likely 
requires resources that would qualify the case as a diagnosis with an 
MCC or, at a minimum, as a CC.
    Our clinical advisors agreed with the commenter. Therefore, in the 
FY 2012 IPPS/LTCH PPS proposed rule, we proposed to remove diagnosis 
codes 707.23 and 707.24 from the CC Exclusion List when a principal 
diagnosis code of one of codes 707.00 through 707.09 is reported. Under 
this proposal, diagnosis code 707.23 or diagnosis code 707.24 would be 
an MCC when reported as a secondary diagnosis code with a principal 
diagnosis code of one of codes 707.00 through 707.09.
    Comment: Several commenters supported the proposed removal of 
diagnosis codes 707.23 and 707.24 from the CC Exclusion list when a 
principal diagnosis code of one of the codes 707.00 through 707.09 is 
reported.
    Response: We appreciate the support of the commenters. As stated 
above, we believe this proposed change has merit.
    After consideration of the public comments we received, we are 
adopting as final our proposal to remove diagnosis codes 707.23 
(Pressure ulcer stage III) and 707.24 (Pressure ulcer stage IV) from 
the CC Exclusion List when reported as a secondary diagnosis code with 
a principal diagnosis code for the pressure ulcer site: diagnosis code 
707.00 (Pressure ulcer, unspecified); diagnosis code 707.01 (Pressure 
ulcer, elbow); diagnosis code 707.02 (Pressure ulcer, upper back); 
diagnosis code 707.03 (Pressure ulcer, lower back); diagnosis code 
707.04 (Pressure ulcer, hip); diagnosis code 707.05 (Pressure ulcer, 
buttock); diagnosis code 707.06 (Pressure ulcer, ankle); diagnosis code 
707.07 (Pressure ulcer, heel); or diagnosis code 707.09 (Pressure 
ulcer, other site).
(B) End-Stage Renal Disease Diagnosis Code
    We received a suggestion from a commenter that diagnosis code 585.6 
(End-stage renal disease) be added to the CC Exclusion List when 
reported with a principal diagnosis code of 403.90 (Hypertensive 
chronic kidney disease, unspecified, with chronic kidney disease stage 
I through stage IV, or unspecified) or diagnosis code 403.91 
(Hypertensive chronic kidney disease, unspecified, with chronic kidney 
disease stage V or end-stage renal disease). Currently, diagnosis code 
585.6 is designated as an MCC.
    According to the commenter, diagnosis codes 585.6 and 403.91 are 
essentially the same diagnosis but coding guidelines require the 
reporting of two codes to identify the stage of chronic kidney disease 
when associated with hypertensive chronic kidney disease. The commenter 
suggested that there is no need for diagnosis code 585.6 to be 
designated as an MCC when reported with a principal diagnosis of 
hypertensive chronic kidney disease, stage V or end-stage renal 
disease. The commenter also pointed out that, while coding guidelines 
would preclude diagnosis codes 403.90 and 585.6 from being reported 
together, the MS-DRG GROUPER allows diagnosis code 585.6 to act as an 
MCC when reported as a secondary diagnosis with principal diagnosis 
code 403.90.
    As discussed in the proposed rule, in response to the first issue, 
our clinical advisors disagree with the commenter. Diagnosis code 
403.91 includes chronic kidney disease stage V or end-stage renal 
disease. These are two separate conditions (or stages) that are 
identified by two unique codes. Diagnosis code 585.5 identifies stage V 
chronic kidney disease and is classified as a CC. Diagnosis code 585.6 
identifies end-stage renal disease, is classified as an MCC, and 
describes patients who require chronic dialysis. The patients diagnosed 
with stage V chronic kidney disease are a different population who 
require different resources than those patients who are diagnosed with 
end-stage renal disease. Therefore, in the FY 2012 IPPS/LTCH PPS 
proposed rule, we did not propose to add diagnosis code 585.6 to the CC 
Exclusion List when reported with a principal diagnosis of code 403.91.
    On the second issue raised by the commenter, our clinical advisors 
agreed. Diagnosis code 403.90 identifies patients with chronic kidney 
disease, stages I through IV or unspecified, and diagnosis code 585.6 
identifies end-stage renal disease. Our clinical advisors indicate that 
the reporting of diagnosis code 585.6 should not be designated as an 
MCC in this case. We agreed with the commenter that diagnosis codes 
403.90 and 585.6 should not be reported together as instructed by the 
Coding Guidelines. Only a code from the 585.1 through 585.4 range 
(stages I through IV, or unspecified) should be reported with diagnosis 
code 403.90. Diagnosis code 585.6 is the exclusive code that uniquely 
identifies end-stage renal disease and should only be reported with 
diagnosis code 403.91. Therefore, in the FY 2012 IPPS/LTCH PPS proposed 
rule, we proposed to add diagnosis code 585.6 to the CC Exclusion List 
when reported with a principal diagnosis code of 403.90.
    Comment: Several commenters supported our proposal to add diagnosis 
code 585.6 to the CC Exclusion List when reported with a principal 
diagnosis code of 403.90.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
adopting as final our proposal to add diagnosis code 585.6 (End stage 
renal disease) to the CC Exclusion List when reported with a principal 
diagnosis code of 403.90 (Hypertensive chronic kidney disease, 
unspecified, with chronic kidney disease stage I through stage IV, or 
unspecified).
(C) Hypertensive Chronic Kidney Disease With Chronic Kidney Disease 
Stage V or End-Stage Renal Disease Code
    We received a comment recommending the addition of diagnosis code 
403.91 (Hypertensive chronic kidney disease, unspecified, with chronic 
kidney disease stage V or end-stage renal disease) to the CC Exclusion 
List when reported as a secondary diagnosis code with principal 
diagnosis code 585.6 (End stage renal disease). The commenter stated 
that it would be unlikely that diagnosis code 403.91 would be reported 
as a secondary diagnosis code with diagnosis code 585.6 as the 
principal diagnosis code due to sequencing rules for end-stage renal 
disease with hypertension. Currently, diagnosis code 403.91 is 
designated as a CC.
    Our clinical advisors agreed with the commenter. Therefore, in the 
FY 2012 IPPS/LTCH PPS proposed rule, we proposed to add diagnosis code 
403.91 to the CC Exclusion List when reported as a secondary diagnosis 
code with principal diagnosis code 585.6.
    Comment: Several commenters supported our proposal to add diagnosis 
code 403.91 to the CC Exclusion List

[[Page 51544]]

when reported as a secondary diagnosis code with principal diagnosis 
code 585.6.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, we are 
adopting as final our proposal to add diagnosis code 403.91 
(Hypertensive chronic kidney disease, unspecified, with chronic kidney 
disease stage V or end stage renal disease) to the CC Exclusion List 
when reported as a secondary diagnosis code with principal diagnosis 
code 585.6 (End stage renal disease).
(2) Suggested Changes to Severity Levels for Encephalopathy
    We received a request that we consider changing the following 
diagnosis codes from an MCC to a CC:

 348.30 (Encephalopathy NOS)
 348.31 (Metabolic encephalopathy)
 348.39 (Encephalopathy NEC)
 349.82 (Toxic encephalopathy)
 572.2 (Hepatic encephalopathy)

    For the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed the claims 
data for the diagnosis codes mentioned above related to encephalopathy. 
We used the same approach we used in initially creating the MS-DRGs and 
classifying secondary diagnosis codes as non-CCs, CCs, or MCCs. A 
detailed discussion of the process and criteria we used in this process 
is described in the FY 2008 IPPS final rule (72 FR 47158 through 
47161). We refer the readers to this discussion for complete 
information on our approach to developing the non-CC, CC, and MCC 
lists. Each diagnosis for which Medicare data were available was 
evaluated to determine its impact on resource use and to determine the 
most appropriate CC subclass (non-CC, CC, or MCC) assignment. In order 
to make this determination, the average cost for each subset of cases 
was compared to the expected cost for cases in that subset. The 
following format was used to evaluate each diagnosis:

--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                Code       Diagnosis                   Cnt1               C1                 Cnt2               C2                 Cnt3               C3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Count (Cnt) is the number of patients in each subset. C1, C2, and 
C3 are a measure of the impact on resource use of patients in each of 
the subsets. The C1, C2, and C3 values are a measure of the ratio of 
average costs for patients with these conditions to the expected 
average cost across all cases. The C1 value reflects a patient with no 
other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a MCC. The C3 value 
reflects a patient with at least one other secondary diagnosis that is 
a MCC. A value close to 1.0 in the C1 field would suggest that the 
diagnosis code produces the same expected value as a non-CC. A value 
close to 2.0 suggests the condition is more like a CC than a non-CC but 
not as significant in resource usage as an MCC. A value close to 3.0 
suggests the condition is expected to consume resources more similar to 
an MCC than a CC or non-CC. For additional details on this analysis, we 
refer readers to the FY 2008 IPPS final rule (72 FR 47158 through 
47161).
    The following chart shows the analysis for each of the 
encephalopathy diagnosis codes that are currently classified as MCCs.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Cnt 1                 Cnt 2                 Cnt 3
                   Code                          Diagnosis description        CC level    Cnt 1      impact     Cnt 2      impact     Cnt 3      impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
34830....................................  Encephalopathy NOS..............        MCC     10,082     2.1206     39,042     2.7774     60,381     3.3702
34831....................................  Metabolic encephalopathy........        MCC      6,389     2.0580     29,651     2.6952     49,343     3.4011
34839....................................  Encephalopathy NEC..............        MCC      4,004     2.1118     15,003     2.7355     19,732     3.3708
34982....................................  Toxic encephalopathy............        MCC      4,333     2.3158     18,126     3.0023     26,009     3.5714
5722.....................................  Hepatic encephalopathy..........        MCC      1,375     1.5448      9,885     2.5054     12,421     3.4435
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We ran the following data as described in FY 2008 IPPS final rule 
(72 FR 47158 through 47161). The C1 value reflects a patient with no 
other secondary diagnosis or with all other secondary diagnoses that 
are non-CCs. The C2 value reflects a patient with at least one other 
secondary diagnosis that is a CC but none that is a MCC. The C3 value 
reflects a patient with at least one other secondary diagnosis that is 
a MCC.
    The chart above shows that the C1 findings ranged from a low of 
1.5448 to a high of 2.3158. As stated earlier, a C1 value close to 2.0 
suggests the condition is more like a CC than a non-CC but not as 
significant in resource usage as an MCC. The C1 findings suggest that 
these codes are more like a CC than a MCC. However, the C2 findings 
ranged from a low of 2.5054 to a high of 3.0023. Values close to 3.0 
suggests the condition is more similar to an MCC than a CC or non-CC. 
The C2 findings support maintaining the encephalopathy codes as an MCC 
level. The data are clearly mixed between the C1 and C2 findings, and 
does not consistently support a change in the severity level. Our 
clinical advisers recommended that these encephalopathy codes remain at 
an MCC level because these patients with encephalopathy typically 
utilize significant resources and are at a higher severity level. Based 
on the clinical analysis and the lack of consistent claims data support 
for the severity level change, we indicated in the proposed rule that 
we believe that the encephalopathy codes should remain on the MCC list. 
Therefore, we proposed to retain the following encephalopathy codes on 
the MCC list:
 348.30 (Encephalopathy NOS)
 348.31 (Metabolic encephalopathy)
 348.39 (Encephalopathy NEC)
 349.82 (Toxic encephalopathy)
 572.2 (Hepatic encephalopathy)
    We invited public comment on our proposal not to change the 
severity level classification for these codes.
    Comment: Several commenters supported our proposal not to change 
the MCC severity level classification for the encephalopathy codes 
listed above. The commenters agreed with our findings that the data 
were mixed between the C1 and C2 findings for these codes, which are 
currently on the MCC list, and that clinical evaluation of these 
conditions supports maintaining them on the MCC list.
    Response: We appreciate the commenters' support. As stated above, 
our data showed mixed findings for C1 and C2 with C1 findings 
supporting a change to CC, but C2 findings supporting maintaining the 
codes on the MCC list. Our clinical advisors' evaluation of 
encephalopathy patients supports our proposal to maintain these 
encephalopathy codes on the MCC list.

[[Page 51545]]

    After consideration of the public comments we received, as we 
proposed, we are keeping the following encephalopathy codes on the MCC 
list.

 348.30 (Encephalopathy NOS) MCC
 348.31 (Metabolic encephalopathy) MCC
 348.39 (Encephalopathy NEC) MCC
 349.82 (Toxic encephalopathy) MCC
 572.2 (Hepatic encephalopathy) MCC

    (3) Suggested Changes to Severity Levels for Mechanical 
Complication and Infection Due to Device-Related Codes
    We received a request to change the severity classification from 
CCs to MCCs for the following diagnosis codes:
     996.01 (Mechanical of cardiac device, implant and graft 
due to cardiac pacemaker (electrode)).
     996.04 (Mechanical complication of cardiac device, 
implant, and graft due to automatic implantable cardiac defibrillator).
     996.61 (Infection and inflammatory reaction due to 
internal prosthetic device, implant, and graft due to cardiac device, 
implant, and graft).
    Currently, all three diagnosis codes are classified as a CC. For 
the FY 2012 IPPS/LTCH PPS proposed rule, we analyzed claims data using 
the methodology described previously in this section for these 
diagnosis codes. The following chart shows our findings:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     Cnt 1                 Cnt 2                 Cnt 3
                  Code                         Diagnosis description         CC Level     Cnt 1      Impact     Cnt 2      Impact     Cnt 3      Impact
--------------------------------------------------------------------------------------------------------------------------------------------------------
99601..................................  Malfunc cardiac pacemaker........           CC     1,296     1.6723      1,920     2.4332      1,333     3.1134
99604..................................  Mch cmp autm mplnt dfbrl.........           CC       419     1.7041      1,032     2.5190        660     3.1508
99661..................................  React-cardiac dev/graft..........           CC       149     1.9922        633     2.8134      1,253     3.5036
--------------------------------------------------------------------------------------------------------------------------------------------------------

    We reviewed the findings from these data. The C1 findings ranged 
from a low of 1.6723 to a high of 1.9922. As stated earlier, a value 
close to 2.0 in the C1 field suggests that the condition is more like a 
CC than a non-CC but not as significant in resource usage as an MCC. 
The C1 findings clearly support the current classification of these 
three codes on the CC list and the C2 findings supports this 
classification. Our clinical advisors agree that the data findings and 
their own clinical evaluation of the severity level of these conditions 
support the classification of these three codes on the CC list. 
Therefore, we proposed that these codes remain on the CC list. We 
invited public comment on this proposal.
    Comment: Several commenters supported our proposal to maintain the 
mechanical complication and infection due to device-related codes 
mentioned above on the CC list. The commenters agreed that the data as 
well as our clinical advisors' evaluation support the current 
classification.
    Several commenters opposed our proposal to keep the mechanical 
complication and infection due to device-related codes on the CC list. 
In support of their position, the commenters cited our decision to keep 
the encephalopathy codes on the MCC list. They pointed out that the 
encephalopathy codes had C1 findings of a low of 1.5448 to a high of 
2.3158 and C2 findings of a low of 2.5054 to a high of 3.0023, yet they 
were maintained on the MCC list. The commenters believed that the same 
logic should be applied to the mechanical complication and infection 
due to device-related codes which had C1 findings of a low of 1.6723 to 
a high of 1.9922 and C2 findings of a low of 2.4332 to a high of 
2.8134. One commenter also offered data from the Healthcare Utilization 
Project (HCUP) database which showed 2008 national statistics of 
average costs for patients admitted with one of these codes as a 
principal diagnosis. This commenter stated that these data showed 
average costs as follows:

       2008 National Statistics--Principal Diagnosis Only Ranked by Costs, Descending Order: Medicare Only
----------------------------------------------------------------------------------------------------------------
                                           Total number of   Length of stay
    ICD-9-CM Principal diagnosis code        discharges       (LOS) (mean)    Charges $ (mean)   Costs $ (mean)
----------------------------------------------------------------------------------------------------------------
996.61--React-Cardiac Dev/Graft.........             8,944              10.7            95,251            26,893
996.04--Mch Comp Aut, Mplnt Dfbri.......             8,095               3.2            59,924            16,891
996.01--Malfunc Cardiac Pacemake........             8,664               2.8            37,056            11,044
427.5--Cardiac Arrest...................             4,781               3.6            35,499            10,908
349.82--Toxic Encephalopathy............             6,835               6.5            37,913            10,765
428.23--Ac On Chr Syst Hrt Fail.........            75,511               5.8            33,732            10,689
428.1--Left Heart Failure...............             2,261               5.1            26,777            10,252
348.39--Encephalopathy Nec..............             4,880               6.3            32,124             9,609
428.31--Ac Diastolic Hrt Failure........            37,216               5.5            30,167             9,298
348.30--Encephalopathy Nos..............            11,057               5.9            31,933             9,232
572.2--Hepatic encephalopathy...........            20,154               5.4            28,056             8,580
----------------------------------------------------------------------------------------------------------------

    The commenter stated that these data support changing these codes 
to the MCC list since the costs associated with these admissions were 
higher than admissions for encephalopathy.
    Response: We agree with the commenters who supported maintaining 
the current CC severity level for the mechanical complication and 
infection due to device related codes. As discussed above the C1 and C2 
findings as well as the advice of our clinical advisors supports this 
recommendation.
    We disagree with the commenters who made comparisons to our 
proposals for the encephalopathy codes. The encephalopathy codes had C1 
findings of a low of 1.5448 to a high of 2.3158 and C2 findings of a 
low of 2.5054 to a high of 3.0023. The encephalopathy codes C1 findings 
supported a change to a CC level. The C2 findings of a high of 3.0023 
support the current MCC assignment for those codes.
    The mechanical complication and infection due to device-related 
codes had C1 findings of a low of 1.6723 and

[[Page 51546]]

a high of 1.9922, which are more like a CC than a non-CC but not as 
significant in resource usage as an MCC. The C2 findings of a low of 
2.4332 and a high of 2.8134 are also supportive of a CC classification 
because, while one was a high of 2.8134, the other was only 2.4332. 
Only one of the codes had a finding that approached 3.0 and neither 
exceeded 3.0. Furthermore, our clinical advisors' evaluation of data on 
patients with encephalopathy as a secondary diagnosis indicates that 
these patients are at a higher severity level. Our clinical advisors 
did not believe that patients who have one of the mechanical 
complication and infection due to device-related codes as a secondary 
diagnoses would require resources justifying the MCC severity level.
    We point out that the data that the commenter shared focused on 
patients admitted for either a mechanical complication or infection due 
to device-related code or for encephalopathy. In other words, these 
conditions were the principal diagnosis in this data. These cases did 
not report the codes as secondary diagnoses. Our clinical criteria are 
based on these conditions being reported as a secondary diagnosis and 
the effect that has on all types of admissions. A detailed discussion 
of the process and criteria we used in this process is described in the 
FY 2008 IPPS final rule with comment period (72 FR 47158 through 
47161). It may well make a difference in the overall costs of the 
admission if a patient were admitted for these types of complications 
and required a pacemaker insertion during the stay. Clearly, the 
encephalopathy cases would not have had a device inserted. Therefore, 
it is not possible to determine the effect of the impact of these 
conditions as a secondary diagnosis based on these data because the 
additional costs of a device is included. Our approach isolates the 
effect of the individual code on all types of admissions when it is 
reported as a secondary diagnosis. It also looks at whether this code 
is the only CC or MCC reported (C1 cases), reported with another CC 
diagnosis (C2 cases), or reported with another MCC diagnosis (C3). We 
cannot determine what, if any, secondary diagnoses were present for the 
cases shown in the HCUP data shown above.
    We believe our consistent approach to evaluating the effect of a 
secondary diagnosis is more appropriate than looking at average costs 
when the condition is reported as a principal diagnosis in establishing 
the severity level of these codes. Modifying the approach by also 
looking at the principal diagnosis would significantly modify our 
current approach that focuses solely on evaluating the impact of 
secondary diagnoses on increasing the severity of the overall 
admission. We also note that our clinical advisors' evaluation of these 
cases, who advised that the codes should remain on the CC lists, 
supports the findings of the data and maintaining the codes on the CC 
list.
    After consideration of the public comments we received, as we 
proposed, we are maintain the mechanical complication and infection due 
to device-related codes listed below on the CC list for FY 2012.
     996.01 (Mechanical of cardiac device, implant and graft 
due to cardiac pacemaker (electrode))--CC
     996.04 (Mechanical complication of cardiac device, 
implant, and graft due to automatic implantable cardiac 
defibrillator)--CC
     996.61 (Infection and inflammatory reaction due to 
internal prosthetic device, implant, and graft due to cardiac device, 
implant, and graft)--CC
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which are effective for discharges occurring on or 
after October 1, 2011, are not being published in the Addendum to this 
final rule because of the length of the two tables. Instead, we are 
making them available through the Internet on the CMS Web site at: 
http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal 
diagnoses for which there is a CC exclusion is shown in Tables 6G and 
6H, which are listed in section VI. of the Addendum to this final rule 
(and available via the Internet) with an asterisk, and the conditions 
that will not count as a CC, are provided in an indented column 
immediately following the affected principal diagnosis.
    A complete updated MCC, CC, and Non-CC Exclusions List is also 
available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or 
after October 1, 2011, the indented diagnoses will not be recognized by 
the GROUPER as valid CCs for the asterisked principal diagnosis.
    To assist readers in identifying the changes to the MCC and CC 
lists that occurred as a result of updates to the ICD-9-CM codes, as 
described in Tables 6A, 6C, and 6E, which are listed in section VI. of 
the Addendum to this final rule and available via the Internet, we are 
providing the following summaries of those MCC and CC changes for FY 
2012.

         Summary of Additions to the MS-DRG MCC List--Table 6I.1
------------------------------------------------------------------------
                 Code                              Description
------------------------------------------------------------------------
284.11................................  Antineoplastic chemotherapy
                                         induced pancytopenia.
284.12................................  Other drug-induced pancytopenia.
348.82................................  Brain death.
415.13................................  Saddle embolus of pulmonary
                                         artery.
444.01................................  Saddle embolus of abdominal
                                         aorta.
488.81................................  Influenza due to identified
                                         novel influenza A virus with
                                         pneumonia.
516.4.................................  Lymphangioleiomyomatosis.
516.61................................  Neuroendocrine cell hyperplasia
                                         of infancy.
516.62................................  Pulmonary interstitial
                                         glycogenosis.
516.63................................  Surfactant mutations of the
                                         lung.
516.64................................  Alveolar capillary dysplasia
                                         with vein misalignment.
516.69................................  Other interstitial lung diseases
                                         of childhood.
518.51................................  Acute respiratory failure
                                         following trauma and surgery.
518.52................................  Other pulmonary insufficiency,
                                         not elsewhere classified,
                                         following trauma and surgery.
518.53................................  Acute and chronic respiratory
                                         failure following trauma and
                                         surgery.
747.31................................  Pulmonary artery coarctation and
                                         atresia.
747.32................................  Pulmonary arteriovenous
                                         malformation.
747.39................................  Other anomalies of pulmonary
                                         artery and pulmonary
                                         circulation.
808.54................................  Multiple open pelvic fractures
                                         without disruption of pelvic
                                         circle.
998.01................................  Postoperative shock,
                                         cardiogenic.

[[Page 51547]]

 
998.02................................  Postoperative shock, septic.
998.09................................  Postoperative shock, other.
------------------------------------------------------------------------

        Summary of Deletions From the MS-DRG MCC List--Table 6I.2
------------------------------------------------------------------------
                 Code                              Description
------------------------------------------------------------------------
518.5.................................  Pulmonary insufficiency
                                         following trauma and surgery.
747.3.................................  Anomalies of pulmonary artery.
------------------------------------------------------------------------

         Summary of Additions to the MS-DRG CC List--Table 6J.1
------------------------------------------------------------------------
                 Code                              Description
------------------------------------------------------------------------
284.19................................  Other pancytopenia.
286.52................................  Acquired hemophilia.
286.53................................  Antiphospholipid antibody with
                                         hemorrhagic disorder.
286.59................................  Other hemorrhagic disorder due
                                         to intrinsic circulating
                                         anticoagulants, antibodies, or
                                         inhibitors.
294.21................................  Dementia, unspecified, with
                                         behavioral disturbance.
358.30................................  Lambert-Eaton syndrome,
                                         unspecified.
358.31................................  Lambert-Eaton syndrome in
                                         neoplastic disease.
358.39................................  Lambert-Eaton syndrome in other
                                         diseases classified elsewhere.
425.11................................  Hypertrophic obstructive
                                         cardiomyopathy.
425.18................................  Other hypertrophic
                                         cardiomyopathy.
444.09................................  Other arterial embolism and
                                         thrombosis of abdominal aorta.
512.2.................................  Postoperative air leak.
512.81................................  Primary spontaneous
                                         pneumothorax.
512.82................................  Secondary spontaneous
                                         pneumothorax.
512.83................................  Chronic pneumothorax.
512.84................................  Other air leak.
512.89................................  Other pneumothorax.
516.33................................  Acute interstitial pneumonitis.
516.35................................  Idiopathic lymphoid interstitial
                                         pneumonia.
516.36................................  Cryptogenic organizing
                                         pneumonia.
516.37................................  Desquamative interstitial
                                         pneumonia.
516.5.................................  Adult pulmonary Langerhans cell
                                         histiocytosis.
539.01................................  Infection due to gastric band
                                         procedure.
539.09................................  Other complications of gastric
                                         band procedure.
539.81................................  Infection due to other bariatric
                                         procedure.
539.89................................  Other complications of other
                                         bariatric procedure.
596.81................................  Infection of cystostomy.
596.82................................  Mechanical complication of
                                         cystostomy.
596.83................................  Other complication of
                                         cystostomy.
808.44................................  Multiple closed pelvic fractures
                                         without disruption of pelvic
                                         circle.
996.88................................  Complications of transplanted
                                         organ, stem cell.
997.32................................  Postprocedural aspiration
                                         pneumonia.
997.41................................  Retained cholelithiasis
                                         following cholecystectomy.
997.49................................  Other digestive system
                                         complications.
998.00................................  Postoperative shock,
                                         unspecified.
999.32................................  Bloodstream infection due to
                                         central venous catheter.
999.33................................  Local infection due to central
                                         venous catheter.
999.34................................  Acute infection following
                                         transfusion, infusion, or
                                         injection of blood and blood
                                         products.
999.41................................  Anaphylactic reaction due to
                                         administration of blood and
                                         blood products.
999.42................................  Anaphylactic reaction due to
                                         vaccination.
999.49................................  Anaphylactic reaction due to
                                         other serum.
999.51................................  Other serum reaction due to
                                         administration of blood and
                                         blood products.
999.52................................  Other serum reaction due to
                                         vaccination.
999.59................................  Other serum reaction.
------------------------------------------------------------------------

        Summary of Deletions From the MS-DRG CC List--Table 6J.2
------------------------------------------------------------------------
                 Code                              Description
------------------------------------------------------------------------
284.1.................................  Pancytopenia.
286.5.................................  Hemorrhagic disorder due to
                                         intrinsic circulating
                                         anticoagulants.
425.1.................................  Hypertrophic obstructive
                                         cardiomyopathy.
444.0.................................  Embolism and thrombosis of
                                         abdominal aorta.
512.8.................................  Other spontaneous pneumothorax.
516.3.................................  Idiopathic fibrosing alveolitis.

[[Page 51548]]

 
997.4.................................  Digestive system complications.
998.0.................................  Postoperative shock.
999.4.................................  Anaphylactic shock due to serum.
999.5.................................  Other serum reaction.
------------------------------------------------------------------------

    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current MS-DRG Definitions Manual, Version 28.0, is available on a CD 
for $225.00. Version 29.0 of this manual, which will include the final 
FY 2012 MS-DRG changes, will be available on a CD for $225.00. These 
manuals may be obtained by writing 3M/HIS at the following address: 100 
Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303, or by 
obtaining an order form at the Web site: http://www.3MHIS.com. Please 
specify the revision or revisions requested.
12. Review of Procedure Codes in MS DRGs 981 Through 983; 984 Through 
986; and 987 Through 989
    Each year, we review cases assigned to former CMS DRG 468 
(Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 
476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and 
CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal 
Diagnosis) to determine whether it would be appropriate to change the 
procedures assigned among these CMS DRGs. Under the MS-DRGs that we 
adopted for FY 2008, CMS DRG 468 was split three ways and became MS-
DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal 
Diagnosis with MCC, with CC, and without CC/MCC, respectively). CMS DRG 
476 became MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure 
Unrelated to Principal Diagnosis with MCC, with CC, and without CC/MCC, 
respectively). CMS DRG 477 became MS-DRGs 987, 988, and 989 
(Nonextensive O.R. Procedure Unrelated to Principal Diagnosis with MCC, 
with CC, and without CC/MCC, respectively).
    MS-DRGs 981 through 983, 984 through 986, and 987 through 989 
(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for 
those cases in which none of the O.R. procedures performed are related 
to the principal diagnosis. These MS-DRGs are intended to capture 
atypical cases, that is, those cases not occurring with sufficient 
frequency to represent a distinct, recognizable clinical group. MS-DRGs 
984 through 986 (previously CMS DRG 476) are assigned to those 
discharges in which one or more of the following prostatic procedures 
are performed and are unrelated to the principal diagnosis:

 60.0, Incision of prostate
 60.12, Open biopsy of prostate
 60.15, Biopsy of periprostatic tissue
 60.18, Other diagnostic procedures on prostate and 
periprostatic tissue
 60.21, Transurethral prostatectomy
 60.29, Other transurethral prostatectomy
 60.61, Local excision of lesion of prostate
 60.69, Prostatectomy, not elsewhere classified
 60.81, Incision of periprostatic tissue
 60.82, Excision of periprostatic tissue
 60.93, Repair of prostate
 60.94, Control of (postoperative) hemorrhage of prostate
 60.95, Transurethral balloon dilation of the prostatic urethra
 60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
 60.97, Other transurethral destruction of prostate tissue by 
other thermotherapy
 60.99, Other operations on prostate

    All remaining O.R. procedures are assigned to MS-DRGs 981 through 
983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those 
discharges in which the only procedures performed are nonextensive 
procedures that are unrelated to the principal diagnosis.\3\
---------------------------------------------------------------------------

    \3\ The original list of the ICD-9-CM procedure codes for the 
procedures we consider nonextensive procedures, if performed with an 
unrelated principal diagnosis, was published in Table 6C in section 
IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final 
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), 
and the FY 1998 final rule (62 FR 45981), we moved several other 
procedures from DRG 468 to DRG 477, and some procedures from DRG 477 
to DRG 468. No procedures were moved in FY 1999, as noted in the 
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 
(67 FR 49999) we did not move any procedures from DRG 477. However, 
we did move procedure codes from DRG 468 and placed them in more 
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), 
we moved several procedures from DRG 468 to DRGs 476 and 477 because 
the procedures are nonextensive. In the FY 2005 final rule (69 FR 
48950), we moved one procedure from DRG 468 to 477. In addition, we 
added several existing procedures to DRGs 476 and 477. In the FY 
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned 
it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and 
assigned it to DRGs 479, 553, and 554. In FYs 2008, 2009, FY 2010, 
and FY 2011, no procedures were moved, as noted in the FY 2008 final 
rule with comment period (72 FR 46241), the FY 2009 final rule (73 
FR 48513), the FY 2010 final rule (74 FR 43796); and the FY 2011 
final rule (75 FR 50122).
---------------------------------------------------------------------------

    Our review of MedPAR claims data showed that there were no cases 
that merited movement or should logically be assigned to any of the 
other MDCs. Therefore, for FY 2012, we did not propose to change the 
procedures assigned among these MS-DRGs.
    We did not receive any public comments on this proposal. Therefore, 
as we proposed, we are not making any changes to the procedures 
assigned to MS-DRGs 981 through 983, 984 through 986, and 987 through 
989 for FY 2012.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 Into MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (Extensive O.R. procedure unrelated to 
principal diagnosis with MCC, with CC, and without CC.MCC, 
respectively) or MS-DRGs 987 through 989 (Nonextensive O.R. procedure 
unrelated to principal diagnosis with MCC, with CC, and without CC/MCC, 
respectively) on the basis of volume, by procedure, to see if it would 
be appropriate to move procedure codes out of these MS-DRGs into one of 
the surgical MS-DRGs for the MDC into which the principal diagnosis 
falls. The data are arrayed in two ways for comparison purposes. We 
look at a frequency count of each major operative procedure code. We 
also compare procedures across MDCs by volume of procedure codes within 
each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical MS-DRGs for the MDC in

[[Page 51549]]

which the diagnosis falls. As noted above, there were no cases that 
merited movement or that should logically be assigned to any of the 
other MDCs. Therefore, for FY 2012, we did not propose to remove any 
procedures from MS-DRGs 981 through 983 or MS-DRGs 987 through 989 into 
one of the surgical MS-DRGs for the MDC into which the principal 
diagnosis is assigned.
    We did not receive any public comments on our proposal. Therefore, 
as we proposed, we are not making any changes to the procedures 
assigned to MS-DRGs 981 through 983 or 987 through 989 for FY 2012.
b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal diagnosis code, result in 
assignment to MS-DRGs 981 through 983, 984 through 986 (Prostatic O.R. 
procedure unrelated to principal diagnosis with MCC, with CC, or 
without CC/MCC, respectively), and 987 through 989, to ascertain 
whether any of those procedures should be reassigned from one of these 
three MS-DRGs to another of the three MS-DRGs based on average charges 
and the length of stay. We look at the data for trends such as shifts 
in treatment practice or reporting practice that would make the 
resulting MS-DRG assignment illogical. If we find these shifts, we 
would propose to move cases to keep the MS-DRGs clinically similar or 
to provide payment for the cases in a similar manner. Generally, we 
move only those procedures for which we have an adequate number of 
discharges to analyze the data.
    There were no cases representing shifts in treatment practice or 
reporting practice that would make the resulting MS-DRG assignment 
illogical, or that merited movement so that cases should logically be 
assigned to any of the other MDCs. Therefore, for FY 2012, we did not 
propose to move any procedure codes among these MS-DRGs.
    We did not receive any public comments on our proposal. Therefore, 
as we proposed, we are not moving any procedures assigned to MS-DRGs 
981 through 983, 984 through 986, and 987 through 989 for FY 2012.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on the review of cases in the MDCs as described above in 
sections III.G.12.a. and b., we did not propose to add any diagnosis or 
procedure codes to MDCs for FY 2012.
    We did not receive any public comments on our proposal. Therefore, 
as we proposed, we are not adding any diagnosis or procedure codes to 
MDCs for FY 2012.
13. Changes to the ICD-9-CM Coding System, Including Discussion of the 
Replacement of the ICD-9-CM Coding System With the ICD-10-CM and ICD-
10-PCS Systems in FY 2014
a. ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this final rule, 
the ICD-9-CM is a coding system currently used for the reporting of 
diagnoses and procedures performed on a patient. In September 1985, the 
ICD-9-CM Coordination and Maintenance Committee was formed. This is a 
Federal interdepartmental committee, co-chaired by the National Center 
for Health Statistics (NCHS), the Centers for Disease Control and 
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM 
system. The Committee is jointly responsible for approving coding 
changes, and developing errata, addenda, and other modifications to the 
ICD-9-CM to reflect newly developed procedures and technologies and 
newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $19.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. The Official Version of the ICD-9-CM is no 
longer available in printed manual form from the Federal Government; it 
is only available on CD-ROM. Users who need a paper version are 
referred to one of the many products available from publishing houses.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2012 at a public meeting held on September 15-16, 
2010 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by November 19, 2010. Those 
coding changes were announced in Tables 6A through 6F, which were 
listed in section VI. of the Addendum to the proposed rule and 
available via the Internet.
    The Committee held its 2011 meeting on March 9-10, 2011. New codes 
for which there was a consensus of public support and for which 
complete tabular and indexing changes were made by May 2011 are 
included in the October 1, 2011 update to ICD-9-CM. Code revisions that 
were discussed at the March 9-10, 2011 Committee meeting but that could 
not be finalized in time to include them in the tables listed in 
section VI. of the Addendum to the proposed rule are included in Tables 
6A through 6F, which are listed in section VI. of the Addendum to this 
final rule and available via the Internet, and are marked with an 
asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 15-16, 2010 meeting and March 9-10, 2011 meeting 
can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the 
diagnosis codes discussions at the September 15-16, 2010 meeting and 
March 9-10, 2011 meeting are found at: http://www.cdc.gov/nchs/icd.htm. 
These Web sites also provide detailed information about the Committee, 
including information on requesting a new code, attending a Committee 
meeting, and timeline requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving

[[Page 51550]]

diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
dfp4@cdc.gov.
    Questions and comments concerning the procedure codes should be 
addressed 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, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: patricia.brooks2@cms.hhs.gov.
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2011. The new ICD-9-CM codes are listed, along 
with their MS-DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively), which are listed in 
section VI. of the Addendum to this final rule and available via the 
Internet. As we stated above, the code numbers and their titles were 
presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved.
    In the FY 2012 IPPS/LTCH PPS proposed rule, we solicited comments 
on the proposed classification of these new codes, which were shown in 
Tables 6A and 6B listed in section VI. of the Addendum to the proposed 
rule and available via the Internet.
    Comment: Several commenters generally supported the proposed 
changes to the MS-DRG classifications. One commenter supported the non-
CC designation for the following new diagnosis codes: 282.40 
(Thalassemia, unspecified); 282.43 (Alpha thalassemia); code 282.44 
(Beta thalassemia); 282.45 (Delta-beta thalassemia); 282.46 
(Thalassemia minor); 282.47 (Hemoglobin E-beta Thalassemia); 516.31 
(Idiopathic pulmonary fibrosis); 516.32 (Idiopathic non-specific 
interstitial pneumonitis); and 516.34 (Respiratory bronchiolitis 
interstitial lung disease). The commenter also supported the non-CC 
designation for and the assignment of code 573.5 (Hepatopulmonary 
syndrome) in MDC 4, MS-DRGs 205 and 206 (Other Respiratory System 
Diagnoses with and without MCC, respectively).
    However, the commenter did not support the non-CC designation of 
code 294.21 (Dementia, unspecified, with behavioral disturbance). The 
commenter noted that a similar diagnosis with behavioral disturbance 
such as code 294.11 (Dementia in conditions classified elsewhere with 
behavioral disturbance) is designated as a CC and questioned why the 
same logic had not been considered for code 294.21.
    Response: Our medical advisors agree with the commenter's 
assessment that diagnosis code 294.21 should qualify as a CC, similar 
to code 294.11. Both codes identify dementia with behavioral 
disturbance and use similar resource use. Therefore, in this final 
rule, we are changing the proposed non-CC designation for code 294.21 
and classifying it as a CC in Table 6A. This change is reflected in 
Table 6A of this final rule which is available via the Internet on the 
CMS Web site.
    Comment: One commenter did not support the non-CC designation for 
diagnosis code 414.4 (Coronary atherosclerosis due to calcified 
coronary lesion). The commenter stated that this code should be 
designated as a CC, the same designation assigned to diagnosis code 
414.02 (Coronary atherosclerosis of autologous vein bypass graft) and 
diagnosis code 414.03 (Coronary atherosclerosis of nonautologous 
biological bypass graft).
    Response: Our medical advisors do not agree with the commenter. 
According to our medical advisors, diagnosis code 414.4 is similar to 
code 414.01 (Coronary atherosclerosis of native coronary artery) which 
is not designated as a CC. Both codes indicate general atherosclerosis 
and are not similar to codes 414.02 and 414.03, which indicate 
atherosclerosis of an artery that has been replaced by graft. 
Therefore, we are not making any modifications to the proposed non-CC 
designation for code 414.4.
    Comment: One commenter supported the CC designation for the 
following diagnosis codes: 425.11(Hypertrophic obstructive 
cardiomyopathy); 425.18 (Other hypertrophic cardiomyopathy); 512.2 
(Postoperative air leak); 512.81 (Primary spontaneous pneumothorax); 
512.82 (Secondary spontaneous pneumothorax); 512.83 (Chronic 
pneumothorax); 512.84 (Other air leak); 512.89 (Other pneumothorax); 
516.35 (Idiopathic lymphoid interstitial pneumonia); 516.36 
(Cryptogenic organizing pneumonia); and 516.37 (Desquamative 
interstitial pneumonia). Some commenters supported the CC designations 
for code 998.00 (Postoperative shock, unspecified).
    One commenter representing a national medical specialty society for 
neurology supported our proposed CC designations for codes 358.30 
(Lambert-Eaton syndrome, unspecified); 358.31 (Lambert-Eaton syndrome 
in neoplastic disease); and 358.39 (Lambert-Eaton syndrome in other 
diseases classified elsewhere). The commenter stated that Lambert-Eaton 
syndrome is increasingly diagnosed and not always a paraneoplastic 
syndrome.
    One commenter supported the CC designation for code 348.82 (Brain 
death), while another commenter did not support this proposed 
designation. The commenter that did not support the proposal stated 
that this code should be designated as an MCC.
    Response: Our medical advisors agree with the commenter that code 
348.82 should be designated as a MCC because this diagnosis requires 
extensive intensive care resources. Therefore, in this final rule, we 
are amending the proposed CC designation of code 348.82 (Brain death) 
to MCC for FY 2012 in Table 6A. This change is reflected in Table 6A in 
this final rule which is available via the Internet on the CMS Web 
site.
    Comment: One commenter did not support the CC designation for code 
516.30 (Idiopathic interstitial pneumonia, not other specified). The 
commenter did not see the differences among codes 516.30, 516.31 
(Idiopathis pulmonary fibrosis), and 516.32 (Idiopathic nonspecific 
interstitial pneumonitis), recognizing that the nonspecific code is 
designated as a CC while the more specific codes are not designated as 
CCs.
    Response: We agree with the commenter that code 516.30 should not 
be designated as a CC because this code identifies an unspecified 
pneumonia which is more reflective of a non-CC. Therefore, in this 
final rule, we are amending the proposed CC designation for of code 
516.30 (Idiopathic interstitial pneumonia, not other specified) to non-
CC for FY 2012 in Table 6A. This change is reflected in Table 6A, 
which, for this final rule, is available via the Internet on the CMS 
Web site.
    Comment: Several commenters supported the MCC designation for the 
following diagnosis codes: 284.11 (Antineoplastic chemotherapy induced 
pancytopenia); 284.12 (Other drug induced pancytopenia); 
488.81(Influenza due to identified novel influenza A virus with 
pneumonia); 998.01 (Postoperative shock, cardiogenic); 998.02 
(Postoperative shock, septic); and 998.09 (Postoperative shock, other). 
In addition, one commenter supported the MCC designation for the 
following diagnosis codes: 518.51 (Acute respiratory failure following 
trauma and surgery); 518.52 (Other pulmonary insufficiency, not 
elsewhere classified);

[[Page 51551]]

and 518.53 (Acute and chronic respiratory failure following trauma and 
surgery).
    Response: We appreciate the commenters' support.
    Comment: One commenter representing a national organization for 
orthopedic surgeons did not support the proposed MCC designation for 
diagnosis code 415.13 (Saddle embolus of pulmonary artery). The 
commenter stated that this designation is clinically inaccurate as a 
saddle embolus is a subcategory of deep vein thrombosis/pulmonary 
embolism.
    Response: Our medical advisors do not agree with the commenter's 
assessment that this diagnosis code does not warrant an MCC 
designation. The diagnosis of saddle embolus is life-threatening, 
requiring intensive care resources. Therefore, we are not making any 
modifications to the proposed MCC designation for code 415.13. We point 
out that diagnosis codes 415.11 (Iatrogenic pulmonary embolism and 
infarction), 415.12 (Septic pulmonary embolism) and 415.19 (Other 
Pulmonary embolism and infarction) are designated as MCCs.
    Comment: One commenter suggested that, as new codes are added to 
the MS-DRG classification, the new codes be assigned to the same MS-DRG 
classification as its predecessor code.
    Response: CMS' longstanding practice has been, where possible, to 
assign new ICD-9-CM codes to the same MS-DRGs(s) as their predecessor 
code.
    Comment: One commenter supported the proposed MS-DRG assignment to 
MS-DRG 264 (Other Circulatory System O.R. Procedures) for procedure 
code 38.26 (Insertion of implantable pressure sensor without lead for 
intracardiac or great vessel hemodynamic monitoring). Another commenter 
supported the surgical classification of procedure code 68.24 (Uterine 
artery embolization [UAE] with coils) and code 68.25 (Uterine artery 
embolization [UAE] without coils).
    Response: We appreciate the support of the commenters.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A, 
which is listed in section VI. of the Addendum to this final rule and 
available via the Internet. New procedure codes are shown in Table 6B, 
which is listed in section VI. of the Addendum to this final rule and 
available via the Internet. Diagnosis codes that have been replaced by 
expanded codes or other codes or have been deleted are in Table 6C 
(Invalid Diagnosis Codes), which is listed in section VI. of the 
Addendum to this final rule and available via the Internet. These 
invalid diagnosis codes will not be recognized by the GROUPER beginning 
with discharges occurring on or after October 1, 2011. Table 6D, which 
is listed in section VI. of the Addendum to this final rule and 
available via the Internet, contains invalid procedure codes. These 
invalid procedure codes will not be recognized by the GROUPER beginning 
with discharges occurring on or after October 1, 2011. Revisions to 
diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), 
which is listed in section VI. of the Addendum to this final rule and 
available via the Internet, and also includes the MS-DRG assignments 
for these revised codes. Table 6F, which is listed in section VI. of 
the Addendum to this final rule and available via the Internet includes 
revised procedure code titles for FY 2012.
    In the September 7, 2001 final rule implementing the IPPS new 
technology add-on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the Spring meeting as part of the 
code revisions effective the following October. As stated previously, 
ICD-9-CM codes discussed at the March 9-10, 2011 Committee meeting that 
received consensus and that were finalized by May 2011 are included in 
Tables 6A through 6F, which are listed in section VI. of the Addendum 
to this final rule and available via the Internet.
    Section 503(a) of Public Law 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each year. This requirement was included as part of the 
amendments to the Act relating to recognition of new technology under 
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by 
adding a clause (vii) which states that the ``Secretary shall provide 
for the addition of new diagnosis and procedure codes on April 1 of 
each year, but the addition of such codes shall not require the 
Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS system by providing information on these new 
technologies at an earlier date. Data will be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid-year systems update 
by providers to identify the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to identify and report the new codes.
    The ICD-9-CM Coordination and Maintenance Committee holds its 
meetings in the spring and fall in order to update the codes and the 
applicable payment and reporting systems by October 1 of each year. 
Items are placed on the agenda for the ICD-9-CM Coordination and 
Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. Final decisions on 
code title revisions are currently made by March 1 so that these titles 
can be included in the IPPS proposed rule. A complete addendum 
describing details of all changes to ICD-9-CM, both tabular and index, 
is published on the CMS and NCHS Web sites in May of each year. 
Publishers of coding books and software use this information to modify 
their products that are used by health care providers. This 5-month 
time period has proved to be necessary for hospitals and other 
providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a)

[[Page 51552]]

of Public Law 108-173, by developing a mechanism for approving, in time 
for the April update, diagnosis and procedure code revisions needed to 
describe new technologies and medical services for purposes of the new 
technology add-on payment process. We also established the following 
process for making these determinations. Topics considered during the 
Fall ICD-9-CM Coordination and Maintenance Committee meeting are 
considered for an April 1 update if a strong and convincing case is 
made by the requester at the Committee's public meeting. The request 
must identify the reason why a new code is needed in April for purposes 
of the new technology process. The participants at the meeting and 
those reviewing the Committee meeting summary report are provided the 
opportunity to comment on this expedited request. All other topics are 
considered for the October 1 update. Participants at the Committee 
meeting are encouraged to comment on all such requests. There were no 
requests approved for an expedited April l, 2011 implementation of an 
ICD-9-CM code at the September 15-16, 2010 Committee meeting. 
Therefore, there were no new ICD-9-CM codes implemented on April 1, 
2011.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along 
with the Official ICD-9-CM Coding Guidelines, can be found on the Web 
site at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, 
and deleted ICD-9-CM codes is also provided to the AHA for publication 
in the Coding Clinic for ICD-9-CM. AHA also distributes information to 
publishers and software vendors.
    CMS also sends copies of all ICD-9-CM coding changes to its 
Medicare contractors for use in updating their systems and providing 
education to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as 
part of the ICD-9-CM Coordination and Maintenance Committee process. 
Thus, although we publish the code titles in the IPPS proposed and 
final rules, they are not subject to comment in the proposed or final 
rules. We will continue to publish the October code updates in this 
manner within the IPPS proposed and final rules. For codes that are 
implemented in April, we will assign the new procedure code to the same 
MS-DRG in which its predecessor code was assigned so there will be no 
MS-DRG impact as far as MS-DRG assignment. Any midyear coding updates 
will be available through the Web sites indicated above and through the 
Coding Clinic for ICD-9-CM. Publishers and software vendors currently 
obtain code changes through these sources in order to update their code 
books and software systems. We will strive to have the April 1 updates 
available through these Web sites 5 months prior to implementation 
(that is, early November of the previous year), as is the case for the 
October 1 updates.
b. Code Freeze
    The International Classification of Diseases, 10th Revision (ICD-
10) coding system applicable to hospital inpatient services will be 
implemented on October 1, 2013, as described in the Health Insurance 
Portability and Accountability Act (HIPAA) Administrative 
Simplification: Modifications to Medical Data code Set Standards to 
Adopt ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362, 
January 16, 2009). The ICD-10 coding system includes the International 
Classification of Diseases, 10th Revision, Clinical Modification (ICD-
10-CM) for diagnosis coding and the International Classification of 
Diseases, 10th Revision, Procedure Coding System (ICD-10-PCS) for 
inpatient hospital procedure coding, as well as the Official ICD-10-CM 
and ICM-10-PCS Guidelines for Coding and Reporting. In the January 16, 
2009 ICD-10-CM and ICD-10-PCS final rule (74 FR 3328 through 3362), 
there was a discussion of the need for a partial or total freeze in the 
annual updates to both ICD-9-CM and ICD-10-CM and ICD-10-PCS codes. The 
public comment addressed in that final rule stated that the annual code 
set updates should cease l year prior to the implementation of ICD-10. 
The commenters stated that this freeze of code updates would allow for 
instructional and/or coding software programs to be designed and 
purchased early, without concern that an upgrade would take place 
immediately before the compliance date, necessitating additional 
updates and purchases.
    We responded to comments in the ICD-10 final rule that the ICD-9-CM 
Coordination and Maintenance Committee has jurisdiction over any action 
impacting the ICD-9-CM and ICD-10 code sets. Therefore, we indicated 
that the issue of consideration of a moratorium on updates to the ICD-
9-CM, ICD-10-CM, and ICD-10-PCS code sets in anticipation of the 
adoption of ICD-10-CM and ICD-10-PCS would be addressed through the 
Committee at a future public meeting.
    The code freeze was discussed at multiple meetings of the ICD-9-CM 
Coordination and Maintenance Committee and public comment was actively 
solicited. The Committee evaluated all comments from participants 
attending the Committee meetings as well as written comments that were 
received. There was an announcement at the September 15-16, 2010 ICD-9-
CM Coordination and Maintenance Committee meeting that a partial freeze 
of both ICD-9-CM and ICD-10 codes would be implemented as follows:
     The last regular annual update to both ICD-9-CM and ICD-10 
code sets will be made on October 1, 2011.
     On October 1, 2012, there will be only limited code 
updates to both ICD-9-CM and ICD-10 code sets to capture new technology 
and new diseases.
     There will be no updates to ICD-9-CM on October 1, 2013, 
as the system will no longer be a HIPAA standard. There will be only 
limited code updates to ICD-10 code sets on October 1, 2013, to capture 
new technology and new diseases.
     On October 1, 2014, regular updates to ICD-10 will begin.
    The ICD-9-CM Coordination and Maintenance Committee announced that 
it would continue to meet twice a year during the freeze. At these 
meetings, the public will be encouraged to comment on whether or not 
requests for new diagnosis and procedure codes should be created based 
on the need to capture new technology and new diseases. Any code 
requests that do not meet the criteria will be evaluated for 
implementation within ICD-10 on or after October 1, 2014, once the 
partial freeze is ended.
    Complete information on the partial code freeze and discussions of 
the issues at the Committee meetings can be found on the ICD-9-CM 
Coordination and Maintenance Committee Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03. A summary of the September 15-16, 2010 
Committee meeting, along with both written and audio transcripts of 
this meeting, are posted on the ``Download'' section of this Web page.
    Comment: Several commenters supported the partial code freeze. The 
commenters stated that the partial freeze was needed to allow providers 
time to prepare for the implementation of ICD-

[[Page 51553]]

10 and the accompanying system and product updates.
    Response: We appreciate the commenters' support. We agree with the 
commenters that the partial code freeze will be useful in providing a 
greater opportunity to focus on ICD-10 implementation issues.
c. Processing of 25 Diagnosis Codes and 25 Procedure Codes on Hospital 
Inpatient Claims
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50127), we discussed 
that we had received repeated requests from the hospital community to 
process all 25 diagnosis codes and 25 procedure codes submitted on 
electronic hospital inpatient claims. Prior to January 1, 2011, 
hospitals could submit up to 25 diagnoses and 25 procedures; however, 
CMS' system limitations allowed for the processing of only the first 9 
diagnoses and 6 procedures. We indicated in that final rule that, as 
part of our efforts to update Medicare systems prior to the 
implementation of ICD-10 on October 1, 2013, we were undergoing 
extensive system updates as part of the move to 5010, which includes 
the ability to accept ICD-10 codes. This complicated transition 
involved converting many internal systems prior to October 1, 2013, 
when ICD-10 will be implemented. We stated that, as one important step 
in this planned conversion process, we were planning to complete the 
expansion of our internal system capability so that we are able to 
process up to 25 diagnoses and 25 procedures on hospital inpatient 
claims as part of the HIPAA ASC X12 Technical Reports Type 3, Version 
005010 (Version 5010) standards system update. We have completed this 
expansion, and, as a result, we were able to process up to 25 diagnosis 
codes and 25 procedure codes when received on the 5010 format starting 
on January 1, 2011. (We note that we made a typographical error in the 
proposed rule (76 FR 25843) and indicated that ``we have not completed 
this expansion.'' This error was pointed out to us by several 
commenters. We corrected this typographical error in a correction 
notice issued in the Federal Register on June 14, 2011 (76 FR 24633).) 
We continue to recognize the value of the additional information 
provided by this coded data for multiple uses such as for payment, 
quality measures, outcome analysis, and other important uses. We will 
continue to process up to 25 diagnosis codes and 25 procedure codes 
when received on the 5010 format.
d. ICD-10 MS-DRGs
    In response to the FY 2011 IPPS/LTCH PPS proposed rule, we received 
comments on the creation of the ICD-10 version of the MS-DRGs, which 
will be implemented on October 1, 2013 (FY 2014) when we implement the 
reporting of ICD-10 codes (75 FR 50127 and 50128). While we did not 
propose an ICD-10 version of the MS-DRGs in the FY 2011 IPPS/LTCH PPS 
proposed rule, we noted that we have been actively involved in 
converting our current MS-DRGs from ICD-9-CM codes to ICD-10 codes and 
sharing this information through the ICD-9-CM Coordination and 
Maintenance Committee. We undertook this early conversion project to 
assist other payers and providers in understanding how to go about 
their own conversion projects. We posted ICD-10 MS-DRGs based on V26.0 
(FY 2009) of the MS-DRGs. We also posted a paper that describes how CMS 
went about completing this project and suggestions for others to 
follow. All of this information can be found on the CMS Web site at: 
http://www.cms.gov/ICD10/17_ICD10_MS_DRG_Conversion_Project.asp. 
We have continued to keep the public updated on our maintenance efforts 
for ICD-10-CM and ICD-10-PCS coding systems as well as the General 
Equivalence Mappings that assist in conversion through the ICD-9-CM 
Coordination and Maintenance Committee. Information on these committee 
meetings can be found at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp.
    During FY 2011, we developed and posted Version 28.0 of the ICD-10 
MS-DRGs based on the FY 2011 MS-DRGs (Version 28.0) that we finalized 
in the FY 2011 IPPS/LTCH PPS final rule on the CMS Web site. This ICD-
10 MS-DRG Version 28.0 also includes the CC Exclusion List and the ICD-
10 version of the hospital acquired conditions (HACs), which was not 
posted with Version 26.0. We also discussed this update at the 
September 15-16, 2010 and the March 9-10, 2011 meetings of the ICD-9-CM 
Coordination and Maintenance Committee. The minutes of these two 
meetings are posted on the CMS Web site at: http://www.cms.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. We will continue to work 
with the public to explain how we are approaching the conversion of MS-
DRGs to ICD-10 and will post drafts of updates as they are developed 
for public review. The final version of the ICD-10 MS-DRGs to be 
implemented in FY 2014 will be subject to notice and comment 
rulemaking. In the meantime, we will provide extensive and detailed 
information on this activity through the ICD-9-CM Coordination and 
Maintenance Committee.
14. Other Issues
a. O.R./Non-O.R. Status of Procedures
(1) Brachytherapy Code
    We received a request that we add ICD-9-CM procedure code 92.27 
(Implantation or Insertion of Radioactive Elements) [Brachytherapy] 
into 41 MS-DRGs that are listed below:

 129 (Major Head and Neck Procedures with CC/MCC or Major 
Device)
 130 (Major Head and Neck Procedures without CC/MCC)
 163 (Major Chest Procedures with MCC)
 164 (Major Chest Procedures with CC)
 165 (Major Chest Procedures without CC/MCC)
 180 (Respiratory Neoplasms with MCC)
 181 (Respiratory Neoplasms with CC)
 182 (Respiratory Neoplasms without CC/MCC)
 326 (Stomach, Esophageal and Duodenal Procedures with MCC)
 327 (Stomach, Esophageal and Duodenal Procedures with CC)
 328 (Stomach, Esophageal and Duodenal Procedures without CC/
MCC)
 329 (Major Small and Large Bowel Procedures with MCC)
 330 (Major Small and Large Bowel Procedures with CC)
 331 (Major Small and Large Bowel Procedures without CC/MCC)
 332 (Rectal Resection with MCC)
 333 (Rectal Resection with CC)
 334 (Rectal Resection without CC/MCC)
 344 (Minor Small and Large Bowel Procedures with MCC)
 345 (Minor Small and Large Bowel Procedures with CC)
 346 (Minor Small and Large Bowel Procedures without CC/MCC)
 347 (Anal and Stomal Procedures with MCC)
 348 (Anal and Stomal Procedures with CC)
 349 (Anal and Stomal Procedures without CC/MCC)
 405 (Pancreas, Liver and Shunt Procedures with MCC)
 406 (Pancreas, Liver and Shunt Procedures with CC)
 407 (Pancreas, Liver and Shunt Procedures without CC/MCC)
 490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC 
or Disc Device/Neurostimulator)
 491 (Back and Neck Procedures Except Spinal Fusion without CC/
MCC)

[[Page 51554]]

 500 (Soft Tissue procedures with MCC)
 501 (Soft Tissue procedures with CC)
 502 (Soft Tissue procedures without CC/MCC)
 584 (Breast Biopsy, Local Excision and Other Breast Procedures 
with CC/MCC)
 585 (Breast Biopsy, Local Excision and Other Breast Procedures 
without CC/MCC)
 597 (Malignant Breast Disorders with MCC)
 598 (Malignant Breast Disorders with CC)
 599 (Malignant Breast Disorders without CC/MCC)
 653 (Major Bladder Procedures with MCC)
 654 (Major Bladder Procedures with CC)
 655 (Major Bladder Procedures without CC/MCC)
 656 (Kidney and Ureter Procedures for Neoplasm with MCC)
 657 (Kidney and Ureter Procedures for Neoplasm with CC)
 658 (Kidney and Ureter Procedures for Neoplasm without CC/MCC)
 662 (Minor Bladder Procedures with MCC)
 663 (Minor Bladder Procedures with CC)
 664 (Minor Bladder Procedures without CC/MCC)
 668 (Transurethral Procedures with MCC)
 669 (Transurethral Procedures with CC)
 670 (Transurethral Procedures without CC/MCC)
 671 (Urethral Procedures with CC/MCC)
 672 (Urethral Procedures without CC/MCC)
 707 (Major Male Pelvic Procedures with CC/MCC)
 708 (Major Male Pelvic Procedures without CC/MCC)
 736 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy with MCC)
 737 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy with CC)
 738 (Uterine and Adnexa Procedures for Ovarian or Adnexal 
Malignancy without CC/MCC)
 739 (Uterine and Adnexa Procedures for Nonovarian or Adnexal 
Malignancy with MCC)
 740 (Uterine and Adnexa Procedures for Nonovarian or Adnexal 
Malignancy with CC)
 741 (Uterine and Adnexa Procedures for Nonovarian or Adnexal 
Malignancy without CC/MCC)
 746 (Vagina, Cervix and Vulva Procedures with CC/MCC)
 747 (Vagina Cervix and Vulva Procedures without CC/MCC)
 748 (Female Reproductive System Reconstructive Procedures)
 749 (Other Female Reproductive System O.R. Procedures with CC/
MCC)
 750 (Other Female Reproductive System O.R. Procedures without 
CC/MCC)

    For the FY 2012 IPPS/LTCH PPS proposed rule, we examined MedPAR 
claims data on this request and only found 150 cases throughout these 
MS-DRGs. Our findings are presented in the table below.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         MS-DRG with Code 92.27                                                      MS-DRG without Code 92.27
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                            Number of    Average length                      Number of    Average length
                          DRG                                 cases          of stay      Average costs        cases          of stay      Average costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
129....................................................               6            6.67         $15,793            1,326            5.35         $14,400
130....................................................               2            1.00           7,587              904            2.78           7,860
163....................................................              17            8.18          24,166           11,871           13.90          31,860
164....................................................              52            5.94          17,505           16,487            7.13          16,865
165....................................................              41            2.95          10,638            9,260            4.27          11,754
180....................................................               0            0                  0           19,304            7.37          11,396
181....................................................               0            0                  0           22,205            5.30           8,014
182....................................................               0            0                  0            2,365            3.59           5,580
326....................................................               0            0                  0           10,321           15.48          35,437
327....................................................               1            4.00           9,302            9,671            8.67          17,889
328....................................................               0            0                  0            8,461            3.49           9,161
329....................................................               1           24.00          37,654           41,107           15.10          33,003
330....................................................               2            9.00          20,043           53,584            8.91          16,736
331....................................................               0            0                  0           22,105            5.13          10,654
332....................................................               1           48.00          61,169            1,439           13.40          29,727
333....................................................               1           10.00          11,446            4,494            7.86          16,008
334....................................................               1           16.00          27,312            2,855            4.76          10,518
344....................................................               0            0                  0              756           11.30          21,590
345....................................................               0            0                  0            2,906            6.67          11,190
346....................................................               0            0                  0            2,331            4.52           7,757
347....................................................               0            0                  0            1,430            8.80          16,644
348....................................................               0            0                  0            3,975            5.40           9,326
349....................................................               0            0                  0            3,512            2.75           5,311
405....................................................               1            8.00           8,444            3,940           15.45          35,970
406....................................................               2           10.50          23,231            4,749            7.83          17,333
407....................................................               0            0                  0            1,799            8.04          12,148
490....................................................               0            0                  0           19,840            4.24          11,940
491....................................................               0            0                  0           38,574            2.05           6,794
500....................................................               0            0                  0            1,935           10.86          20,600
501....................................................               5            7.00          12,896            4,961            5.77          10,256
502....................................................               5            7.40          13,876            5,009            2.78           6,844
584....................................................               0            0                  0              790            5.32          11,126
585....................................................               0            0                  0            1,318            2.12           7,283
597....................................................               0            0                  0              532            7.41          10,990
598....................................................               0            0                  0            1,369            5.32           7,624
599....................................................               0            0                  0              165            3.26           4,368
653....................................................  ..............  ..............  ...............           1,589           16.34          35,856
654....................................................  ..............  ..............  ...............           3,502            9.13          19,367
655....................................................               0            0                  0            1,121            5.53         413,162

[[Page 51555]]

 
656....................................................               1           20.00          77,737            3,110           10.00          24,022
657....................................................               0            0                  0            7,885            5.63          13,345
658....................................................               0            0                  0            6,150            3.25           9,718
662....................................................               0            0                  0              763           10.21          19,455
663....................................................               0            0                  0            1,818            2.18           9,729
664....................................................               0            0                  0            2,705            1.86           7,457
668....................................................               2            3.50           3,972            2,908            8.99          16,852
669....................................................               4            6.50           7,832           13,776            4.25           8,398
670....................................................               2            1.50           5,639            7,321            2.24           5,158
671....................................................               0            0                  0              746            5.45           9,778
672....................................................               0            0                  0              613            2.31           5,575
707....................................................               0            0                  0            4,719            4.26          12,080
708....................................................               1            3.00          11,252           14,329            1.80           8,572
736....................................................               0            0                  0              775           13.18          29,827
737....................................................               1            6.00          13,045            2,844            6.49          13,348
738....................................................               0            0                  0              642            3.47           7,966
739....................................................               0            0                  0              790           10.18          23,070
740....................................................               0            0                  0            3,914            4.34          10,214
741....................................................               1            1.00           3,225            4,917            2.31           7,438
746....................................................               0            0                  0            2,282            3.97           8,504
747....................................................               0            0                  0            6,243            1.72           5,995
748....................................................               0            0                  0           14,682            1.67           6,285
749....................................................               0            0                  0              920            8.58          16,781
750....................................................               0            0                  0              285            2.88           7,116
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The numbers of cases in any of the MS-DRGs listed were minimal. 
Many of the MS-DRGs listed had no occurrences of procedure code 92.27. 
The highest number of cases found was 52, in MS-DRG 164 (Major Chest 
Procedures with CC). Based on these findings, we do not believe that 
making a MS-DRG change based on such a minimal number of cases can be 
justified. Therefore, for FY 2012, we did not propose to add procedure 
code 92.27 to any of the 41 MS-DRGs listed above. Further, we did not 
propose any MS-DRG changes for procedure code 92.27. We welcomed public 
comment on our proposal not to make changes to procedure code 92.27.
    Comment: Several commenters supported our proposal to not add 
procedure code 92.27 to any of the 41 MS-DRGs listed above and to not 
propose any MS-DRG changes for procedure code 92.27.
    Response: We appreciate the commenters' support.
    After consideration of the public comments we received, as we 
proposed, we are not adding procedure code 92.27 to any of the 41 MS-
DRGs listed above and are not making any MS-DRG changes for procedure 
code 92.27 for FY 2012.
(2) Intraoperative Electron Radiation Therapy (IOERT)
    We received a public comment that was outside of the scope of the 
FY 2011 IPPS/LTCH PPS proposed rule regarding the MS-DRG assignment for 
intraoperative electron radiation therapy (IOERT). This issue was 
discussed briefly in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50128). However, we addressed this issue in the FY 2012 IPPS/LTCH PPS 
rulemaking. IOERT is the direct application of radiation to a tumor 
and/or tumor bed while the patient is undergoing surgery for cancer. 
This technology may be used for cancers of the rectum, head/neck, 
pancreas, lung, genitourinary, soft tissue, and breast. IOERT is a 
secondary procedure performed during the primary tumor removal surgery.
    The commenter requested that CMS update the MS-DRG assignments for 
procedure code 92.41 (Intraoperative electron radiation therapy) to 
ensure that the cost of this technology is captured in each MS-DRG 
involving tumor removal in the rectum, head/neck, pancreas, lung, 
genitourinary, soft tissue, and breast. Currently, this code is not 
assigned to a specific MS-DRG as the primary procedure performed, the 
tumor removal, would determine the appropriate MS-DRG assignment.
    The commenter provided a recommended list of MS-DRGs to which IOERT 
should be assigned:

------------------------------------------------------------------------
                 MS-DRG                            Description
------------------------------------------------------------------------
129....................................  Major Head and Neck Procedures
                                          with CC/MCC or Major Device.
130....................................  Major Head and Neck Procedures
                                          without CC/MCC.
133....................................  Other Ear, Nose, Mouth and
                                          Throat O,R, Procedures with CC/
                                          MCC.
134....................................  Other Ear, Nose, Mouth and
                                          Throat O.R. Procedures without
                                          CC/MCC.
163....................................  Major Chest Procedures with
                                          MCC.
164....................................  Major Chest Procedures with CC.
165....................................  Major Chest Procedures without
                                          CC/MCC.
166....................................  Other Respiratory System O.R.
                                          Procedures with MCC.
167....................................  Other Respiratory System O.R.
                                          Procedures with CC.
168....................................  Other Respiratory System O.R.
                                          Procedures without CC/MCC.
326....................................  Stomach, Esophageal and
                                          Duodenal Procedures with MCC.
327....................................  Stomach, Esophageal and
                                          Duodenal Procedures with CC.
328....................................  Stomach, Esophageal and
                                          Duodenal Procedures without CC/
                                          MCC.
329....................................  Major Small and Large Bowel
                                          Procedures with MCC.
330....................................  Major Small and Large Bowel
                                          Procedures with CC.
331....................................  Major Small and Large Bowel
                                          Procedures without CC/MCC.
332....................................  Rectal Resection with MCC.
333....................................  Rectal Resection with CC.
334....................................  Rectal Resection without CC/
                                          MCC.
344....................................  Minor Small and Large Bowel
                                          Procedures with MCC.
345....................................  Minor Small and Large Bowel
                                          Procedures with CC.
346....................................  Minor Small and Large Bowel
                                          Procedures without CC/MCC.
347....................................  Anal and Stomal Procedures with
                                          MCC.
348....................................  Anal and Stomal Procedures with
                                          CC.

[[Page 51556]]

 
349....................................  Anal and Stomal Procedures
                                          without CC/MCC.
356....................................  Other Digestive System O.R.
                                          Procedures with MCC.
357....................................  Other Digestive System O.R.
                                          Procedures with CC.
358....................................  Other Digestive System O.R.
                                          Procedures without CC/MCC.
405....................................  Pancreas, Liver and Shunt
                                          Procedures with MCC.
406....................................  Pancreas, Liver and Shunt
                                          Procedures with CC.
407....................................  Pancreas, Liver and Shunt
                                          Procedures without CC/MCC.
490....................................  Back and Neck Procedures Except
                                          Spinal Fusion with CC/MCC.
491....................................  Back and Neck Procedures Except
                                          Spinal Fusion without CC/MCC.
500....................................  Soft Tissue Procedures with
                                          MCC.
501....................................  Soft Tissue Procedures with CC.
502....................................  Soft Tissue Procedures without
                                          CC/MCC.
579....................................  Other Skin, Subcutaneous Tissue
                                          and Breast Procedures with
                                          MCC.
580....................................  Other Skin, Subcutaneous Tissue
                                          and Breast Procedures with CC.
581....................................  Other Skin, Subcutaneous Tissue
                                          and Breast Procedures without
                                          CC/MCC.
584....................................  Breast Biopsy, Local Excision
                                          and Other Breast Procedures
                                          with CC/MCC.
585....................................  Breast Biopsy, Local Excision
                                          and Other Breast Procedures
                                          without CC/MCC.
653....................................  Major Bladder Procedures with
                                          MCC.
654....................................  Major Bladder Procedures with
                                          CC.
655....................................  Major Bladder Procedures
                                          without CC/MCC.
656....................................  Kidney and Ureter Procedures
                                          For Neoplasm with MCC.
657....................................  Kidney and Ureter Procedures
                                          For Neoplasm with CC.
658....................................  Kidney and Ureter Procedures
                                          for Neoplasm without MCC/CC.
662....................................  Minor Bladder Procedures with
                                          MCC.
663....................................  Minor Bladder Procedures with
                                          CC.
664....................................  Minor Bladder Procedures
                                          without CC/MCC.
668....................................  Transurethral Procedures with
                                          MCC.
669....................................  Transurethral Procedures with
                                          CC.
670....................................  Transurethral Procedures
                                          without CC/MCC.
671....................................  Urethral Procedures with CC/
                                          MCC.
672....................................  Urethral Procedures without CC/
                                          MCC.
707....................................  Major Male Pelvic Procedures
                                          with CC/MCC.
708....................................  Major Male Pelvic Procedures
                                          without CC/MCC.
715....................................  Other Male Reproductive System
                                          O.R. Procedures For Malignancy
                                          with CC/MCC.
716....................................  Other Male Reproductive System
                                          O.R. Procedures For Malignancy
                                          without CC/MCC.
736....................................  Uterine and Adnexa Procedures
                                          for Ovarian or Adnexal
                                          Malignancy with MCC.
737....................................  Uterine and Adnexa Procedures
                                          for Ovarian or Adnexal
                                          Malignancy with CC.
738....................................  Uterine and Adnexa Procedures
                                          for Ovarian or Adnexal
                                          Malignancy without CC/MCC.
739....................................  Uterine and Adnexa Procedures
                                          for Nonovarian or Adnexal
                                          Malignancy with MCC.
740....................................  Uterine and Adnexa Procedures
                                          for Nonovarian or Adnexal
                                          Malignancy with CC.
741....................................  Uterine and Adnexa Procedures
                                          for Nonovarian or Adnexal
                                          Malignancy without CC/MCC.
746....................................  Vagina, Cervix and Vulva
                                          Procedures with CC/MCC.
747....................................  Vagina Cervix and Vulva
                                          Procedures without CC/MCC.
748....................................  Female Reproductive System
                                          Reconstructive Procedures.
749....................................  Other Female Reproductive
                                          System O.R. Procedures with CC/
                                          MCC.
750....................................  Other Female Reproductive
                                          System O.R. Procedures without
                                          CC/MCC.
------------------------------------------------------------------------

    For the FY 2012 IPPS/LTCH PPS proposed rule, based on our review of 
the FY 2010 MedPAR claims data, we found a total of 12 cases with 
procedure code 92.41 reported. There were three cases assigned to MS-
DRG 502; two cases each assigned to two different MS-DRGs: MS-DRG 333 
and MS-DRG 501; and one case assigned each to five MS-DRGs: MS-DRGs 
130, 168, 327, 329, and 330.
    The IOERT cases were assigned to an MS-DRG that included the tumor 
removal of that particular site, which was listed on the table above. 
Therefore, the cost of this technology is appropriately identified in 
the MS-DRG assignment for the removal of the tumor by specific site, 
and no change is warranted at this time. Therefore, we did not propose 
any changes to the assignment for IOERT cases for FY 2012. We invited 
public comment on our proposal to not change the assignment for IOERT 
cases for FY 2012.
    Comment: Several commenters supported our proposal to not make any 
MS-DRG modifications for FY 2012 for IOERT cases reported with 
procedure code 92.41.
    Response: We appreciate the commenters' support. Based on our 
findings, these cases are appropriately assigned to the MS-DRG for the 
removal of the tumor by specific site and warrant no further 
modification.
    After consideration of the public comments we received, we are 
finalizing our proposal to not make any MS-DRG modifications for FY 
2012 for intraoperative electron radiation therapy cases.
b. IPPS Recalled Device Policy Clarification
    In the FY 2008 IPPS final rule with comment period (72 FR 47246 
through 47251), we discussed the topic of Medicare payment for devices 
that are replaced without cost or where credit for a replaced device is 
furnished to the hospital. We implemented a policy to reduce a 
hospital's IPPS payment for certain MS-DRGs where the implantation of a 
device that has been recalled determined the base MS-DRG assignment. At 
that time, we specified that we would reduce a hospital's IPPS payment 
for those MS-DRGs where the hospital received a credit equal to 50 
percent or more of the cost of the device when a manufacturer provided 
a credit for a recalled device.
    A similar policy was adopted under the Hospital Outpatient 
Prospective Payment System (OPPS) in CY 2008 (the ``partial credit'' 
policy). This policy can be viewed in its entirety at 72 FR 66743 
though 66748. In general terms, under the partial credit policy, CMS 
reduces the amount of payment for an implanted device made under the 
OPPS for which CMS determines that a significant portion of the payment 
is attributable to the cost of an implanted device when the provider 
receives partial credit for the cost of a replaced device, but only 
where the amount of the device credit is greater than or equal to 50 
percent of the cost of the new replacement device being implanted.
    It came to our attention that there is a discrepancy between the 
IPPS policy and the OPPS partial credit policy for replacement devices. 
In particular, the OPPS partial credit policy specifies that the credit 
must be 50 percent or greater of the cost of the replacement device. 
However, the IPPS policy does not specify whether the credit should be 
50 percent or greater of the replacement device or the original device. 
We believe that the OPPS partial credit policy and the IPPS policy 
should be consistent with each other on the issue of whether the 50 
percent or more credit is with respect to the replacement device or the 
original device. Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule, 
we proposed to clarify the IPPS policy to state that the policy applies 
where ``the hospital received a credit equal to 50 percent or more of 
the cost of the replacement device.'' We invited public comment on this 
proposal.
    Comment: Several commenters approved of parallel policies for 
recalled

[[Page 51557]]

device credit for both the inpatient setting and the outpatient 
hospital setting.
    Response: We appreciate the commenters' support.
    Comment: One commenter suggested additional clarifications. The 
commenter recommended that CMS reconcile condition codes 49 and 50 with 
the ``FB'' and ``FC'' modifiers from OPPS to include devices obtained 
at reduced or no cost for reasons other than those currently specified 
in condition codes 49 and 50. Condition code 49 addresses ``product 
replacement within product lifecycle'' while condition code 50 covers 
``product replacement for known recall of a product.'' The commenter 
stated that, as currently defined, these two condition codes do not 
represent all of the reasons that devices are obtained at reduced or no 
cost and, therefore, create confusion as to when the device credit 
policy applies. The commenter added that, by comparison, in OPPS, 
modifier ``FB'' covers ``devices that are obtained at no cost to the 
provider'' and modifier ``FC'' covers ``partial credit received for 
replaced device.'' Further, the commenter stated, the definitions of 
the ``FB'' and ``FC'' modifiers denote whether the replacement device 
was obtained at no cost or reduced cost, and generally reflect all 
situations when the device credit policy would apply. As part of the 
clarification, the commenter suggested that CMS further explain whether 
value code ``FD'' as well as modifiers ``FB'' and ``FC'' are for 
``replacement'' devices only.
    Response: We are not clear about the clarifications suggested by 
the commenter. The OPPS modifier ``-FB'' (Item Provided without Cost to 
Provider, Supplier or Practitioner) can be used to describe an item 
provided under warranty, replaced due to defect, or provided as a free 
sample. OPPS modifier ``-FC'' (Partial Credit Received for Replaced 
Device) describes cases in which the hospital receives a partial credit 
of 50 percent or more of the cost of a new replacement device under 
warranty, recall, or field action.
    Value code ``FD'' is used for Medicare Part A reporting of 
replacement devices. Hospitals must use the combination of condition 
code 49 or 50, described above, along with value code ``FD'' to 
correctly bill for a replacement device that was provided with a credit 
or no cost. Condition code 49 or 50 identifies a replacement device 
while value code ``FD'' communicates to Medicare the amount of the 
credit, or cost reduction, received by the hospital for the replaced 
device. We do not believe that hospitals find these reporting 
requirements confusing. Regardless of the actual reason that a device 
is provided at no cost to a hospital or an ambulatory surgical center 
(ASC), the end result is that neither the hospital nor the ASC is 
incurring the full cost of the device, although the Medicare payment is 
calculated based on the full cost of the device.
    Comment: One commenter pointed out that the FY 2009 IPPS/LTCH PPS 
final rule (73 FR 48496) finalized an MS-DRG change by removing several 
procedure codes for AICD leads from MS-DRG 245 as well as revising the 
title of that MS-DRG to read ``AICD Generator Procedures''. New MS-DRG 
265 (AICD Lead Procedures) was also created and included the AICD lead 
procedure codes that were transferred from MS-DRG 245. The commenter 
pointed out that CMS has not issued a new table through its transmittal 
process indicating that MS-DRG 265 should also be included in the list 
of MS-DRGs that are subject to the device recall policy.
    Response: We are aware of this oversight and have begun the process 
to create an updated Change Request to address this issue. We expect to 
issue the Change Request shortly.
    Comment: One commenter suggested that no-charge devices should be 
removed from the calculation of MS-DRG relative weights.
    Response: We appreciate this comment, but we point out that no-
charge devices are not reported on claims. Therefore, charges for the 
device have not been included in the computation of the MS-DRG relative 
weights.
    After consideration of the public comments we received, we are 
finalizing our proposed clarification of the IPPS recalled device 
policy to state that the policy applies where ``the hospital received a 
credit equal to 50 percent or more of the cost of the replacement 
device,'' and we will issue instructions to hospitals accordingly.
15. Public Comments on Issues Not Addressed in the Proposed Rule
    We received a number of public comments regarding MS-DRG issues 
that were outside the scope of the proposals included in the FY 2012 
IPPS/LTCH PPS proposed rule. We have summarized these public comments 
below. However, because these public comments were outside of the scope 
of the proposed rule, we are not addressing them in this final rule. As 
stated in section II.B.2. of this preamble, we encourage individuals 
with comments about MS-DRG classifications to submit these comments no 
later than December of each year so they can be considered for possible 
inclusion in the annual proposed rule and, if included, may be 
subjected to public review and comment. We will consider these comments 
for possible proposals in future rulemaking as part of our annual 
review process.
    Commenters requested that CMS create new MS-DRGs for (1) disorders 
of porphyrin metabolism and (2) related and unrelated allogeneic bone 
marrow transplants. The commenters also requested that CMS create a new 
MS-DRG that would distinguish between ventricular assist device (VAD) 
implantation and heart transplants.
    Commenters requested that CMS evaluate the non-CC, CC, or MCC 
designation of the following codes:

 263.0 (Malnutrition of moderate degree)
 263.1 (Malnutrition of mild degree)
 263.9 (Unspecified protein-calorie malnutrition)
 285.3 (Antineoplastic chemotherapy induced anemia)
 425.4-425.9 (Cardiomyopathy)
 428.0 (Heart failure, unspecified)
 707.25 (Pressure ulcer, unstageable)

    One commenter recommended that CMS consider the reassignment of 
cases of patients diagnosed with influenza with pneumonia and who also 
have secondary diagnoses that would otherwise qualify the assignment of 
the cases to MS-DRGs 177 (Respiratory Infections and Inflammations with 
MCC), 178 (Respiratory Infections and Inflammations with CC), and 179 
(Respiratory Infections and Inflammations without MCC/CC). The 
commenter recommended these cases be reassigned from MS-DRGs 193 
(Simple Pneumonia and Pleurisy with MCC), 194 (Simple Pneumonia and 
Pleurisy with CC), and 195 (Simple Pneumonia and Pleurisy without MCC/
CC) to MS-DRGs 177, 178, and 179.

H. Recalibration of MS-DRG Weights

    In developing the FY 2012 system of weights, we used two data 
sources: claims data and cost report data. As in previous years, the 
claims data source is the MedPAR file. This file is based on fully 
coded diagnostic and procedure data for all Medicare inpatient hospital 
bills. The FY 2010 MedPAR data used in this final rule include 
discharges occurring on October 1, 2009, through September 30, 2010, 
based on bills received by CMS through March 31, 2011, from all 
hospitals subject to the IPPS and short-term, acute care hospitals in 
Maryland (which are under a waiver from the IPPS under section 
1814(b)(3) of the Act). The FY 2010

[[Page 51558]]

MedPAR file used in calculating the relative weights includes data for 
approximately 10,836,723 Medicare discharges from IPPS providers. 
Discharges for Medicare beneficiaries enrolled in a Medicare Advantage 
managed care plan are excluded from this analysis. These discharges are 
excluded when the MedPAR ``GHO Paid'' indicator field on the claim 
record is equal to ``1'' or when the MedPAR DRG payment field, which 
represents the total payment for the claim, is equal to the MedPAR 
``Indirect Medical Education (IME)'' payment field, indicating that the 
claim was an ``IME only'' claim submitted by a teaching hospital on 
behalf of a beneficiary enrolled in a Medicare Advantage managed care 
plan. In addition, the March 31, 2011 update of the FY 2010 MedPAR was 
updated to comply with version 5010 of the X12 HIPAA Transaction and 
Code Set Standards. The expansion of the MedPAR to the 5010 format 
includes a new variable called ``claim type.'' Claim type ``60'' 
indicates that the claim was an inpatient claim paid as fee-for-
service. Claim types of ``61,'' ``62,'' ``63,'' and ``64'' relate to 
encounter claims, Medicare Advantage IME claims, and HMO no-pay claims. 
Therefore, beginning with the calculation of the relative weights for 
FY 2012, we are also excluding claims with claim type values not equal 
to ``60.'' The data exclude CAHs, including hospitals that subsequently 
became CAHs after the period from which the data were taken. The second 
data source used in the cost-based relative weighting methodology is 
the FY 2009 Medicare cost report data files from HCRIS (that is, cost 
reports beginning on or after October 1, 2008, and before October 1, 
2009), which represents the most recent full set of cost report data 
available. We used the March 31, 2011 update of the HCRIS cost report 
files for FY 2009 in setting the relative cost-based weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2010 MedPAR claims data and FY 2009 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the FY 2012 MS-DRG classifications discussed in sections II.B. 
and G. of the preamble of this final rule.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2010 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each MS-DRG and before 
eliminating statistical outliers.
     Claims with total charges or total lengths of stay less 
than or equal to zero were deleted. Claims that had an amount in the 
total charge field that differed by more than $10.00 from the sum of 
the routine day charges, intensive care charges, pharmacy charges, 
special equipment charges, therapy services charges, operating room 
charges, cardiology charges, laboratory charges, radiology charges, 
other service charges, labor and delivery charges, inhalation therapy 
charges, emergency room charges, blood charges, and anesthesia charges 
were also deleted.
     At least 96.2 percent of the providers in the MedPAR file 
had charges for 10 of the 15 cost centers. Claims for providers that 
did not have charges greater than zero for at least 10 of the 15 cost 
centers were deleted.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each MS-DRG.
     Effective October 1, 2008, because hospital inpatient 
claims include a POA indicator field for each diagnosis present on the 
claim, only for purposes of relative weight-setting, the POA indicator 
field was reset to ``Y'' for ``Yes'' for all claims that otherwise have 
an ``N'' (No) or a ``U'' (documentation insufficient to determine if 
the condition was present at the time of inpatient admission) in the 
POA field.
    Under current payment policy, the presence of specific HAC codes, 
as indicated by the POA field values, can generate a lower payment for 
the claim. Specifically, if the particular condition is present on 
admission (that is, a ``Y'' indicator is associated with the diagnosis 
on the claim), it is not a HAC, and the hospital is paid for the higher 
severity (and, therefore, the higher weighted MS-DRG). If the 
particular condition is not present on admission (that is, an ``N'' 
indicator is associated with the diagnosis on the claim) and there are 
no other complicating conditions, the DRG GROUPER assigns the claim to 
a lower severity (and, therefore, the lower weighted MS-DRG) as a 
penalty for allowing a Medicare inpatient to contract a HAC. While the 
POA reporting meets policy goals of encouraging quality care and 
generates program savings, it presents an issue for the relative 
weight-setting process. Because cases identified as HACs are likely to 
be more complex than similar cases that are not identified as HACs, the 
charges associated with HAC cases are likely to be higher as well. 
Thus, if the higher charges of these HAC claims are grouped into lower 
severity MS-DRGs prior to the relative weight-setting process, the 
relative weights of these particular MS-DRGs would become artificially 
inflated, potentially skewing the relative weights. In addition, we 
want to protect the integrity of the budget neutrality process by 
ensuring that, in estimating payments, no increase to the standardized 
amount occurs as a result of lower overall payments in a previous year 
that stem from using weights and case-mix that are based on lower 
severity MS-DRG assignments. If this would occur, the anticipated cost 
savings from the HAC policy would be lost.
    To avoid these problems, we reset the POA indicator field to ``Y'' 
only for relative weight-setting purposes for all claims that otherwise 
have a ``N'' or an ``U'' in the POA field. This resetting ``forced'' 
the more costly HAC claims into the higher severity MS-DRGs as 
appropriate, and the relative weights calculated for each MS-DRG more 
closely reflect the true costs of those cases.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 15 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals in Alaska and Hawaii, the 
applicable cost-of-living adjustment. Because hospital charges include 
charges for both operating and capital costs, we standardized total 
charges to remove the effects of differences in geographic adjustment 
factors, cost-of-living adjustments, and DSH payments under the capital 
IPPS as well. Charges were then summed by MS-DRG for each of the 15 
cost groups so that each MS-DRG had 15 standardized charge totals. 
These charges were then adjusted to cost by applying the national 
average CCRs developed from the FY 2009 cost report data.

[[Page 51559]]

    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. The table shows the lines on the cost 
report and the corresponding revenue codes that we used to create the 
15 national cost center CCRs.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

[[Page 51571]]

    We developed the national average CCRs as follows:
    Taking the FY 2009 cost report data, we removed CAHs, Indian Health 
Service hospitals, all-inclusive rate hospitals, and cost reports that 
represented time periods of less than 1 year (365 days). We included 
hospitals located in Maryland because we include their charges in our 
claims database. We then created CCRs for each provider for each cost 
center (see prior table for line items used in the calculations) and 
removed any CCRs that were greater than 10 or less than 0.01. We 
normalized the departmental CCRs by dividing the CCR for each 
department by the total CCR for the hospital for the purpose of 
trimming the data. We then took the logs of the normalized cost center 
CCRs and removed any cost center CCRs where the log of the cost center 
CCR was greater or less than the mean log plus/minus 3 times the 
standard deviation for the log of that cost center CCR. Once the cost 
report data were trimmed, we calculated a Medicare-specific CCR. The 
Medicare-specific CCR was determined by taking the Medicare charges for 
each line item from Worksheet D-4 and deriving the Medicare-specific 
costs by applying the hospital-specific departmental CCRs to the 
Medicare-specific charges for each line item from Worksheet D-4. Once 
each hospital's Medicare-specific costs were established, we summed the 
total Medicare-specific costs and divided by the sum of the total 
Medicare-specific charges to produce national average, charge-weighted 
CCRs.
    After we multiplied the total charges for each MS-DRG in each of 
the 15 cost centers by the corresponding national average CCR, we 
summed the 15 ``costs'' across each MS-DRG to produce a total 
standardized cost for the MS-DRG. The average standardized cost for 
each MS-DRG was then computed as the total standardized cost for the 
MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The 
average cost for each MS-DRG was then divided by the national average 
standardized cost per case to determine the relative weight.
    The new cost-based relative weights were then normalized by an 
adjustment factor of 1.5808272736 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. The normalization adjustment is intended to ensure that 
recalibration by itself neither increases nor decreases total payments 
under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.
    The 15 national average CCRs for FY 2012 are as follows:

------------------------------------------------------------------------
                            Group                                 CCR
------------------------------------------------------------------------
Routine Days.................................................      0.525
Intensive Days...............................................      0.453
Drugs........................................................      0.199
Supplies & Equipment.........................................      0.329
Therapy Services.............................................      0.380
Laboratory...................................................      0.146
Operating Room...............................................      0.251
Cardiology...................................................      0.155
Radiology....................................................      0.140
Emergency Room...............................................      0.236
Blood and Blood Products.....................................      0.402
Other Services...............................................      0.402
Labor & Delivery.............................................      0.454
Inhalation Therapy...........................................      0.191
Anesthesia...................................................      0.116
------------------------------------------------------------------------

    Since FY 2009, the relative weights have been based on 100 percent 
cost weights based on our MS-DRG grouping system.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. In the FY 2012 IPPS/LTCH PPS proposed 
rule, we proposed to use that same case threshold in recalibrating the 
MS-DRG weights for FY 2012. Using the FY 2010 MedPAR data set, there 
were 8 MS-DRGs that contain fewer than 10 cases. Under the MS-DRGs, we 
have fewer low-volume DRGs than under the CMS DRGs because we no longer 
have separate DRGs for patients aged 0 to 17 years. With the exception 
of newborns, we previously separated some DRGs based on whether the 
patient was age 0 to 17 years or age 17 years and older. Other than the 
age split, cases grouping to these DRGs are identical. The DRGs for 
patients aged 0 to 17 years generally have very low volumes because 
children are typically ineligible for Medicare. In the past, we have 
found that the low volume of cases for the pediatric DRGs could lead to 
significant year-to-year instability in their relative weights. 
Although we have always encouraged non-Medicare payers to develop 
weights applicable to their own patient populations, we have heard 
frequent complaints from providers about the use of the Medicare 
relative weights in the pediatric population. We believe that 
eliminating this age split in the MS-DRGs will provide more stable 
payment for pediatric cases by determining their payment using adult 
cases that are much higher in total volume. Newborns are unique and 
require separate MS-DRGs that are not mirrored in the adult population. 
Therefore, it remains necessary to retain separate MS-DRGs for 
newborns. All of the low-volume MS-DRGs listed below are for newborns. 
In FY 2012, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we 
proposed to compute weights for the low-volume MS-DRGs by adjusting 
their FY 2011 weights by the percentage change in the average weight of 
the cases in other MS-DRGs. The crosswalk table is shown below:

----------------------------------------------------------------------------------------------------------------
         Low[dash]volume  MS-DRG                      MS-DRG title                     Crosswalk to MS-DRG
----------------------------------------------------------------------------------------------------------------
768.....................................  Vaginal Delivery with O.R. Procedure  FY 2011 FR weight (adjusted by
                                           Except Sterilization and/or D&C.      percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
789.....................................  Neonates, Died or Transferred to      FY 2011 FR weight (adjusted by
                                           Another Acute Care Facility.          percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
790.....................................  Extreme Immaturity or Respiratory     FY 2011 FR weight (adjusted by
                                           Distress Syndrome, Neonate.           percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
791.....................................  Prematurity with Major Problems.....  FY 2011 FR weight (adjusted by
                                                                                 percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
792.....................................  Prematurity without Major Problems..  FY 2011 FR weight (adjusted by
                                                                                 percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
793.....................................  Full-Term Neonate with Major          FY 2011 FR weight (adjusted by
                                           Problems.                             percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
794.....................................  Neonate with Other Significant        FY 2011 FR weight (adjusted by
                                           Problems.                             percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
795.....................................  Normal Newborn......................  FY 2011 FR weight (adjusted by
                                                                                 percent change in average
                                                                                 weight of the cases in other MS-
                                                                                 DRGs).
----------------------------------------------------------------------------------------------------------------

[[Page 51572]]

    We did not receive any public comments on this section. Therefore, 
we are adopting the national average CCRs as proposed, with the MS-DRG 
weights recalibrated based on these CCRs.

I. Add-On Payments for New Services and Technologies

1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies (sometimes collectively referred to in this section as 
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the 
Act specifies that a medical service or technology will be considered 
new if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that a new medical service or technology may be considered 
for new technology add-on payment if, ``based on the estimated costs 
incurred with respect to discharges involving such service or 
technology, the DRG prospective payment rate otherwise applicable to 
such discharges under this subsection is inadequate.'' We note that 
beginning with discharges occurring in FY 2008, CMS transitioned from 
CMS-DRGs to MS-DRGs.
    The regulations implementing these provisions specify three 
criteria for a new medical service or technology to receive the 
additional payment: (1) The medical service or technology must be new; 
(2) the medical service or technology must be costly such that the DRG 
rate otherwise applicable to discharges involving the medical service 
or technology is determined to be inadequate; and (3) the service or 
technology must demonstrate a substantial clinical improvement over 
existing services or technologies. These three criteria are explained 
below in the ensuing paragraphs in further detail.
    Under the first criterion, as reflected in 42 CFR 412.87(b)(2), a 
specific medical service or technology will be considered ``new'' for 
purposes of new medical service or technology add-on payments until 
such time as Medicare data are available to fully reflect the cost of 
the technology in the MS-DRG weights through recalibration. Typically, 
there is a lag of 2 to 3 years from the point a new medical service or 
technology is first introduced on the market (generally on the date 
that the technology receives FDA approval/clearance) and when data 
reflecting the use of the medical service or technology are used to 
calculate the MS-DRG weights. For example, data from discharges 
occurring during FY 2010 were used to calculate the FY 2012 MS-DRG 
weights in this final rule. Section 412.87(b)(2) of the regulations 
therefore provides that ``a medical service or technology may be 
considered new within 2 or 3 years after the point at which data begin 
to become available reflecting the ICD-9-CM code assigned to the new 
medical service or technology (depending on when a new code is assigned 
and data on the new medical service or technology become available for 
DRG recalibration). After CMS has recalibrated the MS-DRGs, based on 
available data to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology will no longer be 
considered `new' under the criterion for this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin on the date on 
which the medical service or technology received FDA approval or 
clearance. (We note that, for purposes of this section of this final 
rule, we generally refer to both FDA approval and FDA clearance as FDA 
``approval.'') However, in some cases, there may be few to no Medicare 
data available for the new service or technology following FDA 
approval. For example, the newness period could extend beyond the 2-
year to 3-year period after FDA approval is received in cases where the 
product initially was generally unavailable to Medicare patients 
following FDA approval, such as in cases of a national noncoverage 
determination or a documented delay in bringing the product onto the 
market after that approval (for instance, component production or drug 
production has been postponed following FDA approval due to shelf life 
concerns or manufacturing issues). After the MS-DRGs have been 
recalibrated to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology is no longer eligible 
for special add-on payment for new medical services or technologies (as 
specified under Sec.  412.87(b)(2)). For example, an approved new 
technology that received FDA approval in October 2009 and entered the 
market at that time may be eligible to receive add-on payments as a new 
technology for discharges occurring before October 1, 2012 (the start 
of FY 2013). Because the FY 2013 MS-DRG weights would be calculated 
using FY 2011 MedPAR data, the costs of such a new technology would be 
fully reflected in the FY 2013 MS-DRG weights. Therefore, the new 
technology would no longer be eligible to receive add-on payments as a 
new technology for discharges occurring in FY 2013 and thereafter.
    We do not consider a service or technology to be new if it is 
substantially similar to one or more existing technologies. That is, 
even if a technology receives a new FDA approval, it may not 
necessarily be considered ``new'' for purposes of new technology add-on 
payments if it is ``substantially similar'' to a technology that was 
approved by FDA and has been on the market for more than 2 to 3 years. 
In the FY 2006 IPPS final rule (70 FR 47351), we explained our policy 
regarding substantial similarity in detail and its relevance for 
assessing if the hospital charge data used in the development of the 
relative weights for the relevant DRGs reflect the costs of the 
technology. In that final rule, we stated that, for determining 
substantial similarity, we consider (1) whether a product uses the same 
or a similar mechanism of action to achieve a therapeutic outcome, and 
(2) whether a product is assigned to the same or a different DRG. We 
indicated that both of the above criteria should be met in order for a 
technology to be considered ``substantially similar'' to an existing 
technology. However, in that same final rule, we also noted that, due 
to the complexity of issues regarding the substantial similarity 
component of the newness criterion, it may be necessary to exercise 
flexibility when considering whether technologies are substantially 
similar to one another. Specifically, we stated that we may consider 
additional factors, depending on the circumstances specific to each 
application.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43813 and 
43814), we noted that the discussion of substantial similarity in the 
FY 2006 IPPS final rule related to comparing two separate technologies 
made by different manufacturers. Nevertheless, we stated that the 
criteria discussed in the FY 2006 IPPS final rule also are relevant 
when comparing the similarity between a new use and existing uses of 
the same technology (or a very similar technology manufactured by the 
same manufacturer). In other words, we stated that it is necessary to 
establish that the new indication for which the technology has received 
FDA approval is not substantially similar to that of the prior 
indication. We explained that such a distinction is necessary to 
determine the appropriate start date of the newness period in 
evaluating whether the technology would qualify for add-on payments 
(that is, the date of the ``new'' FDA approval or that of the prior

[[Page 51573]]

approval), or whether the technology could qualify for separate new 
technology add-on payments under each indication.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43814), we 
added a third factor of consideration to our analysis of whether a new 
technology is substantially similar to one or more existing 
technologies. Specifically, in making a determination of whether a 
technology is substantially similar to an existing technology, we 
adopted a policy to consider whether the new use of the technology 
involves the treatment of the same or similar type of disease and the 
same or similar patient population (74 FR 24130), in addition to 
considering the already established factors described in the FY 2006 
IPPS final rule (that is, (1) whether a product uses the same or a 
similar mechanism of action to achieve a therapeutic outcome; and (2) 
whether a product is assigned to the same or a different DRG). As we 
noted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule, if all three 
components are present and the new use is deemed substantially similar 
to one or more of the existing uses of the technology (that is, beyond 
the newness period), we would conclude that the technology is not new 
and, therefore, is ineligible for the new technology add-on payment.
    Under the second criterion, Sec.  412.87(b)(3) further provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the MS-DRG prospective payment rate otherwise applicable 
to the discharge involving the new medical services or technologies 
must be assessed for adequacy. Under the cost criterion, to assess the 
adequacy of payment for a new technology paid under the applicable MS-
DRG prospective payment rate, we evaluate whether the charges for cases 
involving the new technology exceed certain threshold amounts. In the 
FY 2004 IPPS final rule (68 FR 45385), we established the threshold at 
the geometric mean standardized charge for all cases in the MS-DRG plus 
75 percent of 1 standard deviation above the geometric mean 
standardized charge (based on the logarithmic values of the charges and 
converted back to charges) for all cases in the MS-DRG to which the new 
medical service or technology is assigned (or the case-weighted average 
of all relevant MS-DRGs, if the new medical service or technology 
occurs in more than one MS-DRG).
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, 
CMS will apply ``a threshold * * * that is the lesser of 75 percent of 
the standardized amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard deviation for the 
diagnosis-related group involved.'' (We refer readers to section IV.D. 
of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a 
discussion of the revision of the regulations to incorporate the change 
made by section 503(b)(1) of Public Law 108-173.) Table 10 that was 
included in the IPPS/LTCH PPS final rule published in the Federal 
Register on August 16, 2010, contained the final thresholds that were 
used to evaluate applications for new technology add-on payments for 
this final rule for FY 2012 (75 FR 50605 through 50613).
    In the September 7, 2001 final rule that established the new 
technology add-on payment regulations (66 FR 46917), we discussed the 
issue of whether the Health Insurance Portability and Accountability 
Act (HIPAA) Privacy Rule at 45 CFR Parts 160 and 164 applies to claims 
information that providers submit with applications for new technology 
add-on payments. Specifically, we explained that health plans, 
including Medicare, and providers that conduct certain transactions 
electronically, including hospitals that would receive new technology 
add-on payments, are required to comply with the HIPAA Privacy Rule. We 
further explained how such entities could meet the applicable HIPAA 
requirements by discussing how the HIPAA Privacy Rule permitted 
providers to share with health plans information needed to ensure 
correct payment, if they had obtained consent from the patient to use 
that patient's data for treatment, payment, or health care operations. 
We also explained that, because the information to be provided within 
applications for new technology add-on payment would be needed to 
ensure correct payment, no additional consent would be required. The 
HHS Office for Civil Rights has since amended the HIPAA Privacy Rule, 
but the results remain. The HIPAA Privacy Rule does not require a 
covered entity to obtain consent from patients to use or disclose 
protected health information for the covered entity's treatment, 
payment, or health care operations purposes, and expressly permits such 
entities to use or to disclose protected health information for these 
purposes and for the treatment purposes of another health care provider 
and the payment purposes of another covered entity or health care 
provider. (We refer readers to 45 CFR 164.502(a)(1)(ii) and 
164.506(c)(1) and (c)(3) and the Standards for Privacy of Individually 
Identifiable Health Information published in the Federal Register (67 
FR 53208 through 53214) on August 14, 2002, for a full discussion of 
consent in the context of the HIPAA Privacy Rule.)
    Under the third criterion, Sec.  412.87(b)(1) of our existing 
regulations provides that a new technology is an appropriate candidate 
for an additional payment when it represents ``an advance that 
substantially improves, relative to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries.'' For example, a 
new technology represents a substantial clinical improvement when it 
reduces mortality, decreases the number of hospitalizations or 
physician visits, or reduces recovery time compared to the technologies 
previously available. (We refer readers to the September 7, 2001 final 
rule for a complete discussion of this criterion (66 FR 46902).)
    The new medical service or technology add-on payment policy under 
the IPPS provides additional payments for cases with relatively high 
costs involving eligible new medical services or technologies while 
preserving some of the incentives inherent under an average-based 
prospective payment system. The payment mechanism is based on the cost 
to hospitals for the new medical service or technology. Under Sec.  
412.88, if the costs of the discharge (determined by applying cost to 
charge ratios (``CCRs'') as described in Sec.  412.84(h)) exceed the 
full DRG payment (including payments for IME and DSH, but excluding 
outlier payments), Medicare will make an add-on payment equal to the 
lesser of: (1) 50 percent of the estimated costs of the new technology 
(if the estimated costs for the case including the new technology 
exceed Medicare's payment); or (2) 50 percent of the difference between 
the full DRG payment and the hospital's estimated cost for the case. 
Unless the discharge qualifies for an outlier payment, Medicare payment 
is limited to the full MS-DRG payment plus 50 percent of the estimated 
costs of the new technology.
    Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments 
to annual MS-DRG classifications and relative weights be made in a 
manner that ensures that aggregate payments to hospitals are not more 
or less than they were in the prior fiscal year (that is, they are 
``budget neutral''). Therefore, in the past, we accounted for projected 
payments under the new medical service and technology provision during 
the upcoming fiscal year, while at the

[[Page 51574]]

same time estimating the payment effect of changes to the MS-DRG 
classifications and recalibration. The impact of additional payments 
under this provision was then included in the budget neutrality factor, 
which was applied to the standardized amounts and the hospital-specific 
amounts. However, section 503(d)(2) of Public Law 108-173 provides that 
there shall be no reduction or adjustment in aggregate payments under 
the IPPS due to add-on payments for new medical services and 
technologies. Therefore, in accordance with section 503(d)(2) of Public 
Law 108-173, add-on payments for new medical services or technologies 
for FY 2005 and later years have not been subjected to budget 
neutrality.
    In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we 
modified our regulations at Sec.  412.87 to codify our longstanding 
practice of how CMS evaluates the eligibility criteria for new medical 
service or technology add-on payment applications. That is, we first 
determine whether a medical service or technology meets the newness 
criteria, and only if so, do we then make a determination as to whether 
the technology meets the cost threshold and represents a substantial 
clinical improvement over existing medical services or technologies. We 
also amended Sec.  412.87(c) to specify that all applicants for new 
technology add-on payments must have FDA approval or clearance for 
their new medical service or technology by July 1 of each year prior to 
the beginning of the fiscal year that the application is being 
considered.
    The Council on Technology and Innovation (CTI) at CMS oversees the 
agency's cross-cutting priority on coordinating coverage, coding and 
payment processes for Medicare with respect to new technologies and 
procedures, including new drug therapies, as well as promoting the 
exchange of information on new technologies between CMS and other 
entities. The CTI, composed of senior CMS staff and clinicians, was 
established under section 942(a) of Public Law 108-173. The Council is 
co-chaired by the Director of the Office of Clinical Standards and 
Quality (OCSQ) and the Director of the Center for Medicare (CM), who is 
also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CM, OCSQ, and the local claims-payment contractors (in 
the case of local coverage and payment decisions). The CTI supplements, 
rather than replaces, these processes by working to assure that all of 
these activities reflect the agency-wide priority to promote high-
quality, innovative care. At the same time, the CTI also works to 
streamline, accelerate, and improve coordination of these processes to 
ensure that they remain up to date as new issues arise. To achieve its 
goals, the CTI works to streamline and create a more transparent coding 
and payment process, improve the quality of medical decisions, and 
speed patient access to effective new treatments. It is also dedicated 
to supporting better decisions by patients and doctors in using 
Medicare-covered services through the promotion of better evidence 
development, which is critical for improving the quality of care for 
Medicare beneficiaries.
    CMS plans to continue its Open Door forums with stakeholders who 
are interested in CTI's initiatives. In addition, to improve the 
understanding of CMS' processes for coverage, coding, and payment and 
how to access them, the CTI has developed an ``Innovator's Guide'' to 
these processes. The intent is to consolidate this information, much of 
which is already available in a variety of CMS documents and in various 
places on the CMS Web site, in a user-friendly format. This guide was 
published in August 2008 and is available on the CMS Web site at: 
http://www.cms.gov/CouncilonTechInnov/Downloads/InnovatorsGuide5_10_10.pdf.
    As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we 
invite any product developers or manufacturers of new medical 
technologies to contact the agency early in the process of product 
development if they have questions or concerns about the evidence that 
would be needed later in the development process for the agency's 
coverage decisions for Medicare.
    The CTI aims to provide useful information on its activities and 
initiatives to stakeholders, including Medicare beneficiaries, 
advocates, medical product manufacturers, providers, and health policy 
experts. Stakeholders with further questions about Medicare's coverage, 
coding, and payment processes, or who want further guidance about how 
they can navigate these processes, can contact the CTI at 
CTI@cms.hhs.gov.
    We note that applicants for add-on payments for new medical 
services or technologies for FY 2013 must submit a formal request, 
including a full description of the clinical applications of the 
medical service or technology and the results of any clinical 
evaluations demonstrating that the new medical service or technology 
represents a substantial clinical improvement, along with a significant 
sample of data to demonstrate that the medical service or technology 
meets the high-cost threshold. Complete application information, along 
with final deadlines for submitting a full application, will be posted 
as it becomes available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to 
identify the new medical services or technologies under review before 
the publication of the proposed rule for FY 2013, the Web site also 
will post the tracking forms completed by each applicant.
    Comment: A number of commenters submitted public comments that 
addressed topics relating to the substantial similarity criteria, 
marginal cost factor for the new technology add-on payment, the use of 
external data in determining the cost threshold, paying new technology 
add-on payments for 2 to 3 years, mapping new technologies to the 
appropriate MS-DRG, and the use of the date that a ICD-9-CM code is 
assigned to a technology or the FDA approval date (whichever is later) 
as the start of the newness period.
    Response: We did not invite public comments nor propose to make any 
changes to any of the issues summarized above. Because these public 
comments are outside of the scope of the provisions included in the 
proposed rule, we are not providing a complete summary of the comments 
or responding to them in this final rule.
2. Public Input Before Publication of a Notice of Proposed Rulemaking 
on Add-On Payments
    Section 1886(d)(5)(K)(viii) of the Act, as amended by section 
503(b)(2) of Public Law 108-173, provides for a mechanism for public 
input before publication of a notice of proposed rulemaking regarding 
whether a medical service or technology represents a substantial 
clinical improvement or advancement. The process for evaluating new 
medical service and technology applications requires the Secretary to--
     Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries;
     Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending;
     Accept comments, recommendations, and data from the public 
regarding whether a service or

[[Page 51575]]

technology represents a substantial clinical improvement; and
     Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new medical service or 
technology represents a substantial clinical improvement to the 
clinical staff of CMS.
    In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2012 prior 
to publication of the FY 2012 IPPS/LTCH PPS proposed rule, we published 
a notice in the Federal Register on November 29, 2010 (75 FR 73091 
through 73094), and held a town hall meeting at the CMS Headquarters 
Office in Baltimore, MD, on February 2, 2011. In the announcement 
notice for the meeting, we stated that the opinions and alternatives 
provided during the meeting would assist us in our evaluations of 
applications by allowing public discussion of the substantial clinical 
improvement criterion for each of the FY 2012 new medical service and 
technology add-on payment applications before the publication of the FY 
2012 proposed rule.
    Approximately 50 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. Each of the three FY 2012 applicants presented 
information on its technology, including a discussion of data 
reflecting the substantial clinical improvement aspect of the 
technology. We considered each applicant's presentation made at the 
town hall meeting, as well as written comments submitted on the 
applications, in our evaluation of the new technology add-on 
applications for FY 2012 in the FY 2012 proposed rule and in this final 
rule.
    In response to the published notice and the new technology town 
hall meeting, we received three written comments regarding applications 
for FY 2012 new technology add-on payments. We summarized these 
comments or, if applicable, indicated that there were no comments 
received, at the end of each discussion of the individual applications 
in the proposed rule. We refer readers to the FY 2012 IPPS/LTCH PPS 
proposed rule for a complete iteration of the comments received in 
response to the published notice and the new technology town hall 
meeting and CMS' responses (76 FR 25861 through 25863).
3. FY 2012 Status of Technologies Approved for FY 2011 Add-On Payments
a. Spiration[supreg] IBV[supreg] Valve System
    Spiration, Inc. submitted an application for new technology add-on 
payments for the Spiration[supreg] IBV[supreg] Valve System 
(Spiration[supreg] IBV[supreg]). The Spiration[supreg] IBV[supreg] is a 
device that is used to place, via bronchoscopy, small, one-way valves 
into selected small airways in the lung in order to limit airflow into 
selected portions of lung tissue that have prolonged air leaks 
following surgery while still allowing mucus, fluids, and air to exit, 
thereby reducing the amount of air that enters the pleural space. The 
device is intended to control prolonged air leaks following three 
specific surgical procedures: lobectomy; segmentectomy; or lung volume 
reduction surgery (LVRS). According to the applicant, an air leak that 
is present on postoperative day 7 is considered ``prolonged'' unless 
present only during forced exhalation or cough. In order to help 
prevent valve migration, there are five anchors with tips that secure 
the valve to the airway. The implanted valves are intended to be 
removed no later than 6 weeks after implantation.
    With regard to the newness criterion, the Spiration[supreg] 
IBV[supreg] received a HDE approval from the FDA on October 24, 2008. 
We were unaware of any previously FDA-approved predicate devices, or 
otherwise similar devices, that could be considered substantially 
similar to the Spiration[supreg] IBV[supreg]. However, the applicant 
asserted that the FDA had precluded the device from being used in the 
treatment of any patients until the Institutional Review Board (IRB) 
granted approvals regarding its study sites. Therefore, the 
Spiration[supreg] IBV[supreg] met the newness criterion once it 
obtained at least one IRB approval because the device would then be 
available on the market to treat Medicare beneficiaries. In the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43819), the applicant stated 
that the first IRB approval for the Spiration[supreg] IBV[supreg] was 
March 12, 2009. In that final rule, based on the information above from 
the applicant, we determined that the Spiration[supreg] IBV[supreg] 
meets the newness criterion and the newness period for the 
Spiration[supreg] IBV[supreg] begins on March 12, 2009.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for the 
Spiration[supreg] IBV[supreg] and consideration of the public comments 
we received in response to the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule, including the additional analysis of clinical data and supporting 
information submitted by the applicant, we approved the 
Spiration[supreg] IBV[supreg] for new technology add-on payments for FY 
2010 with a maximum add-on payment of $3,437.50.
    In the FY 2011 IPPS/LTCH PPS proposed rule, we did not propose any 
changes to the new technology add-on payments for the Spiration[supreg] 
IBV[supreg]. We did not receive any public comments on whether to 
continue or discontinue the new technology add-on payment for the 
Spiration[supreg] IBV[supreg] for FY 2011. Therefore, for FY 2011, we 
continued new technology add-on payments for cases involving the 
Spiration[supreg] IBV[supreg] in FY 2011, with a maximum add-on payment 
of $3,437.50.
    The new technology add-on payment regulations provide that ``a 
medical service or technology may be considered new within 2 or 3 years 
after the point at which data begin to become available reflecting the 
ICD-9-CM code assigned to the new medical service or technology'' (42 
CFR 412.87(b)(2)). Our practice has been to begin and end new 
technology add-on payments on the basis of a fiscal year, and we have 
generally followed a guideline that uses a 6-month window before and 
after the start of the fiscal year to determine whether to extend the 
new technology add-on payment for an additional fiscal year. In 
general, we extend add-on payments for an additional year only if the 
3-year anniversary date of the product's entry on the market occurs in 
the latter half of the fiscal year (70 FR 47362). With regard to the 
newness criterion for the Spiration[supreg] IBV[supreg], as stated 
above, we consider the beginning of the newness period for the device 
to have commenced on the date of the first IRB approval for the 
Spiration[supreg] IBV[reg], which was March 12, 2009. For FY 2012, as 
of March 12, 2012, the Spiration[supreg] IBV[supreg] will have been on 
the market for 3 years, and is therefore no longer considered ``new'' 
as of March 12, 2012. Because the 3-year anniversary date of the 
Spiration[supreg] IBV[supreg]'s entry onto the market will occur in the 
first half of the fiscal year, we proposed to discontinue its new 
technology add-on payment for FY 2012.
    Comment: One commenter requested that the new technology add-on 
payments for the Spiration[supreg] IBV[supreg] be extended for a third 
year. The commenter reasoned that, although two hospital IRBs approved 
the use of the Spiration[supreg] IBV[supreg], those two hospitals did 
not implant the valve until June 2010 and September 2010, respectively. 
The commenter explained that there was a delay in the hospitals' 
implantation of the device from the time of IRB approval due to the 
following

[[Page 51576]]

reasons: (1) Infrequent number of cases; and (2) the clinical, 
administrative, and operation processes that needed to be completed in 
order to make the technology available under HDE approval at each 
institution. Therefore, the commenter stated that even though a 
hospital would have received IRB approval, it would not expect the 
first case to be performed immediately. The commenter believed that for 
these reasons, the newness period should begin with the first 
implantation of the Spiration[supreg] IBV[supreg], which occurred in 
June 2009. Using this date, the commenter determined that the newness 
period for the Spiration[supreg] IBV[supreg] would end June 2012, 
during the latter half of FY 2012, thus making the Spiration[supreg] 
IBV[supreg] eligible for a third year of new technology add-on 
payments.
    Response: CMS' policy is that the newness period begins with the 
product's or device's FDA approval date, except in limited 
circumstances that could limit the availability of the product (69 FR 
49002). In this case, the product was approved as an HDE, which 
included IRB approval as a requirement. Therefore, we determined that 
the date of IRB approval was the appropriate start date of the newness 
period (74 FR 43819). We do not agree that the start date for the 
newness period should be further adjusted if a hospital then decided 
not to immediately utilize the technology. In this case, the hospital's 
IRB approved the product for use on March 12, 2009, and the product was 
available, but no patients had the product implanted until June 2010. 
We believe this is similar to a situation in which a technology is FDA 
approved (without any additional qualifications for use, such as IRB 
approval), but no hospital uses the technology for a period of time 
after FDA approval. In such a case, the newness period would still 
begin with FDA approval, and we would not delay the beginning of the 
newness period until a hospital uses the drug or device for the first 
time. Therefore, we disagree with the commenter, and we continue to 
believe it is appropriate to start the newness period for the 
Spiration[supreg] IBV[supreg] with the first IRB approval, which was 
March 12, 2009. As mentioned above, for FY 2012, as of March 12, 2012, 
the Spiration[supreg] IBV[supreg] will have been available for 
hospitals' utilization for 3 years, and it is therefore no longer 
considered ``new'' as of March 12, 2012. Because this date occurs in 
the first half of the fiscal year, we are finalizing our proposal to 
discontinue its new technology add-on payment for FY 2012.
b. CardioWest\TM\ Temporary Total Artificial Heart System 
(CardioWest\TM\ TAH-t)
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWest\TM\ Temporary Total Artificial Heart System (TAH-t) in 
FY 2009. The TAH-t is a technology that is used as a bridge to heart 
transplant device for heart transplant-eligible patients with end-stage 
biventricular failure. The TAH-t pumps up to 9.5 liters of blood per 
minute. This high level of perfusion helps improve hemodynamic function 
in patients, thus making them better heart transplant candidates.
    The TAH-t was approved by the FDA on October 15, 2004, for use as a 
bridge to transplant device in cardiac transplant-eligible candidates 
at risk of imminent death from biventricular failure. The TAH-t is 
intended to be used in hospital inpatients. One of the FDA's post-
approval requirements is that the manufacturer agrees to provide a 
post-approval study demonstrating that success of the device at one 
center can be reproduced at other centers. The study was to include at 
least 50 patients who would be followed up to 1 year, including (but 
not limited to) the following endpoints: Survival to transplant; 
adverse events; and device malfunction.
    In the past, Medicare did not cover artificial heart devices, 
including the TAH-t. However, on May 1, 2008, CMS issued a final 
national coverage determination (NCD) expanding Medicare coverage of 
artificial hearts when they are implanted as part of a study that is 
approved by the FDA and is determined by CMS to meet CMS' Coverage with 
Evidence Development (CED) clinical research criteria. (The final NCD 
is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)
    We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, 
because Medicare's previous coverage policy with respect to this device 
had precluded payment from Medicare, we did not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine the relative weights of MS-DRGs. As we have indicated 
in the past, and as we discussed in the FY 2009 IPPS final rule, 
although we generally believe that the newness period would begin on 
the date that FDA approval was granted, in cases where the applicant 
can demonstrate a documented delay in market availability subsequent to 
FDA approval, we would consider delaying the start of the newness 
period. This technology's situation represented such a case. We also 
noted that section 1886(d)(5)(K)(ii)(II) of the Act requires that we 
provide for the collection of cost data for a new medical service or 
technology for a period of at least 2 years and no more than 3 years 
``beginning on the date on which an inpatient hospital code is issued 
with respect to the service or technology.'' Furthermore, the statute 
specifies that the term ``inpatient hospital code'' means any code that 
is used with respect to inpatient hospital services for which payment 
may be made under the IPPS and includes ICD-9-CM codes and any 
subsequent revisions. Although the TAH-t has been described by the ICD-
9-CM code(s) since the time of its FDA approval, because the TAH-t had 
not been covered under the Medicare program (and, therefore, no 
Medicare payment had been made for this technology), this code could 
not be ``used with respect to inpatient hospital services for which 
payment'' is made under the IPPS, and thus we assumed that none of the 
costs associated with this technology would be reflected in the 
Medicare claims data used to recalibrate the MS-DRG relative weights 
for FY 2009. For this reason, as discussed in the FY 2009 IPPS final 
rule, despite the FDA approval date of the technology, we determined 
that TAH-t would still be eligible to be considered ``new'' for 
purposes of the new technology add-on payment because the TAH-t met the 
newness criterion on the date that Medicare coverage began, consistent 
with issuance of the final NCD, effective on May 1, 2008.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for the TAH-t 
and consideration of the public comments we received in response to the 
FY 2009 IPPS proposed rule, we approved the TAH-t for new technology 
add-on payments for FY 2009 (73 FR 48557). We also continued to make 
new technology add-on payments for the TAH-t in FY 2010 and FY 2011.
    We describe the new technology add-on payment requirements with 
regard to newness above. With regard to the newness criterion for the 
TAH-t, as stated above, we consider the beginning of the newness period 
for the device to have commenced from the Medicare NCD date of May 1, 
2008; it is no longer considered new as of May 11, 2011. Because the 3-
year anniversary date of the TAH-t will occur prior to the start of FY 
2012, we proposed to discontinue the new technology add-on payment for 
the TAH-t in FY 2012.

[[Page 51577]]

    We did not receive any public comments on this proposal. Therefore, 
we are finalizing our proposal to discontinue new technology add-on 
payments for the TAH-t in FY 2012.
c. Auto Laser Interstitial Thermal Therapy (AutoLITT\TM\) System
    Monteris Medical submitted an application for new technology add-on 
payments for FY 2011 for the AutoLITT\TM\. AutoLITT\TM\ is a minimally 
invasive, MRI-guided laser tipped catheter designed to destroy 
malignant brain tumors with interstitial thermal energy causing 
immediate coagulation and necrosis of diseased tissue. The technology 
can be identified by ICD-9-CM procedure codes 17.61 (Laser interstitial 
thermal therapy [LITT] of lesion or tissue of brain under guidance), 
and 17.62 (Laser interstitial thermal therapy [LITT] of lesion or 
tissue of head and neck under guidance), which became effective on 
October 1, 2009.
    The AutoLITT\TM\ received a 510K FDA clearance in May 2009. The 
AutoLITT\TM\ is indicated for use to necrotize or coagulate soft tissue 
through interstitial irradiation or thermal therapy in medicine and 
surgery in the discipline of neurosurgery with 1064 nm lasers. The 
AutoLITT\TM\ may be used in patients with glioblastoma multiforme brain 
(GBM) tumors. The applicant stated in its application and through 
supplemental information that, due to required updates, the technology 
was actually introduced to the market in December 2009. The applicant 
explained that it was necessary to reduce the thermal damage lines from 
three to one and complete International Electrotechnical Commission/
Underwriter Laboratory testing, which led to the introduction of the 
technology to the market in December 2009, although the technology was 
approved by FDA in May 2009. The applicant also stated through 
supplementary information to its application that the first sale of the 
product took place on March 19, 2010. However, because the product was 
already available for use in December 2009, it appears that the newness 
date would begin in December 2009. In the FY 2011 IPPS/LTCH PPS 
proposed rule, we welcomed public comments on this issue.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology payments for the AutoLITT\TM\ 
and consideration of the public comments we received in response to the 
FY 2011 IPPS/RY 2011 LTCH PPS proposed rule, including the additional 
analysis of clinical data and supporting information submitted by the 
applicant, we approved the AutoLITT\TM\ for new technology add-on 
payments for FY 2011. Consistent with the applicant's clinical trial, 
the add-on payment is intended only for use of the device in cases of 
Glioblastoma Multiforme. Therefore, we limited the new technology add-
on payment to cases involving the AutoLITT\TM\ in MS-DRGs 025 
(Craniotomy and Endovascular Intracranial Procedures with MCC), 026 
(Craniotomy and Endovascular Intracranial Procedures with CC), and 027 
(Craniotomy and Endovascular Intracranial Procedures without CC or 
MCC). Cases involving the AutoLITT\TM\ that are eligible for the new 
technology add-on payment are identified by assignment to MS-DRGs 025, 
026, and 027 with a procedure code of 17.61 (Laser interstitial 
thermotherapy of lesion or tissue of brain under guidance) in 
combination with a primary diagnosis codes that begins with a prefix of 
191 (Malignant neoplasm of brain). We note that using the procedure and 
diagnosis codes above and restricting the add-on payment to cases that 
map to MS-DRGs 025, 026, and 027 is consistent with information 
provided by the applicant, which demonstrated that cases of the 
AutoLITT\TM\ would only map to MS-DRGs 025, 026, and 027. Procedure 
code 17.62 (Laser interstitial thermotherapy of lesion or tissue of 
head and neck under guidance) does not map to MS-DRGs 025, 026, or 027 
under the GROUPER software and, therefore, is ineligible for new 
technology add-on payment.
    The average cost of the AutoLITT\TM\ is reported as $10,600 per 
case. Under Sec.  412.88(a)(2) of the regulations, new technology add-
on payments are limited to the lesser of 50 percent of the average cost 
of the device or 50 percent of the costs in excess of the MS-DRG 
payment for the case. As a result, the maximum add-on payment for a 
case involving the AutoLITT\TM\ is $5,300.
    We describe the new technology add-on payment requirements with 
regard to newness above. With regard to the newness criterion for the 
AutoLITT\TM\, as stated above, we consider the beginning of the newness 
period for the device to commence from the market release date of 
December 2009. Therefore, the device will be considered ``new'' until 
December 2012. Because the 3-year anniversary date for the AutoLITT\TM\ 
will occur after FY 2012, we proposed to continue to make new 
technology add-on payments for the AutoLITT\TM\ in FY 2012.
    We did not receive any public comments on this proposal. Therefore, 
we are finalizing our proposal to continue to make new technology add-
on payments for the AutoLITT\TM\ in FY 2012. The maximum add-on payment 
for a case involving the AutoLITT\TM\ will continue to be $5,300 for FY 
2012.
4. FY 2012 Applications for New Technology Add-On Payments
    We received three applications for new technology add-on payments 
for FY 2012. However, one applicant, the Champion\TM\ HF Monitoring 
System by CardioMems, Inc., withdrew its application after publication 
of the proposed rule because the applicant believed it would not 
receive FDA approval for its technology prior to the July 1 deadline, 
as required under Sec.  412.87(c) of our regulations. Because the 
applicant withdrew its application, and we did not receive any public 
comments on this application, we are not discussing this application in 
this final rule. A discussion of the remaining two applications is 
presented below.
    a. AxiaLIF[supreg] 2L+\TM\ System
    TranS1 submitted an application for new technology add-on payments 
for the AxiaLIF[supreg] 2L+\TM\ System for FY 2012. The AxiaLIF[supreg] 
2L+\TM\ System is an implantable spinal fixation system, delivered 
through a pre-sacral approach, facilitating spinal fusion through axial 
stabilization of the anterior lumbar spine at Lumbar vertebrae 4 
through Sacral vertebrae 1 (L4-S1).
    The AxiaLIF[supreg] 2L+\TM\ System received 510K FDA clearance 
(K092124) on January 21, 2010, and the applicant asserts that the 
device was available on the market immediately afterward through a 
limited market release program. The AxiaLIF[supreg] 2L+\TM\ System is 
indicated for use to provide anterior stabilization of the L4-S1 spinal 
segments as an adjunct to spinal fusion. It is also indicated for 
minimally invasive access to the anterior portion of the lower spine 
for assisting in the treatment of degeneration of the lumbar disc, 
performing lumbar discectomy, or for assistance in the performance of 
L4-S1 interbody fusion. The AxiaLIF[supreg] 2L+\TM\ System may be used 
in patients requiring fusion to treat pseudoarthrosis, unsuccessful 
previous fusion, spinal stenosis, spondylolisthesis (Grade 1), or 
degenerative disc disease as defined as back pain of discogenic origin 
with degeneration of the disc confirmed by history and radiographic 
studies. The AxiaLIF[supreg] 2L+\TM\ System is coded using ICD-9-CM 
procedure code 81.08 (Lumbar and lumbosacral fusion of the anterior 
column, posterior technique).
    In the FY 2012 IPPS/LTCH PPS proposed rule, we expressed numerous

[[Page 51578]]

concerns regarding the application for new technology add-on payments 
for the AxiaLIF[supreg] 2L+\TM\ System. With regard to the newness 
criterion, we were concerned that the AxiaLIF[supreg] 2L+\TM\ System 
may be substantially similar to the other devices manufactured by the 
applicant, AxiaLIF[supreg] System and AxiaLIF[supreg] II\TM\ System, 
the latter of which is listed as the predicate device on the 
AxiaLIF[supreg] 2L+\TM\ System's application for FDA approval. 
Specifically, in making a determination of substantial similarity, we 
consider the following: (1) Whether a product uses the same or similar 
mechanism of action to achieve a therapeutic outcome; (2) whether a 
product is assigned to the same or different DRG; and (3) whether the 
new use of a technology involves the treatment of the same or similar 
type of disease and the same or similar patient population.
    We were particularly concerned that the AxiaLIF[supreg] 
2L+\TM\System uses the same or similar mechanism of action as the 
AxiaLIF[supreg] II\TM\ System to achieve a therapeutic outcome. 
According to the applicant's 510K summary submitted to the FDA 
(K073514), the AxiaLIF[supreg] System is a multicomponent system 
including titanium alloy implantable devices and instrumentation for 
creating a pre-sacral axial track to the L5-S1 disk space. Similarly, 
the AxiaLIF[supreg] II\TM\ System is described in the applicant's 510K 
summary submitted to the FDA (K073643) as a system of medical grade 
titanium alloy for the anterior stabilization of the L4-S1 spinal 
segments as an adjunct to spinal fusion. As we stated in the proposed 
rule, the applicant states that the AxiaLIF[supreg] 2L+\TM\ System was 
created from the AxiaLIF[supreg] II\TM\ System platform. The applicant 
submitted the following to distinguish the AxiaLIF[supreg] 2L+\TM\ 
System from the AxiaLIF[supreg] II\TM\ System:
     There have been internal thread changes for the 2L+ 
implant to accompany the Spanning Distraction Rod, which is designed to 
create and hold distraction in the L5-S1 disc space and allow for a 
higher degree of control over the Rod advancement and distraction;
     The design enhancements in the 2L+ System remove the 
dependence of distraction on size and placement of the S1 Rod, thus 
allowing precise implant placement in the vertebral bodies;
     In the 2L+ Implant, the L4 section of the L4-L5 Rod 
incorporates a conical design to increase fixation. The outer diameter 
(O.D.) of the L5 section is increased to be identical to the O.D. of 
the S1 implant to provide more surface area bone contact;
     The 2L+ Instrumentation incorporates Dilator Trials as an 
opportunity to enhance and simplify the intraoperative measuring 
technique by providing a direct visual means of measurement; and
     The 2L+ Fixation Rod fills the cannulation to prevent 
graft from moving into the rod from the disc space. The Fixation Rod 
also fixates the S1 Anchor and L4-L5 Rod together such that these 
components cannot passively separate.
    Based on indications for use listed by the FDA for the 
AxiaLIF[supreg] System (K073514), the AxiaLIF[supreg] IITM 
System (K073643), and the AxiaLIF[supreg] 2L+TM System (as 
described above), we also were concerned that all of these devices 
involve the treatment of the same or similar type of disease and the 
same or similar patient population. With respect to whether a product 
is assigned to the same or different DRG, we noted in the proposed rule 
that currently the AxiaLIF[supreg] System and the AxiaLIF[supreg] 
2L+TM System both generally map to MS-DRGs 459 (Spinal 
Fusion Except Cervical with MCC) and 460 (Spinal Fusion Except Cervical 
without MCC). Though the AxiaLIF[supreg] IITM System is no 
longer on the market, it would also map to the same DRGs.
    If the AxiaLIF[supreg] 2L+TM System is found to be 
substantially similar to the AxiaLIF[supreg] System or the 
AxiaLIF[supreg] IITM System, the AxiaLIF[supreg] 
2L+TM System would no longer qualify for the new technology 
add-on payment. Specifically, the appropriate start date for the 
AxiaLIF[supreg] 2L+TM System would be the start date of the 
device that is found to be substantially similar to the AxiaLIF[supreg] 
2L+TM System. As noted above, the AxiaLIF[supreg] 
IITM System received FDA approval on April 28, 2008. The 3-
year newness period for the AxiaLIF[supreg] IITM System ends 
prior to the start of FY 2012 (July 28, 2011). Given the length of time 
since the AxiaLIF[supreg] IITM System's entry into the 
market, cost-related data for the AxiaLIF[supreg] IITM 
System is already reflected in the most recent MS-DRG relative weights. 
Additionally, the AxiaLIF[supreg] System received multiple FDA 
approvals, the most recent of which was on January 11, 2008. The 3-year 
newness period for the AxiaLIF[supreg] System also ends prior to the 
start of FY 2012 (January 11, 2011). Given the length of time since the 
AxiaLIF[supreg] System's entry into the market, cost-related data for 
the AxiaLIF[supreg] System is already reflected in the most recent MS-
DRG relative weights. However, if the AxiaLIF[supreg] 2L+TM 
System is not substantially similar to any of the predicate devices 
mentioned above, then the newness period for the AxiaLIF[supreg] 
2L+TM System would begin on January 21, 2010 (the 
AxiaLIF[supreg] 2L+TM System's FDA approval date) and would 
be within the year newness period for FY 2012.
    We invited public comment regarding whether or not the 
AxiaLIF[supreg] 2L+TM System meets the newness criteria, 
and, in particular, whether it is substantially similar to the 
AxiaLIF[supreg] System or the AxiaLIF[supreg] IITM System. 
We did not receive any public comments regarding the newness criteria 
or the substantial similarity of the AxiaLIF[supreg] 2L+TM 
System to the AxiaLIF[supreg] System or the AxiaLIF[supreg] 
IITM System.
    In the proposed rule, we also expressed concerns with the 
applicant's methodology for demonstrating that it met the cost 
criterion. Specifically, in determining the projected standardized 
charge for the AxiaLIF[supreg] 2L+TM System, the applicant 
relied on a charge markup for defibrillators because it is also a high-
cost implantable device for which a hospital purchase price is known. 
We were concerned about whether more direct data or different proxies 
are available, including a charge markup for the AxiaLIF[supreg] System 
or AxiaLIF[supreg] IITM System. In reviewing the applicant's 
charge markup, we also were concerned about the source data for 
determining the 2.77 charge markup ratio for defibrillators. We invited 
public comment on whether the AxiaLIF[supreg] 2L+TM System 
meets the cost criterion for a new technology add-on payment for FY 
2012.
    We did not receive any public comments that addressed our concerns 
regarding the cost criterion for new technology add-on payment.
    With respect to the substantial clinical improvement criterion, the 
applicant asserted that it meets this criterion in its application. The 
applicant stated that substantial clinical improvement is demonstrated 
by the AxiaLIF[supreg] 2L+TM System's facilitation of spinal 
fusion surgery without a laparotomy. By avoiding a laparotomy, the 
AxiaLIF[supreg] 2L+TM System reduces blood loss, 
postoperative pain, narcotic use, denervation, morbidity, the 
probability of complications, and the risk of trauma to the tissue area 
surrounding the lumbar. The applicant further stated that the 
AxiaLIF[supreg] 2L+TM System reduces morbidity and has 
reduced risk of injuring vital organs and important intrinsic 
stabilizing structures, with a lower complication profile than 
traditional open fusion techniques. The applicant noted that long-term 
results can include better support of lordosis and prevention of 
adjacent level disease. In the proposed rule, we also expressed concern 
that this

[[Page 51579]]

does not demonstrate a substantial clinical improvement from the 
AxiaLIF[supreg] IITM System, which also facilitated spinal 
fusion surgery without a laparotomy.
    The applicant has not conducted clinical trials, but the 300 cases 
of AxiaLIF[supreg] 2L+TM System's use (through the Limited 
Market Release) yielded a complication rate of 0.7 percent. The 
applicant also asserts that the pre-sacral approach results in a lower 
average length of stay than a non-sacral approach.
    The applicant referred us to several sources of literature 
presenting data related to the pre-sacral approach for the applicant's 
AxiaLIF[supreg] device. Again, we expressed concern that the applicant 
generally repeated the statements made regarding the clinical 
improvement of its AxiaLIF[supreg] device and had not provided 
information that indicates that the AxiaLIF[supreg] 2L+TM 
System offers a substantial clinical benefit over the earlier 
AxiaLIF[supreg] or AxiaLIF[supreg] IITM devices. Moreover, 
the applicant failed to provide any clinical outcomes data for the 
AxiaLIF[supreg] 2L+TM System to substantiate its assertions 
regarding substantial clinical improvement for the AxiaLIF[supreg] 
2L+TM System. While the applicant maintains that data from 
the AxiaLIF[supreg] device are relevant and can be used to substantiate 
its assertions for the AxiaLIF[supreg] 2L+TM System, we were 
concerned that data directly associated with the use of the 
AxiaLIF[supreg] 2L+TM System are not available. For example, 
we stated in the proposed rule that it was not clear the degree to 
which the population that required treatment with the AxiaLIF[supreg] 
2L+TM System differed from the population that required 
treatment with the AxiaLIF[supreg] device or the AxiaLIF[supreg] 
IITM System, and that it was also not clear the degree to 
which the differences amongst the devices discussed above may affect 
clinical outcomes. We invited public comments on whether the 
AxiaLIF[supreg] 2L+TM System meets the substantial clinical 
improvement criterion for the new technology add-on payment for FY 
2012. We did not receive any public comments regarding the substantial 
clinical improvement criterion.
    We did not receive any public comments with regard to this 
application. In the absence of comments with information addressing our 
various concerns with this application, we are not approving the 
AxiaLIF[supreg] 2L+TM System for new technology add-on 
payments for FY 2012.
b. PerfectCLEAN With Micrillon[supreg]
    UMF Corporation (the manufacturer) submitted an application for a 
technology called the PerfectCLEAN with Micrillon[supreg] 
(PerfectCLEAN). PerfectCLEAN is a cleaning textile product (or cleaning 
mat/wipe) with chlorine embedded or bound to the extruded fiber. The 
manufacturer asserts that PerfectCLEAN is intended to be used to trap 
and eliminate pathogens such as Methicillin-resistant Staphylococcus 
aureus (MRSA), Clostridium difficile (C diff.) and the H1N1 flu virus 
from surfaces within the hospital (as well as other health care 
facilities and locations). The applicant asserts that it can trap and 
remove more than 99.99 percent of bacteria on hard surfaces.
    The manufacturer stated that the PerfectCLEAN is an Environmental 
Protection Agency (EPA) approved antimicrobial/disinfectant that will 
be available on the market in the first quarter of 2011. The applicant 
maintains that PerfectCLEAN is subject to review and approval by the 
EPA per the EPA's Federal Insecticide, Fungicide, Rodenticide Act 
(FIFRA) Treated Article Exemption and, therefore, is not subject to 
review by the FDA. The applicant states that it was determined in a 
pre-registry meeting with the EPA that the underlying chemistries used 
to create the chlorine binding effects of Micrillon[supreg] chemistry 
are EPA and FDA approved even though no FDA claims are being sought.
    With respect to whether the PerfectCLEAN is eligible for new 
technology add-on payments, in the proposed rule we noted that our 
regulations at Sec.  412.87(c) state, ``CMS will only consider, for 
add-on payments for a particular fiscal year, an application for which 
the new medical service or technology has received FDA approval or 
clearance by July 1 prior to the particular fiscal year.'' FDA 
``approval,'' refers to the premarket approval application (PMA) 
process for most Class III devices, and FDA ``clearance'' refers to the 
510(k) premarket notification submission process for most Class II 
devices and some Class I and Class III devices (section 515 of the 
Food, Drug and Cosmetic Act (FDCA) for PMA) and sections 510(k) and 
513(i) of the FDCA (for premarket notification submission process)). 
Therefore, we believe our regulations, by requiring applicants to 
receive an FDA approval or clearance in order to be eligible for new 
technology add-on payments, limit the universe of items and services 
eligible to receive these payments to those that require FDA approval 
or clearance. The applicant has informed CMS that it is in the process 
of registering and listing its product with the FDA under section 
510(b) through (d) and (j) and anticipates this process to be completed 
prior to the July 1 regulatory deadline. The registration process that 
the applicant is currently pursing will result in neither FDA approval 
nor clearance. In the proposed rule, we stated that we were therefore 
concerned that the PerfectCLEAN is not eligible for new technology add-
on payments under our existing regulations, which require ``FDA 
approval or clearance by July 1 prior to the particular fiscal year'' 
(42 CFR Sec.  412.87(c)). We welcomed public comments on whether the 
PerfectCLEAN is eligible for new technology add-on payments under the 
current regulations.
    We did not receive any public comments in response to our concern 
that the PerfectCLEAN does not meet the newness criteria. Therefore, we 
conclude that the PerfectCLEAN does not meet the requirement specified 
under Sec.  412.87(c) of our regulations that we requires applicants to 
receive an FDA approval or clearance by July 1 prior to the particular 
fiscal year, rather than registering and listing its product with the 
FDA, in order to be eligible for new technology add-on payments. As a 
result, we are not approving new technology add-on payments for the 
PerfectCLEAN for FY 2012. However, we will consider whether it would be 
appropriate for a product that is registered and listed with the FDA to 
be eligible for new technology add-on payments. If we conclude that 
such products should be eligible for new technology add-on payments in 
the future, we will propose changes to our regulations in a future 
rulemaking.
    With regard to the cost criterion, the applicant used data from the 
FY 2011 After Outliers Removed (AOR) file (posted on the CMS Web site) 
for its cost analysis, which is based on the FY 2009 MedPAR file. The 
applicant considered MS-DRGs that relate to surgeries, skin abrasions, 
open sores, wounds, and similar inflamed tissue conditions where 
infection sites are thought to be more likely to occur for inpatient 
care situations. This resulted in the applicant determining that the 
technology would be most frequently used in 622 different MS-DRGs. The 
applicant noted that the charges from the FY 2011 AOR file were not 
inflated from FY 2009 to FY 2011; therefore the applicant applied a 2-
year inflation factor of 12 percent (to update the charges from FY 2009 
to FY 2011). The applicant based the 2-year inflation factor of 12 
percent on a 3-year average of the 2 year rate-of-change in charges 
(the 2-year rate-of-change for FY 2009 of 11.841 percent (73 FR 48764); 
the 2-year rate-of-change for FY 2010 of 14.184

[[Page 51580]]

percent (74 FR 44010); and the 2-year rate-of-change for FY 2011 of 
9.8843 percent (75 FR 50429)) that CMS uses in its outlier threshold 
calculation as published in section II. of the Addendum to the annual 
IPPS final rule. The applicant computed a case-weighted standardized 
charge per case of $40,442 for all 622 MS-DRGs, which did not include 
any charges related to the PerfectCLEAN. Therefore, it added the 
charges related to the technology to the case-weighted average 
standardized charge per case in evaluating the cost threshold 
criterion. The manufacturer estimates a charge per patient of $100 per 
day for the PerfectCLEAN. The applicant includes in this amount charges 
for payroll, treated textiles, packaging and protective gloves, 
laundering, storage, and distribution. The applicant multiplied the 
average length of stay for each MS-DRG (as found in Table 5 of the 
Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50547 through 
50566)) by the charge per patient per day to determine the total 
charges per stay by MS-DRG related to the PerfectCLEAN. The applicant 
added additional charges per stay for the PerfectCLEAN to the case-
weighted standardized charge per case and determined a total case-
weighted average standardized charge per case of $41,105. Based on the 
622 MS-DRGs to which the technology mapped, the applicant computed a 
case-weighted threshold of $40,834. Because the total case-weighted 
average standardized charge per case of $41,105 exceeds the case 
weighted threshold of $40,834, the applicant maintains that it meets 
the cost criteria.
    In the proposed rule, we discussed several concerns regarding the 
applicant's cost analysis. First, although the technology can 
potentially be used in every single Medicare case, the application 
targets specific MS-DRGs. The applicant did not provide a detailed 
clinical justification regarding their selection of MS-DRGs, or a 
detailed justification for why the technology could not be used in 
other MS-DRGs. We believe it would be more appropriate to target all 
cases in every MS-DRG when conducting the cost analysis for this type 
of non-procedure or condition specific item. Using the FY 2011 AOR 
file, we conducted our own analysis with the same methodology above 
(and inflated the charges and included the total charges per stay 
related to the PerfectCLEAN) across all MS-DRGs. Based on our analysis, 
we determined a total case-weighted average standardized charge per 
case of $29,535. Using the applicant's methodology, we also determined 
a case-weighted threshold of $37,384 across all MS-DRGs. Because the 
total case-weighted average standardized charge per case of $29,535 is 
less than the case-weighted threshold of $37,384, we believe the 
PerfectCLEAN may not meet the cost criteria.
    Second, the applicant included in the average charge per day more 
general charges unrelated to the specific new technology, such as 
payroll, packaging and protective gloves, laundering, storage and 
distribution. We do not believe it is appropriate to include charges 
for expenses already accounted for in MS-DRG based payments, such as 
laundering, storage, and distribution, and supplies already used by 
hospital staff such as packaging and protective gloves. We also note 
that the applicant states in its substantial clinical improvement 
discussion that the PerfectCLEAN represents the first comprehensive 
process for the removal and elimination of harmful micro-organisms 
responsible for HAIs from patient environments, the elimination of 
cross-contamination, and significant savings across many cost centers. 
If the PerfectCLEAN is a substitute for other cleaning mechanisms such 
as wiping down a hospital room with a spray and can produce significant 
savings across many cost centers, then it would be appropriate to 
deduct some charges from the average charge per day in order to 
accurately reflect the cost to hospitals of this technology. For these 
reasons, we remain concerned about the accuracy of the computation of a 
charge per patient of $100 per day and whether the PerfectCLEAN meets 
the cost criterion.
    Thirdly, the applicant based the 12-percent, 2-year rate-of-change 
in charges on a 3-year average (FY 2009 through FY 2011) of the 2-year 
rate-of-change in charges as published in section II. of the Addendum 
to the annual IPPS final rule. We do not believe it is appropriate to 
use a 3-year average of the 2-year rate-of-change in charges as the 2-
year rate-of-change in charges already uses the most recent data 
available to measure this change and, therefore, does not need to be 
averaged with prior years. Specifically, as described in section II. of 
the Addendum to this final rule, to calculate the proposed FY 2012 2-
year rate-of-change in charges, we compared the 1-year average 
annualized rate-of-change in charges per case from the last quarter of 
FY 2009 in combination with the first quarter of FY 2010 (July 1, 2009 
through December 31, 2009) to the last quarter of FY 2010 in 
combination with the first quarter of FY 2011 (July 1, 2010 through 
December 31, 2010). This rate-of-change was 4.43 percent (1.044394) or 
9.07 percent (1.090759) over 2 years. If we substitute the FY 2012 
proposed 2-year rate-of-change in charges of 9.07 percent for the 12-
percent 3-year average of the 2-year rate-of-change in charges that the 
applicant used in its cost analysis, the total case-weighted average 
standardized charge per case would be $40,047 across the 622 MS-DRGs to 
which the applicant believes the technology would map. As mentioned 
above, the applicant computed a case-weighted threshold of $40,834. 
Because the total case-weighted average standardized charge per case of 
$40,047 is less than the case-weighted threshold of $40,834, it appears 
the applicant would not meet the cost criteria. We invited public 
comment on whether the PerfectCLEAN meets the cost criterion.
    Comment: Several commenters expressed concerns that the cost 
estimates assume that this product would replace other items currently 
used in the hospital.
    Response: As mentioned above, because PerfectCLEAN does not meet 
the requirements specified under Sec.  412.87(c) of our regualtions it 
was not approved for FY 2012 new technology add-on payments. Once an 
applicant does not meet one of our criteria (newness, cost and 
substantial clinical improvement; in that order), we typically do not 
respond to public comments on the rest of the new technology add-on 
payment criteria. However, we are responding to the public comment 
above to ensure our cost criteria policy is clear.
    The applicant substituted and added charges related to their 
product as part of its efforts to demonstrate that the product's costs 
exceed the cost threshold. While we have concerns regarding certain 
aspects of the applicant's methodology, it is common practice for new 
technology add-on payment applicants to substitute and/or add charges 
related to their technology in order to develop an average standardized 
charge per case to demonstrate that a technology exceeds the cost 
threshold.
    The applicant maintained that it met the substantial clinical 
improvement criteria for the following reasons: The applicant believes 
the PerfectCLEAN significantly improves clinical outcomes for a patient 
population as compared to currently available treatments, decreases 
rate of subsequent diagnostic or therapeutic interventions, and 
decreases the number of future hospitalizations or physician visits. 
The applicant cited independent laboratory studies that set forth the 
level of removal and elimination of pathogens achieved by

[[Page 51581]]

the PerfectCLEAN. The applicant stated that the PerfectCLEAN includes 
``more precise and focused patient room procedures that when properly 
applied utilize the textile and micro-denier efficacies'' listed in the 
product's independent test reports. The applicant stated that this 
results ``in a safer patient environment where the likelihood of cross 
contamination is reasonable.'' The applicant included test report data 
for the product, which demonstrated a 99.99 percent effectiveness of 
removing pathogens such as MRSA and C diff. The applicant cited 
industry and clinical support to demonstrate that improved patient 
environment can save lives. The applicant also stated that PerfectCLEAN 
represents the first comprehensive process for the removal and 
elimination of harmful micro-organisms responsible for hospital 
acquired infections from patient environments, the elimination of 
cross-contamination, and significant savings across many cost centers. 
The applicant stated that this new innovative system delivers reliable 
and repeatable results not currently achieved using currently available 
protocols and products. The applicant provided the following example: a 
traditional method of disinfection is to apply liquid disinfectants, 
which the applicant stated typically requires a 10-minute dwell time 
(which in most cases is not completed by the hospital) and then wiping 
or mopping up the nonevaporated liquids. Compared to this method, the 
applicant asserts that the PerfectCLEAN first removes the micro-
organisms from those surfaces using specially designed microscopic 
fibers. The applicant asserted that these pathogens are trapped in a 
formulation of a chlorine binding technology which eliminates the 
pathogens.
    The applicant further asserted that the PerfectCLEAN maintains its 
disinfecting capability longer than other methods because the chlorine-
binding technology is introduced at the pellet stage of fiber extrusion 
so that it is present throughout the fiber, as opposed to a finish or 
coating process that wears off as textiles are used and laundered. 
Additionally, the applicant asserted that the technology's non-leaching 
chlorination system recharges in the wash process by attracting and 
binding free molecules of chlorine. The applicant further asserted that 
in this way the PerfectCLEAN recharges back to its original strength 
and efficacy which allows it to work more rapidly than other 
techniques. The applicant asserted that this reduces cross-
contamination by those persons handling soiled textiles after the 
people contact surfaces which have been cleaned of harmful micro-
organisms. The applicant added that the training in use of color coated 
textiles (different color mats) affords superior monitoring and 
compliance supervision of the hygiene specialists charged with 
responsibility to reduce cross contamination. We invited public comment 
on whether the PerfectCLEAN meets the substantial clinical improvement 
criterion.
    Comment: Several commenters opposed consideration of this product 
for new technology add-on payments. The commenters stated that neither 
CMS nor the applicant provided sufficient supporting data to approve 
this technology for add-on payments. The commenters also stated that a 
cursory review of information sources on this product, including the 
company's own Web site, did not identify any scientific, peer-reviewed 
studies demonstrating efficacy against cross transmission, or 
prevention or mitigation of Healthcare-Acquired Infections (HAIs). The 
commenters urged CMS not to approve the application for new technology 
add-on payments for this or any product that lacks scientific evidence 
of its efficacy and urged CMS to use objective rigor to evaluate the 
methodological quality and strength of evidence submitted in support of 
new technology add-on payment applications.
    Response: Because PerfectCLEAN does not meet the requirements 
specified under Sec.  412.87(c) of our regulations (and was not 
approved for FY 2012 new technology add-on payments), we are not 
responding to these public comments in this final rule.

III. Changes to the Hospital Wage Index for Acute Care Hospitals

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the delineations 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the FY 2012 hospital wage index based on the 
statistical areas, including OMB's revised definitions of Metropolitan 
Areas, appears under section III.B. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section of the Act provides that the Secretary base the update on a 
survey of wages and wage-related costs of short-term, acute care 
hospitals. The survey must exclude the wages and wage-related costs 
incurred in furnishing skilled nursing services. This provision also 
requires us to make any updates or adjustments to the wage index in a 
manner that ensures that aggregate payments to hospitals are not 
affected by the change in the wage index. The adjustment for FY 2012 is 
discussed in section II.B. of the Addendum to this final rule.
    As discussed below in section III.H. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the 
Secretary is required to adjust the standardized amounts so as to 
ensure that aggregate payments under the IPPS after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. The budget neutrality adjustment for 
FY 2012 is discussed in section II.A.4.b. of the Addendum to this final 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2011 (the FY 2012 wage index) appears under 
section III.C. of this preamble.

B. Core-Based Statistical Areas for the Hospital Wage Index

    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, beginning with FY 2005, we define hospital labor market areas 
based on the Core-Based Statistical Areas (CBSAs) established by OMB 
and announced in December 2003 (69 FR 49027). For a discussion of OMB's 
revised delineations of CBSAs and our implementation of the CBSA 
definitions, we refer readers to the

[[Page 51582]]

preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).
    As with the FY 2011 final rule, and as we proposed, in this FY 2012 
final rule, we are providing that hospitals receive 100 percent of 
their wage index based upon the CBSA configurations. Specifically, for 
each hospital, we determined a wage index for FY 2012 employing wage 
index data from hospital cost reports for cost reporting periods 
beginning during FY 2008 and using the CBSA labor market definitions. 
We consider CBSAs that are Metropolitan Statistical Areas (MSAs) to be 
urban, and CBSAs that are Micropolitan Statistical Areas as well as 
areas outside of CBSAs to be rural. In addition, it has been our 
longstanding policy that where an MSA has been divided into 
Metropolitan Divisions, we consider the Metropolitan Division to 
comprise the labor market areas for purposes of calculating the wage 
index (69 FR 49029) (regulations at Sec.  412.64(b)(1)(ii)(A)).
    In OMB Bulletin No. 10-2, issued on December 1, 2009, OMB announced 
that the CBSA changes in that bulletin would be the final update prior 
to the 2010 Census of Population and Housing. CMS adopted those changes 
in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50162), beginning 
October 1, 2010, and they are reflected in this FY 2012 final rule. In 
2013, OMB plans to announce new area delineations based on its 2010 
standards (75 FR 37246) and the 2010 Census data.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB--go to ``Agency Information'' and click on 
``Bulletins''.

C. Occupational Mix Adjustment to the FY 2012 Wage Index

    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.
1. Development of Data for the FY 2012 Occupational Mix Adjustment 
Based on the 2007-2008 Occupational Mix Survey
    As provided for under section 1886(d)(3)(E) of the Act, we collect 
data every 3 years on the occupational mix of employees for each short-
term, acute care hospital participating in the Medicare program.
    For the FY 2010 hospital wage index, we used occupational mix data 
collected on a revised 2007-2008 Medicare Wage Index Occupational Mix 
Survey (the 2007-2008 survey) to compute the occupational mix 
adjustment for FY 2010. (We refer readers to the FY 2010 IPPS final 
rule (74 FR 43827) for a detailed discussion of the 2007-2008 survey.) 
Again, for the FY 2011 hospital wage index, we used data from the 2007-
2008 survey (including revised data for 45 hospitals) to compute the FY 
2011 adjustment.
    As we proposed, for the FY 2012 hospital wage index, we again used 
occupational mix data collected on the 2007-2008 Medicare Wage Index 
Occupational Mix Survey to compute the occupational mix adjustment for 
FY 2012. We included data for 3,168 hospitals that also have wage data 
included in the FY 2012 wage index.
2. New 2010 Occupational Mix Survey for the FY 2013 Wage Index
    As stated earlier, section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 
years on the occupational mix of employees for each short-term, acute 
care hospital participating in the Medicare program. We used 
occupational mix data collected on the 2007-2008 survey to compute the 
occupational mix adjustment for FY 2010 and the FY 2011 wage index and 
are using the 2007-2008 occupational mix survey data in this final rule 
for the FY 2012 wage index. Therefore, a new measurement of 
occupational mix will be required for FY 2013.
    The new 2010 survey (Form CMS-10079 (2010)) provides for the 
collection of hospital-specific wages and hours data for calendar year 
2010 (that is, payroll periods ending between January 1, 2010 and 
December 31, 2010) and will be applied beginning with the FY 2013 wage 
index. The 2010 survey was adopted in the Federal Register on January 
15, 2010 (75 FR 2548) and approved by OMB on February 26, 2010 (OMB 
control number 0938-0907). The survey is available on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage 
and through the fiscal intermediaries/MACs. Hospitals were required to 
submit their completed 2010 surveys to their fiscal intermediaries/MACs 
by July 1, 2011. The preliminary, unaudited 2010 survey data will be 
released in early October 2011, along with the FY 2009 Worksheet S-3 
wage data, for the FY 2013 wage index review and correction process.
3. Calculation of the Occupational Mix Adjustment for FY 2012
    For FY 2012 (as we did for FY 2011), we calculated the occupational 
mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours. Repeat 
this computation for each of the four nursing subcategories: (1) 
Registered nurses; (2) licensed practical nurses; (3) nursing aides, 
orderlies, and attendants; and (4) medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the four nursing subcategories.
    Step 4--For each hospital, determine the adjusted average hourly 
rate for the total nursing category by summing the adjusted average 
hourly rate (from Step 3) for each of the nursing subcategories.
    Step 5--Determine the national average hourly rate for the total 
nursing category by dividing total nursing category salaries for all 
hospitals in the occupational mix survey database by total nursing 
category hours for all hospitals in the occupational mix survey 
database.
    Step 6--For each hospital, compute the occupational mix adjustment 
factor for the total nursing category by dividing the national average 
hourly rate for the total nursing category (from Step 5) by the 
hospital's adjusted average hourly rate for the total nursing category 
(from Step 4).
    If the hospital's adjusted average hourly rate is less than the 
national average hourly rate (indicating the

[[Page 51583]]

hospital employs a less costly mix of nursing employees), the 
occupational mix adjustment factor is greater than 1.0000. If the 
hospital's adjusted average hourly rate is greater than the national 
average hourly rate, the occupational mix adjustment factor is less 
than 1.0000.
    Step 7--For each hospital, calculate the occupational mix adjusted 
salaries and wage-related costs for the total nursing category by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section III.F. of 
this preamble) by the percentage of the hospital's total workers 
attributable to the total nursing category (using the occupational mix 
survey data, this percentage is determined by dividing the hospital's 
total nursing category salaries by the hospital's total salaries for 
``nursing and all other'') and by the total nursing category's 
occupational mix adjustment factor (from Step 6 above).
    The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the 
hospital is not adjusted by the occupational mix. A hospital's all 
other portion is determined by subtracting the hospital's nursing 
category percentage from 100 percent.
    Step 8--For each hospital, calculate the total occupational mix 
adjusted salaries and wage-related costs for a hospital by summing the 
occupational mix adjusted salaries and wage-related costs for the total 
nursing category (from Step 7) and the portion of the hospital's 
salaries and wage-related costs for all other employees (from Step 7).
    To compute a hospital's occupational mix adjusted average hourly 
wage, divide the hospital's total occupational mix adjusted salaries 
and wage-related costs by the hospital's total hours (from Step 4 of 
the unadjusted wage index calculation in section III.F. of this 
preamble).
    Step 9--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 10--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours 
for all hospitals in the Nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
FY 2012 occupational mix adjusted national average hourly wage is 
$36.2481.
    Step 11--To compute the occupational mix adjusted wage index, 
divide each area's occupational mix adjusted average hourly wage (Step 
9) by the national occupational mix adjusted average hourly wage (Step 
10).
    Step 12--To compute the Puerto Rico specific occupational mix 
adjusted wage index, follow Steps 1 through 11 above. The FY 2012 
occupational mix adjusted Puerto Rico-specific average hourly wage is 
$15.4142.
    The table below is an illustrative example of the occupational mix 
adjustment.
BILLING CODE 4120-01-P

[[Page 51584]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.014

[[Page 51585]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.015

BILLING CODE 4120-01-C

[[Page 51586]]

    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the FY 2012 wage 
index. For the FY 2007-2008 survey, the response rate was 90.8 percent.
    In computing the FY 2012 wage index, if a hospital did not respond 
to the occupational mix survey, or if we determined that a hospital's 
submitted data were too erroneous to include in the wage index, we 
assigned the hospital the average occupational mix adjustment for its 
labor market area. This method has the least impact on the wage index 
for other hospitals in the area. For areas where no hospital submitted 
data for purposes of calculating the occupational mix adjustment, we 
applied the national occupational mix factor of 1.0000 in calculating 
the area's FY 2012 occupational mix adjusted wage index. In addition, 
if a hospital submitted a survey, but that survey data could not be 
used because we determined the survey data to be aberrant, we also 
assigned the hospital the average occupational mix adjustment for its 
labor market area. For example, if a hospital's individual nurse 
category average hourly wages were out of range (that is, unusually 
high or low), and the hospital did not provide sufficient documentation 
to explain the aberrancy, or the hospital did not submit any registered 
nurse salaries or hours data, we assigned the hospital the average 
occupational mix adjustment for the labor market area in which it is 
located.
    In calculating the average occupational mix adjustment factor for a 
labor market area, we replicated Steps 1 through 6 of the calculation 
for the occupational mix adjustment. However, instead of performing 
these steps at the hospital level, we aggregated the data at the labor 
market area level. In following these steps, for example, for CBSAs 
that contain hospitals that did not submit occupational mix survey 
data, the occupational mix adjustment factor ranged from a low of 
0.9246 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0761 
(CBSA 19, Rural Louisiana). Also, in computing a hospital's 
occupational mix adjusted salaries and wage-related costs for nursing 
employees (Step 7 of the calculation), in the absence of occupational 
mix survey data, we multiplied the hospital's total salaries and wage-
related costs by the percentage of the area's total workers 
attributable to the area's total nursing category. For FY 2012, there 
are five CBSAs (that include six hospitals) for which we did not have 
occupational mix data for any of its hospitals. The CBSAs are:

 CBSA 36140, Ocean City, NJ (1 hospital)
 CBSA 22140, Farmington, NM (1 hospital)
 CBSA 41900, San German-Cabo Rojo, PR (2 hospitals)
 CBSA 49500, Yauco, PR (1 hospital)
 CBSA 21940, Fajardo, PR (1 hospital)

    Since the FY 2007 IPPS final rule, we have periodically discussed 
applying a hospital-specific penalty to hospitals that fail to submit 
occupational mix survey data (71 FR 48013 through 48014; 72 FR 47314 
through 47315; 73 FR 48580; 74 FR 43832, and 75 FR 50167). During the 
FY 2008 rulemaking cycle, some commenters suggested a penalty equal to 
a 1- to 2-percent reduction in the hospital's wage index value or a set 
percentage of the standardized amount. During the FY 2009 and FY 2010 
rulemaking cycles, several commenters reiterated their view that full 
participation in the occupational mix survey is critical, and that CMS 
should develop a methodology that encourages hospitals to report 
occupational mix survey data but does not unfairly penalize neighboring 
hospitals. We indicated in the FY 2010 IPPS/RY 2010 LTCH PPS proposed 
rule that, while we were not proposing a penalty at that time, we would 
consider the public comments we previously received, as well as any 
public comments on the proposed rule, as we developed the FY 2011 wage 
index.
    In the FY 2011 IPPS/LTCH PPS proposed and final rules (75 FR 23943 
and 50167, respectively), we stated that, in order to gain a better 
understanding of why some hospitals are not submitting the occupational 
mix data, we will require hospitals that do not submit occupational mix 
data to provide an explanation for not complying. This requirement will 
be effective beginning with the new 2010 occupational mix survey (the 
2010 survey is discussed in section III.C.2. of this preamble). We will 
instruct fiscal intermediaries/MACs to begin gathering this information 
as part of the FY 2013 wage index desk review process. We note that we 
reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals.

D. Worksheet S-3 Wage Data for the FY 2012 Wage Index

    The FY 2012 wage index values are based on the data collected from 
the Medicare cost reports submitted by hospitals for cost reporting 
periods beginning in FY 2008 (the FY 2011 wage index was based on data 
from cost reporting periods beginning during FY 2007).
1. Included Categories of Costs
    The FY 2012 wage index includes the following categories of data 
associated with costs paid under the IPPS (as well as outpatient 
costs):
     Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty)
     Home office costs and hours
     Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services, and certain contract indirect 
patient care services (as discussed in the FY 2008 final rule with 
comment period (72 FR 47315))
     Wage-related costs, including pensions and other deferred 
compensation costs.
2. Changes to the Reporting Requirements for Pension Costs for the 
Medicare Wage Index
a. Background
    The instructions for determining and reporting costs of qualified 
defined benefit pension on the cost report for Medicare cost-finding 
purposes are located in section 2142 of the Provider Reimbursement 
Manual, Part I (PRM-I). For Medicare wage index purposes, the 
instructions in section 3605.2 of the Provider Reimbursement Manual, 
Part II (PRM-II) for Worksheet S-3, Part II, Lines 13 through 20, 
require hospitals to comply with the requirements in section 2142 of 
the PRM-I.
    Specifically, section 2142.5 of the PRM-I defines the current 
period liability for pension cost (that is, the maximum allowable 
pension cost) based on the actuarial accrued liability, normal cost, 
and unfunded actuarial liability. Under section 2142.4(A) of the PRM-I, 
these liability measurements are to be computed in accordance with the 
Employee Retirement Income Security Act of 1974 (ERISA), regardless of 
whether or not the pension plan is subject to ERISA. Also, section 
2142.6(A) of the PRM-I requires the current period liability for 
pension costs to be funded in order to be allowable. In addition, 
section 2142.6(C) of the PRM-I allows for funding in excess of

[[Page 51587]]

the current period liability to be carried forward and recognized in 
future periods. We note that, on March 28, 2008, CMS published Revision 
436, a technical clarification to section 2142 of the PRM-I.
    Under ERISA, the actuarial accrued liability and normal cost are 
typically determined on an ongoing plan basis using long-term, best-
estimate assumptions. The interest assumption reflects the average 
rates of return expected over the period during which benefits were 
payable, taking into account the investment mix of plan assets. Pension 
costs for plans not subject to ERISA (such as church plans and plans 
sponsored by public sector employers) are also typically based on the 
actuarial accrued liability and normal cost using long-term, best 
estimate assumptions.
    The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended 
ERISA. Under the PPA amendments to ERISA, the actuarial accrued 
liability and normal cost are no longer used as a basis for determining 
ERISA minimum required or maximum tax deductible contributions. ERISA 
contribution limits are now based on a ``funding target'' and ``target 
normal cost'' measured on a settlement basis using the current market 
interest rates for investment grade corporate bonds that match the 
duration of the benefit payouts. The Internal Revenue Service (IRS) 
publishes the applicable interest rate tables on a monthly basis. 
Because pension liabilities are very sensitive to changes in the 
interest rate used to discount future benefit payouts, pension costs 
based on the PPA ``funding target'' and ``target normal cost'' values 
are expected to be less stable than those based on the pre-PPA 
traditional long-term, best-estimate assumptions, which change 
infrequently. Furthermore, plans not subject to the ERISA requirements, 
as amended by the PPA, are not likely to use the new ``funding target'' 
and ``target normal cost'' basis for determining pension costs, and 
ERISA plans are not likely to continue to report costs developed using 
the actuarial accrued liability and normal cost based on long-term, 
best estimate assumptions. Accordingly, there is no longer a standard 
actuarial basis used by all plans.
    In response to the PPA amendments to ERISA, we began a review of 
the rules for determining pension costs for Medicare cost finding and 
wage index purposes. As an interim measure, we issued a Joint Signature 
Memorandum (JSM) in November 2009 that contained instructions and a 
spreadsheet to assist hospitals and Medicare contractors in determining 
the annual allowable defined benefit pension cost for the FY 2011 wage 
index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these 
instructions were released for purposes of the wage index, they also 
serve as interim guidance for Medicare cost-finding purposes.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25874 through 
25876), we proposed to revise our policy for determining pension cost 
for Medicare purposes. As mentioned above, due to the ERISA rules, as 
amended by the PPA, there is no longer a standard actuarial cost basis 
used by all types of plans. Therefore, we proposed to no longer rely on 
actuarial computations to determine the maximum annual cost limitation 
for Medicare. Instead, the general parameters of our policy would 
maintain the current requirement that pension costs must be funded to 
be reportable, and would require all hospitals to report the actual 
pension contributions funded during the reporting period, on a cash 
basis.
    In addition, under this cash basis approach, we proposed separate 
methodologies for measuring pension costs for Medicare cost-finding 
purposes (discussed in section IV.M. of this preamble) and for purposes 
of updating the wage index (discussed below in section III.D.2.b. of 
this preamble). It is necessary to have two distinct policies in order 
to address the different goals of determining a hospital's payments and 
updating the average hourly wage to establish the geographic area wage 
index. The function of the wage index is to measure relative hospital 
labor costs across areas. This function is distinct from Medicare 
payment determinations, where the goal is to measure the actual costs 
incurred by individual hospitals. These two distinct policies would 
require separate updated instructions to section 2142 of the PRM-I for 
Medicare cost-finding purposes and section 3605.2 of the PRM-II for 
purposes of the wage index. Below is a detailed discussion of our 
proposal for reporting pension costs under the wage index, as well as 
our final policy. A full discussion of our new methodology for Medicare 
cost-finding purposes is discussed in section IV.M. of this preamble, 
along with a summary of the public comments we received, our responses, 
and statements of our final policy.
    The final policy below reflects our commitment to the general 
principles of the President's Executive Order released January 18, 
2011, entitled ``Improving Regulation and Regulatory Review.''
b. Proposed and Final Policy for Allowable Pension Cost for the 
Medicare Wage Index
    As mentioned above, the function of the Medicare wage index is to 
measure relative hospital labor costs across all areas. Therefore, 
while we believe pension costs must be funded in order to be reportable 
(we refer readers to the August 12, 2010 Federal Register (74 FR 47369) 
for an explanation of this longstanding policy), it also is important 
for pension costs to be relatively stable from year to year so that 
there is less volatility in the wage index. Thus, in the FY 2012 IPPS/
LTCH PPS proposed rule, we proposed to include, in the wage index, 
pension costs equal to a hospital's average actual cash contributions 
deposited to its defined benefit pension plan over a 3-year period. The 
use of cash contributions as a measure of the costs incurred is 
necessary to ensure uniformity among all hospitals, regardless of their 
tax status or ERISA coverage. The 3-year average is intended to reduce 
the volatility that often occurs due to timing of contributions. Most 
pension plan sponsors have flexibility to determine the pension funding 
for a particular period and their decisions may be based on cash-flow 
considerations or other factors unrelated to the normal operation of 
the plan. Furthermore, the funding of current period pension costs may 
be delayed by almost a full year after the close of the period to which 
it applies. By using a 3-year average, we hope to enhance the stability 
of the wage index.
    To ensure that the average annual pension cost reflected in the 
wage index is consistent with the reporting period applicable to all 
other costs included in the index, we proposed that the 3-year average 
be centered on the current cost reporting period for the wage index. 
For example, the 2013 wage index is based on cost reporting periods 
beginning during Federal Fiscal Year (FFY) 2009 and would therefore 
reflect the average pension contributions made in hospitals' cost 
reporting periods beginning during FFYs 2008, 2009, and 2010. Thus, 
this policy would require pension plan contribution data for the cost 
reporting periods immediately preceding and immediately following the 
current cost reporting period for the wage index.
    In the proposed rule, we indicated that we do not anticipate that 
the use of contributions made in the period immediately following the 
current cost reporting period will create an administrative burden 
because, even under the existing rule, contributions to

[[Page 51588]]

fund current period costs are often deferred until the following 
period. In addition, trust account statements and general ledger 
reports to support the contributions should be readily available.
    We proposed to apply the above methodology for reporting pension 
costs for the wage index beginning with the FY 2013 IPPS update. We 
solicited public comment on this policy proposal and indicated that we 
were especially interested in receiving comments related to the 
proposed 3-year averaging period.
    Comment: A number of commenters suggested that CMS convene a 
Medicare Technical Advisory Group (MTAG) before establishing a policy 
on pension costs.
    Response: An MTAG is not required by statute. Engaging in notice 
and comment rulemaking provides sufficient process for developing a 
policy on this issue. In addition, timeliness of an updated rule is 
needed because the actuarial terminology used in section 2142 of the 
PRM-I is no longer used under ERISA as amended by the PPA. Also, as 
many commenters noted, there have been numerous appeals related to 
pension cost adjustments in recent years, and we believe our policy 
will alleviate the confusion demonstrated by such appeals. Proposing 
the issue through the notice and comment rulemaking process will allow 
CMS to address the issue by finalizing the policy effective October 1, 
2011.
    Comment: Many commenters supporting an MTAG also stated that an 
MTAG might recommend adoption of Generally Accepted Accounting 
Principles (GAAP) (with no funding limit) for the wage index. These 
commenters generally called for CMS to propose a methodology that 
accurately reflects the total resources hospitals expend over the life 
of their defined benefit plans and recognizes those costs fully in the 
wage index. They implied that GAAP could be the most appropriate method 
to satisfy this goal. One commenter noted that a proposal to base 
pension expense for both the wage index and cost-finding purposes on a 
3-year average of actual funding is inconsistent with the other 
principles of the cost report relying on GAAP and accrual versus cash-
basis accounting.
    Response: There is no consistently applied, standardized pension 
cost accounting methodology that produces a stable measure of the 
actual cost incurred over the life of a pension plan. Moreover, not all 
providers are subject to the same GAAP standards, and the rules 
applicable to pension costs under the various standards are not 
consistent. Uniformity of costs for the wage index would require all 
providers to compute pension costs under a particular GAAP standard. 
This would create an administrative burden for some and would limit 
transparency.
    Even under GAAP as promulgated by the Financial Accounting 
Standards Board (FASB), significant inconsistencies may exist because 
the rules allow gains and losses to either be recognized immediately 
(as a current period cost), or spread over future periods. Until 
recently, immediate recognition of gains and losses was seldom used 
because it can cause pension costs to be extremely volatile. For 
example, those who have adopted immediate recognition of gains and 
losses are likely to see their GAAP pension costs shift to pension 
income (negative costs) when interest rates begin to rise.
    Finally, the GAAP standards are currently in a state of flux. The 
Government Accounting Standards Board (GASB) and the International 
Accounting Standards Board (IASB) are both in the process of reviewing 
their rules for pension accounting. The FASB and IASB are discussing 
how U.S. accounting can be reconciled with international accounting. We 
anticipate changes in GAAP pension rules will reflect the trend towards 
mark-to-market financial reporting (immediate recognition of gains and 
losses) and thereby further increase the potential volatility of those 
cost measurements.
    Comment: Most commenters expressed concern that hospitals with 
prefunded pension plans would be disadvantaged, while those with 
underfunded plans would be rewarded. A number of these commenters 
called for a ``true-up'' of costs to ensure absolute equity between 
past and future periods, similar to the carry forward provision in the 
current PRM.
    Response: We continue to believe that absolute equity between past 
and future periods is not necessary since the wage index is a relative 
rather than an absolute measure of costs. However, in response to 
public comments, we agree that it would be appropriate to allow certain 
prefunded amounts to be reported as pension costs in future periods. 
Although most plan sponsors follow a relatively stable pattern of 
funding over time, accelerated funding may have been required due to 
stock market losses and declining interest rates in recent years. We 
are particularly sensitive to the fact that many hospitals were 
required to make contributions in excess of the amount reportable for 
Medicare purposes to satisfy ERISA requirements based on the ``current 
liability.'' We are also aware that some hospitals accelerated their 
pension plan funding in order to avoid benefit restrictions or other 
penalties under the PPA amendments to ERISA. As a result, we are 
finalizing a transition policy based on funding that may have exceeded 
the amounts reportable for the FY 2007 through FY 2012 wage indexes 
(cost reports with begin dates during the period of (on or after) 
October 1, 2002 through (on or before) September 30, 2008). We believe 
this period is representative of the period when contributions may have 
exceeded the amounts reportable for Medicare purposes.
    Our transition policy will allow providers to establish a 
prefunding balance equal to (A) minus (B), where (A) is the sum of cash 
contributions made during a period of consecutive provider cost 
reporting periods commencing no earlier than October 1, 2002 (the cost 
reporting period applicable for the FY 2007 wage index), and ending 
with the cost reporting period applicable for the FY 2012 wage index, 
and (B) is the sum of pension costs actually reflected in the wage 
index for the same cost reporting periods. It should be noted that the 
prefunding balance is not the same as the carry forward amount 
described in section 2142.6C of the PRM-I since the carry forward 
amount may include different periods and may include contributions made 
after the end of the cost reporting period ending immediately prior to 
the effective date of this new policy.
    The transition policy permits a hospital to include 1/10th of the 
prefunding balance in the wage index pension cost each year commencing 
with the FY 2013 wage index and ending with the FY 2022 wage index, 
that is, in 10 equal prefunding installments. Any prefunding 
installment that is not included in the wage index pension cost for the 
current cost reporting period cannot be reassigned and added to the 
wage index pension cost of any subsequent period. To take advantage of 
all 10 prefunding installments, hospitals must determine and begin 
claiming the prefunding installment in the pension cost for the FY 2013 
wage index. Distributing excess funding over a period of 10 years will 
ensure that when hospitals have substantial prefunding balances, the 
amount assigned to any one year will not unduly influence the wage 
index in that year. An example of how the pension cost (including the 
prefunding balance) is to be calculated is included in our response to 
another comment.

[[Page 51589]]

    For each cost reporting period that a prefunding installment is 
included in the reported pension cost, the provider must have 
documentation to support the calculation of the prefunding balance, 
including the contributions made to the pension plan and pension costs 
reported in the wage index for each applicable cost reporting period 
reflected in the calculation. In order to notify the public of this 
transition policy, we will issue a memorandum to Medicare contractors 
after the publication of this final policy, requiring them to notify 
hospitals in writing of these changes. In addition, we plan to post 
this letter on our Web site and will announce these changes through our 
regular open door forums.
    Comment: A number of commenters expressed support for our proposed 
rule. One viewed it as a compromise between methods required for 
private, public, and non-profit entities and thought its simplicity 
will help to maintain consistency. Another felt it would fairly reflect 
the actual costs, mitigate year-to-year volatility, and encourage 
adequate funding. One commenter agreed with our decision to eliminate 
actuarial based measurements because they were too complex and lead to 
inconsistency. A number of commenters noted that the Medicare wage 
index methodology ``should be transparent so that it can be easily 
reviewed and replicated by providers and other constituents, which 
allows providers and others to have confidence in the resulting 
indices.''
    Response: We appreciate the commenters' support of our proposal. 
Our final policy is intended to be one of simplicity that will help 
maintain consistency. We believe that this final policy will satisfy 
the objectives of a transparent methodology for including pension costs 
in the wage index.
    Comment: One commenter expressed concern that our proposal would 
hurt financially strapped hospitals that cannot afford to fund their 
plans. Another commenter believed that the proposal in the proposed 
rule would understate wage related costs in periods when a provider was 
not able to fund, and overstate wage costs in other periods. One 
commenter was concerned that the proposal in the proposed rule would 
``incent a hospital to `over fund' their plan in a particular year to 
increase its hourly rate.'' One commenter stated that our policy will 
penalize good management of investments while rewarding bad management.
    Response: Our policy is that costs must be funded to be reportable 
for Medicare purposes. Some providers have no legal obligation to fund 
their pension liabilities. There may be organizations that cannot 
afford to maintain their plan and will ultimately terminate the plan 
with unfunded liabilities. Moreover, some liabilities reflected in 
current period costs may never materialize due to future gains or 
benefit cutbacks.
    We understand that the level of funding will vary from one period 
to the next due to financial constraints or other factors, but believe 
that the 3-year average will help to limit volatility caused by short-
term fluctuations.
    We do not believe that Medicare wage index policy will have a 
material effect on the ultimate level of pension plan funding. Because 
pension contributions made to a qualified trust are generally 
irrevocable and most providers have limited financial resources, 
significant overfunding is not likely to occur solely because of 
Medicare wage index policy.
    Over the long term, pension costs may increase or decrease due to 
changes in plan coverage, benefit levels, or gains and losses from 
investment performance or other sources. However, these changes would 
ultimately affect the level of future pension costs regardless of how 
those costs have been reported in the past. Thus, we do not expect that 
providers will choose investments with poor returns or elevate their 
contribution levels for the sole purpose of increasing their wage 
index.
    Comment: Several commenters requested clarification on technical 
aspects of the proposed rule on timing or procedural issues. There was 
confusion regarding the treatment of payments made after the end of a 
fiscal year but within the 1-year period (or 3 years with extension) 
permitted under the liquidation of liabilities provision in section 
2305 of PRM-I.
    Response: The pension cost to be reflected in the wage index will 
be reported on Worksheet S-3, Part II and will equal the average 
contributions paid, on a cash basis, over the applicable 3-year period 
(plus any prefunding installment discussed above). The applicable 
period for the 3-year average includes the current cost reporting 
period applicable to the wage index (4 year lag), and the periods 
immediately preceding and immediately following the applicable wage 
index reporting period. The 3-year average is reportable even if it 
exceeds the current period contribution. There is no requirement to 
demonstrate that the 3-year average, prefunding installment or the 
amount funded in any particular period are necessary to satisfy a 
liability under ERISA or any other actuarial basis. Since actuarial 
measurements are not used to compute pension costs under the final 
policy, there is no longer a need for a crosswalk between the different 
terminology used by IRS and GAAP.
    For a new plan, the averaging period will be limited to the number 
of years the plan was in effect. If there is a merger (plan or 
corporate), contributions should include a provider's pension plan 
payments made either to a predecessor plan or the current plan during 
the applicable 3-year period. Increased costs attributable to benefit 
improvements will be recognized when funded. This is consistent with 
the amortization of costs associated with plan changes under GAAP and 
ERISA.
    The actual funded amounts for each cost reporting period to be 
included in the average will not necessarily appear on the cost report 
for the period in which they were made. We are considering 
modifications to the cost report to allow for reporting of current 
period contributions. Instead, provider will be required to obtain 
contribution data from the pension trustee, insurance carrier, Schedule 
B or SB of IRS Form 5500, and, if applicable, from accounting records 
showing the allocation of total plan contributions to each 
participating provider. These records should be maintained as needed 
for subsequent periods.
    The following is an example of the calculation of pension cost to 
be included in the FY 2013 wage index calculation for a hospital with a 
June 30 fiscal year end and a June 30 cost reporting period:

----------------------------------------------------------------------------------------------------------------
                                              Provider fiscal year                               Reported wage
           Wage index year           --------------------------------------   Total pension      index pension
                                          Beginning            Ending         contributions           cost
----------------------------------------------------------------------------------------------------------------
2007................................           7/1/2003          6/30/2004         $3,200,000         $2,500,000
2008................................           7/1/2004          6/30/2005      not available          2,800,000
2009................................           7/1/2005          6/30/2006          1,300,000            800,000
2010................................           7/1/2006          6/30/2007          2,700,000          3,000,000

[[Page 51590]]

 
2011................................           7/1/2007          6/30/2008          4,100,000          3,600,000
2012................................           7/1/2008          6/30/2009          3,000,000            200,000
2013................................           7/1/2009          6/30/2010          1,000,000  .................
                                               7/1/2010          6/30/2011          2,000,000  .................
----------------------------------------------------------------------------------------------------------------

    Since this hospital can only produce supporting documentation of 
contributions for the continuous fiscal years beginning 2005 through 
2008, the determination of the prefunding balance must exclude 
contributions from fiscal years beginning (FYB) in 2003 and 2004. The 
sum of contributions made during FYB in 2005 through 2008 is 
$11,100,000. The sum of pension costs reflected in the wage index for 
FYB in 2005 through 2008 is $7,600,000. The prefunding balance is 
$3,500,000 ($11,100,000--$7,600,000) and the prefunding installment is 
$350,000 ($3,500,000/10). The $350,000 prefunding installment can be 
added to the pension costs reported each year for the FY 2013 through 
FY 2022 wage index.
    In this illustration, the hospital determines the 3-year average 
pension contribution for the FY 2013 wage index is $2,000,000 based on 
cash contributions made during FYB in 2008, 2009, and 2010. It should 
report pension costs of $2,350,000 (the sum of the current 3-year 
average contribution of $2,000,000 [($1,000,000 + $3,000,000 + 
$2,000,000) 3] plus the prefunding installment of $350,000) on 
Worksheet S-3, Part II for the FY 2013 wage index. For audit purposes, 
the hospital must retain and make available its supporting 
documentation for the 3-year average, the prefunding balance and 
prefunding installment.
    We note that contributions are to be determined on a cash basis 
rather than an accrual basis. Since there is no recognition of funding 
which occurs after June 30, 2011, all of the data needed to determine 
the pension cost for the FY 2013 wage index will be readily available 
when the reporting process begins in October 2011. Under this final 
policy, neither section 2142 nor 2305 will be applicable for wage index 
purposes.
    Comment: One commenter believed that we may be ``attempting 
retroactive rulemaking.'' Another commenter stated that ``if it goes 
forward with the proposal or a revised version of the proposal, CMS 
should do so in a prospective manner * * * CMS should apply it only as 
of the FY 2016 wage index (which would, if using a 3-year rolling 
average, include pension costs from cost reporting periods beginning 
during Federal fiscal years 2011, 2012 and 2013).''
    Response: We disagree with the commenter that our policy represents 
retroactive rulemaking. We proposed this change through notice and 
comment rulemaking and have given the public sufficient time to provide 
input through public comments before making any policy change 
concerning the reporting of pension costs under the wage index. The use 
of data from prior periods to implement prospective policy changes does 
not constitute retroactive rulemaking. Therefore, we believe we have 
applied this policy change prospectively.
    Comment: One commenter recommended that there should be specific 
statements in the cost report that pension costs for cost-finding will 
be treated differently from pension costs for the wage index. The 
commenter also suggested separate PRM cost reporting instructions for 
the Medicare cost report versus the Medicare wage index, given that 
there will be separate methodologies for determining pension costs.
    Response: CMS is implementing different pension cost policies for 
wage index and cost finding purposes. Accordingly, the PRM will be 
revised to include separate and distinct pension cost provisions for 
wage index and cost-finding purposes.
    We would like to thank the provider community for their public 
comments on the proposed rule for reporting pension costs for Medicare 
wage index purposes. After considering their concerns and suggestions, 
we are finalizing our policy with modifications for reporting pension 
costs for Medicare wage index purposes. The final policy is effective 
for the FY 2013 wage index for which the wage index process begins in 
October 2011.
    Under the final policy, the pension cost to be included in the wage 
index equals a hospital's average cash contributions deposited to its 
defined benefit pension plan over a 3-year period, or number of years 
that the hospital has sponsored a defined benefit plan if less than 3 
years. Any reversion or other withdrawal of assets from the pension 
fund or trust is treated as a negative contribution for purposes of 
measuring the 3-year average. The 3-year average is centered on the 
base cost reporting period for the wage index. For example, the FY 2013 
wage index will be based on Medicare cost reporting periods beginning 
during FFY 2009 and will reflect the average pension contributions made 
in hospitals' cost reporting periods beginning during FFYs 2008, 2009, 
and 2010.
    In response to the public comments as discussed above, we are 
finalizing a transition policy that permits a hospital to determine a 
``prefunding balance'' based on pension contributions made but not 
reflected in the wage index during certain prior periods. Our 
transition policy will allow providers to establish a prefunding 
balance equal to (A) minus (B), where (A) is the sum of cash 
contributions made during a period of consecutive provider cost 
reporting periods commencing no earlier than October 1, 2002 (the cost 
reporting period applicable for the FY 2007 wage index), and ending 
with the cost reporting period applicable for the FY 2012 wage index, 
and (B) is the sum of pension costs actually reflected in the wage 
index for the same cost reporting periods.
    The transition policy permits a hospital to include 1/10th of the 
prefunding balance in the wage index pension cost each year commencing 
with the FY 2013 wage index and ending with the FY 2022 wage index, 
that is, in 10 equal prefunding installments. Any prefunding 
installment that is not included in the wage index pension cost for the 
current year cannot be reassigned and added to the wage index pension 
cost of any subsequent year.
3. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2011, the wage 
index for FY 2012 also excludes the direct and overhead salaries and 
hours for services not subject to IPPS payment, such as SNF services, 
home health services, costs related to GME (teaching physicians and 
residents) and certified registered nurse anesthetists (CRNAs), and 
other subprovider components that are not paid under the IPPS. The FY 
2012 wage index also excludes the

[[Page 51591]]

salaries, hours, and wage-related costs of hospital-based rural health 
clinics (RHCs), and Federally qualified health centers (FQHCs) because 
Medicare pays for these costs outside of the IPPS (68 FR 45395). In 
addition, salaries, hours, and wage-related costs of CAHs are excluded 
from the wage index, for the reasons explained in the FY 2004 IPPS 
final rule (68 FR 45397).
4. Use of Wage Index Data by Providers Other Than Acute Care Hospitals 
under the IPPS
    Data collected for the IPPS wage index are also currently used to 
calculate wage indices applicable to other providers, such as SNFs, 
home health agencies (HHAs), and hospices. In addition, they are used 
for prospective payments to IRFs, IPFs, and LTCHs, and for hospital 
outpatient services. We note that, in the IPPS rules, we do not address 
comments pertaining to the wage indices for non-IPPS providers, other 
than for LTCHs. Such comments should be made in response to separate 
proposed rules for those providers.

E. Verification of Worksheet S-3 Wage Data

    The wage data for the FY 2012 wage index were obtained from 
Worksheet S-3, Parts II and III of the Medicare cost report for cost 
reporting periods beginning on or after October 1, 2007, and before 
October 1, 2008. For wage index purposes, we refer to cost reports 
during this period as the ``FY 2008 cost report,'' the ``FY 2008 wage 
data,'' or the ``FY 2008 data.'' Instructions for completing Worksheet 
S-3, Parts II and III are in the Provider Reimbursement Manual (PRM), 
Part II, sections 3605.2 and 3605.3. The data file used to construct 
the wage index includes FY 2008 data submitted to us as of June 27, 
2011. As in past years, we performed an intensive review of the wage 
data, mostly through the use of edits designed to identify aberrant 
data.
    We asked our fiscal intermediaries/MACs to revise or verify data 
elements that result in specific edit failures. For the proposed FY 
2012 wage index, we identified and excluded 23 providers with data that 
was too aberrant to include in the proposed wage index, although we 
stated that if data elements for some of these providers are corrected, 
we intended to include some of these providers in the FY 2012 final 
wage index. We have received corrected data for seven providers, and 
therefore, we are including the data for these seven providers in the 
FY 2012 final wage index. However, we have also determined that the 
data for three additional providers are too aberrant to include in the 
FY 2012 final wage index. Thus, in total, we are excluding the data of 
27 (23 + 7--3) providers from the FY 2012 final wage index.
    In constructing the FY 2012 wage index, we included the wage data 
for facilities that were IPPS hospitals in FY 2008, inclusive of those 
facilities that have since terminated their participation in the 
program as hospitals, as long as those data did not fail any of our 
edits for reasonableness. We believe that including the wage data for 
these hospitals is, in general, appropriate to reflect the economic 
conditions in the various labor market areas during the relevant past 
period and to ensure that the current wage index represents the labor 
market area's current wages as compared to the national average of 
wages. However, we excluded the wage data for CAHs as discussed in the 
FY 2004 IPPS final rule (68 FR 45397). In the proposed rule, we removed 
19 hospitals that converted to CAH status between February 16, 2010, 
the cut-off date for CAH exclusion from the FY 2011 wage index, and 
February 15, 2011, the cut-off date for CAH exclusion from the FY 2012 
wage index. However, since the issuance of the proposed rule, we have 
learned of four additional hospitals that have converted to CAH status 
between February 16, 2010, and February 15, 2011. We have excluded the 
wage data of these four hospitals as well. After removing hospitals 
with aberrant data and hospitals that converted to CAH status, the FY 
2012 final wage index is calculated based on 3,489 hospitals.
    In the FY 2008 final rule with comment period (72 FR 47317) and the 
FY 2009 IPPS final rule (73 FR 48582), we discussed our policy for 
allocating a multicampus hospital's wages and hours data, by full-time 
equivalent (FTE) staff, among the different labor market areas where 
its campuses are located. During the FY 2011 wage index desk review 
process, we requested fiscal intermediaries/MACs to contact multicampus 
hospitals that had campuses in different labor market areas to collect 
the data for the allocation. The FY 2011 wage index included separate 
wage data for campuses of three multicampus hospitals.
    For FY 2012, as we discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50168), and as we proposed, we are no longer allowing 
hospitals to use discharge data for the allocation of a multicampus 
hospital's wage data among the different labor market areas where its 
campuses are located. The Medicare cost report was updated in May 2008 
to provide for the reporting of FTE data by campus for multicampus 
hospitals (Form CMS-2552-96, Worksheet S-2, lines 61 and 62). The data 
from cost reporting periods that begin in FY 2008 are now available for 
calculating the wage index for FY 2012. Therefore, a multicampus 
hospital will not have the option to use either FTE or discharge data 
for allocating wage data among its campuses by providing the 
information from the applicable cost reporting period to CMS through 
its fiscal intermediary/MAC. Table 2 for the FY 2012 wage index, which 
is listed in section VI. of the Addendum to this proposed rule and 
available via the Internet, includes separate wage data for campuses of 
three multicampus hospitals.

F. Method for Computing the FY 2012 Unadjusted Wage Index

1. Steps for Computation
    The method used to compute the FY 2012 wage index without an 
occupational mix adjustment follows:
    Step 1--As noted above, we based the proposed FY 2012 wage index on 
wage data reported on the FY 2008 Medicare cost reports. We gathered 
data from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts II and III of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 2007, and before October 1, 2008. In addition, 
we included data from some hospitals that had cost reporting periods 
beginning before October 2007 and reported a cost reporting period 
covering all of FY 2008. These data are included because no other data 
from these hospitals would be available for the cost reporting period 
described above, and because particular labor market areas might be 
affected due to the omission of these hospitals. However, we generally 
describe these wage data as FY 2008 data. We note that, if a hospital 
had more than one cost reporting period beginning during FY 2008 (for 
example, a hospital had two short cost reporting periods beginning on 
or after October 1, 2007, and before October 1, 2008), we included wage 
data from only one of the cost reporting periods, the longer, in the 
wage index calculation. If there was more than one cost reporting 
period and the periods were equal in length, we included the wage data 
from the later period in the wage index calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. 
(We note that, beginning with FY 2008 (72 FR 47315),

[[Page 51592]]

we include Lines 22.01, 26.01, and 27.01 of Worksheet S-3, Part II for 
overhead services in the wage index. However, we note that the wages 
and hours on these lines are not incorporated into Line 101, Column 1 
of Worksheet A, which, through the electronic cost reporting software, 
flows directly to Line 1 of Worksheet S-3, Part II. Therefore, the 
first step in the wage index calculation for FY 2011 is to compute a 
``revised'' Line 1, by adding to the Line 1 on Worksheet S-3, Part II 
(for wages and hours respectively) the amounts on Lines 22.01, 26.01, 
and 27.01.) In calculating a hospital's average salaries plus wage-
related costs, we subtract from Line 1 (total salaries) the GME and 
CRNA costs reported on Lines 2, 4.01, 6, and 6.01, the Part B salaries 
reported on Lines 3, 5 and 5.01, home office salaries reported on Line 
7, and exclude salaries reported on Lines 8 and 8.01 (that is, direct 
salaries attributable to SNF services, home health services, and other 
subprovider components not subject to the IPPS). We also subtract from 
Line 1 the salaries for which no hours were reported. To determine 
total salaries plus wage-related costs, we add to the net hospital 
salaries the costs of contract labor for direct patient care, certain 
top management, pharmacy, laboratory, and nonteaching physician Part A 
services (Lines 9 and 10), home office salaries and wage-related costs 
reported by the hospital on Lines 11 and 12, and nonexcluded area wage-
related costs (Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on Line 13 of Worksheet S-3, Part III. Next, we compute the 
amounts of overhead wage-related costs to be allocated to excluded 
areas using three steps: (1) we determine the ratio of overhead hours 
(Part III, Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to 
revised hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 
1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 
22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent 
wage index calculations, we are excluding the sum of lines 22.01, 
26.01, and 27.01 from the determination of the ratio of overhead hours 
to revised hours because hospitals typically do not provide fringe 
benefits (wage-related costs) to contract personnel. Therefore, it is 
not necessary for the wage index calculation to exclude overhead wage-
related costs for contract personnel. Further, if a hospital does 
contribute to wage-related costs for contracted personnel, the 
instructions for Lines 22.01, 26.01, and 27.01 require that associated 
wage-related costs be combined with wages on the respective contract 
labor lines.); (2) we compute overhead wage-related costs by 
multiplying the overhead hours ratio by wage-related costs reported on 
Part II, Lines 13, 14, and 18; and (3) we multiply the computed 
overhead wage-related costs by the above excluded area hours ratio. 
Finally, we subtract the computed overhead salaries, wage-related 
costs, and hours associated with excluded areas from the total salaries 
(plus wage-related costs) and hours derived in Steps 2 and 3.
    Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries 
plus wage-related costs. To make the wage adjustment, we estimate the 
percentage change in the employment cost index (ECI) for compensation 
for each 30-day increment from October 14, 2005, through April 15, 
2007, for private industry hospital workers from the BLS' Compensation 
and Working Conditions. We use the ECI because it reflects the price 
increase associated with total compensation (salaries plus fringes) 
rather than just the increase in salaries. In addition, the ECI 
includes managers as well as other hospital workers. This methodology 
to compute the monthly update factors uses actual quarterly ECI data 
and assures that the update factors match the actual quarterly and 
annual percent changes. We also note that, since April 2006 with the 
publication of March 2006 data, the BLS' ECI uses a different 
classification system, the North American Industrial Classification 
System (NAICS), instead of the Standard Industrial Codes (SICs), which 
no longer exist. We have consistently used the ECI as the data source 
for our wages and salaries and other price proxies in the IPPS market 
basket, and we are not making any changes to the usage for FY 2012. The 
factors used to adjust the hospital's data were based on the midpoint 
of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
               After                         Before             factor
------------------------------------------------------------------------
10/14/2007.........................  11/15/2007............      1.03990
11/14/2007.........................  12/15/2007............      1.03699
12/14/2007.........................  01/15/2008............      1.03402
01/14/2008.........................  02/15/2008............      1.03113
02/14/2008.........................  03/15/2008............      1.02831
03/14/2008.........................  04/15/2008............      1.02555
04/14/2008.........................  05/15/2008............      1.02286
05/14/2008.........................  06/15/2008............      1.02024
06/14/2008.........................  07/15/2008............      1.01766
07/14/2008.........................  08/15/2008............      1.01511
08/14/2008.........................  09/15/2008............      1.01258
09/14/2008.........................  10/15/2008............      1.01015
10/14/2008.........................  11/15/2008............      1.00787
11/14/2008.........................  12/15/2008............      1.00575
12/14/2008.........................  01/15/2009............      1.00375
01/14/2009.........................  02/15/2009............      1.00183
02/14/2009.........................  03/15/2009............      1.00000
03/14/2009.........................  04/15/2009............      0.99820
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2008, and ending December 31, 2008, is June 30, 2008. An 
adjustment factor of 1.01766 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 2008 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add the total 
adjusted salaries plus wage-related costs obtained in Step 5 for all 
hospitals in that area to determine the total adjusted salaries plus 
wage-related costs for the labor market area.
    Step 7--We divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.

[[Page 51593]]

    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage (unadjusted for occupational mix) is 
$36.2784.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7 by the national average 
hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We add the total adjusted salaries plus wage-
related costs (as calculated in Step 5) for all hospitals in Puerto 
Rico and divide the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall average hourly wage 
(unadjusted for occupational mix) of $15.3899 for Puerto Rico. For each 
labor market area in Puerto Rico, we calculate the Puerto Rico-specific 
wage index value by dividing the area average hourly wage (as 
calculated in Step 7) by the overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. The areas affected by this provision are 
identified in Table 4D which is listed in section VI. of the Addendum 
to this final rule and available via the Internet.
    In the FY 2012 IPPS/LTCH PPS proposed rule, we made no proposals 
for changing our policies pertaining to the rural floor provision. 
However, we received several public comments, particularly regarding 
the FY 2012 rural floor wage index for Massachusetts, which was 
discussed in section VI.B.7. of Appendix A (76 FR 26059 and 26060) as 
part of the regulatory impact analysis for the proposed rule.
    Comment: Some commenters stated that CMS had correctly calculated 
the Massachusetts rural floor wage index in accordance with existing 
law and regulations. One commenter agreed with the basic policy and 
premise of the rural floor limit but opined that all hospitals in 
Massachusetts receiving a significant increase in Medicare revenues as 
a result of a small hospital converting to an acute care provider is 
inconsistent with the intent and spirit of the law. The commenter 
suggested that CMS revisit its regulatory and policy options as it 
relates to section 4410 of the BBA.
    The MedPAC stated that the Massachusetts rural floor situation is 
suggestive of why a new wage index system is needed, adding that the 
current system is not equitable because extra payments made to 
hospitals receiving such exceptions are budget neutral; therefore, all 
hospitals must absorb the cost. A national hospital association 
requested that CMS provide a table indicating the state-by-state impact 
of the rural floor provision for providers in each state, including a 
schedule of what the area wage indexes would be if the rural floor was 
not applied. The commenter also suggested that CMS publish this 
information annually.
    Response: Beginning with this FY 2012 IPPS-LTCH final rule, we are 
including in the impact section of Appendix A of both the proposed and 
final rules a table indicating State level impacts of the rural floor 
provision. For FY 2012, this table includes the impacts of both the 
rural and imputed floors, as discussed under section III.F.2. of this 
preamble. In addition, we are revising Table 4D of the Addendum, which 
specifies the wage index for States or urban areas receiving the 
frontier, rural, or imputed floor, to include a column indicating the 
pre-floor area wage index. We will consider the commenters' other 
suggestions as part of our development of the Report to Congress on 
reforming the wage index, required by section 3137(b) of the Affordable 
Care Act and due to the Congress by December 31, 2011.
2. Imputed Floor Policy
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25878 and 25879), 
we discussed the expiration of the imputed floor policy. (We refer 
readers to FY 2005 IPPS final rule (69 FR 49109 through 49111) for an 
explanation of CMS' adoption of the ``imputed'' floor as a temporary 3-
year regulatory measure to address concerns that hospitals in all-urban 
States were disadvantaged by the absence of rural hospitals to set a 
wage index floor in those States; the FY 2008 IPPS final rule with 
comment period (72 FR 47321) for a discussion of the extension of the 
imputed floor through FY 2008; and the FY 2009 IPPS final rule (73 FR 
48570 through 48574 and 48584) for a discussion of the extension of the 
imputed floor for an additional 3 years, through FY 2011, due to 
applying statewide budget neutrality for the rural and imputed floors.) 
As noted in the FY 2012 IPPS/LTCH PPS proposed rule and the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50160), section 3141 of the Affordable 
Care Act replaced the statewide budget neutrality policy and required 
that budget neutrality for the rural and imputed floor be applied 
``through a uniform, national adjustment to the area wage index'' 
instead of within each State beginning in FY 2011. However, the 
Affordable Care Act did not include a provision to extend the imputed 
floor or to make the imputed floor permanent.
    As discussed in the FY 2008 IPPS proposed rule and final rule with 
comment period (72 FR 24786 and 72 FR 47322, respectively), the 
application of the national budget neutrality requirement for the rural 
and imputed floors requires a transfer of payments from hospitals in 
States with rural hospitals but where the rural floor is not applied to 
hospitals in States where the rural or imputed floor is applied. In the 
final FY 2012 wage index, the rural floor will apply to 297 hospitals 
in 29 States. Continuing the imputed floor policy into FY 2012 results 
in an imputed floor applied for 39 hospitals in New Jersey. In the FY 
2012 IPPS/LTCH PPS proposed rule, we did not propose to extend the 
imputed floor but sought public comments regarding the expiration of 
the imputed floor.
    Comment: Although a few commenters, including a national hospital 
association, supported CMS making no proposal to extend the imputed 
floor policy and agreed that this type of floor benefits only one State 
at the expense of all others, applies even though there are no rural 
areas in the State, and should apply only when required by statute, 
several commenters requested that CMS extend the current imputed floor 
policy. These commenters, including a national hospital association and 
a few State hospital associations, noted that, absent any new wage 
index policies that address the original need for the imputed floor, an 
imputed floor should be continued. Some of the commenters suggested 
that CMS make the imputed floor policy permanent. They asserted that 
hospitals in all-urban States suffer financial and competitive 
disadvantages, and they believed that CMS' permanent adoption of an 
imputed floor policy would remedy these disadvantages. The commenters 
stated that other States could potentially benefit from the imputed 
floor in the future should their circumstances

[[Page 51594]]

change, and the fact that only one State currently benefits from the 
policy should not serve as CMS' rationale for eliminating it. One 
commenter also suggested that if the imputed floor is to expire, it 
should be phased out over several years to avoid dramatic cost cutting 
and elimination of vital services.
    Response: In response to commenters' concerns regarding the 
proposed September 30, 2011 expiration of the imputed floor, we have 
decided to extend the policy for 2 additional years, for FYs 2012 and 
2013 (that is, through September 30, 2013), after which time we will 
reevaluate the policy. We believe that continuing the current imputed 
floor policy through FY 2013 is a reasonable accommodation for the 
hospitals that have benefited from the imputed floor. Also, a 2-year 
extension period coincides with the requirement under section 3137(c) 
of Public Law 111-148 that CMS must apply the reclassification average 
hourly wage comparison standards that were in place during FY 2008 
``until the first fiscal year beginning on or after the date that is 
one year after the Secretary of Health and Human Services submits a 
report to Congress on reforming the wage index under 3137(b) of Public 
Law 111-148.'' (We refer readers to a complete discussion of this 
requirement in the FY 2011 IPPS/LTCH PPS supplemental proposed rule (75 
FR 30919).) The report to Congress is due by December 31, 2011. 
Therefore, because the first fiscal year beginning after December 31, 
2012 (a year after the report to Congress is due) starts on October 1, 
2013, CMS cannot make any changes to the reclassification average 
hourly wage comparison standards before FY 2014. Given our current 
study of the entire wage index system, including geographic 
reclassification and the rural and imputed floor policies, we believe 
it is reasonable to continue the current imputed floor policy through 
the same evaluation period specified under section 3137(c) of Public 
Law 111-148.
    Therefore, in this FY 2012 final rule, we are providing an 
extension of the current imputed floor policy, including a national 
budget neutrality adjustment, through FY 2013 (that is, through 
September 30, 2013). Accordingly, we also have revised the Medicare 
regulations in Sec.  412.64(h)(4) to reflect this extension. We note 
that, although the extension of the imputed floor policy in this final 
rule is partially based on the due date of the report to Congress under 
section 3137(b) of Public Law 111-148 and the time period for which CMS 
is prohibited from making any changes to the FY 2008 reclassification 
average hourly wage comparison standards, under 3137(c) of Public Law 
111-148, this extension of the imputed floor policy is effective 
through the end of FY 2013, regardless of any changes that may be 
subsequently made pursuant to these statutory provisions.
    Thus, the final FY 2012 wage index and impact tables associated 
with this final rule and published on CMS' Web site include the 
application of the imputed floor policy and a national budget 
neutrality adjustment for the imputed floor. As mentioned above, 39 
providers in New Jersey will receive an increase in their FY 2012 wage 
index due to the imputed floor policy.
3. FY 2012 Puerto Rico Wage Index
    We note that, for the FY 2012 wage index, there is one new hospital 
in rural Puerto Rico when previously there were none. However, this 
hospital has no cost reporting period beginning during FY 2008 and, 
therefore, has no wage data for inclusion in the FY 2012 wage index 
calculation for rural Puerto Rico. We discussed in the FY 2005 IPPS 
final rule that the imputed floor policy in Sec.  412.64(h)(4) of the 
regulations does not apply to Puerto Rico hospitals (69 FR 49111). (We 
note that in this discussion in the FY 2012 IPPS/LTCH PPS proposed 
rule, we incorrectly stated that the imputed floor policy would apply 
to Puerto Rico. We have revised the discussion in the preamble of this 
final rule to accurately reflect our policies.) However, we adopted the 
policy in the FY 2008 IPPS final rule with comment period (72 FR 47323) 
that if there are no hospitals' cost report wage data available to 
calculate a State's rural floor, and the imputed floor policy has 
expired (or, in the case of Puerto Rico, the imputed floor is not 
applicable), ``we will use the unweighted average of the wage indices 
from all CBSAs (urban areas) that are contiguous to the rural counties 
of the State to compute the State's rural floor. (We define contiguous 
as sharing a border.)'' Except for Fajardo, Puerto Rico (CBSA 21940), 
all other Puerto Rico urban areas are contiguous to a rural area. 
Therefore, based on our existing policy, the FY 2012 rural Puerto Rico 
wage index is calculated based on the average of the FY 2012 wage 
indices for the following urban areas: Aguadilla-Isabela-San 
Sebasti[aacute]n, PR (CBSA 10380); Guayama, PR (CBSA 25020); 
Mayag[uuml]ez, PR (CBSA 32420); Ponce, PR (CBSA 38660), San 
Germ[aacute]n-Cabo Rojo, PR (CBSA 41900), San Juan-Caguas-Guaynabo, PR 
(CBSA 41980), and Yauco, PR (CBSA 49500).

G. Analysis and Implementation of the Occupational Mix Adjustment and 
the FY 2012 Occupational Mix Adjusted Wage Index

    As discussed in section III.C. of this preamble, for FY 2012, we 
apply the occupational mix adjustment to 100 percent of the FY 2012 
wage index. We calculated the occupational mix adjustment using data 
from the 2007-2008 occupational mix survey data, using the methodology 
described in section III.C.3. of this preamble.
    Using the occupational mix survey data and applying the 
occupational mix adjustment to 100 percent of the FY 2012 wage index 
results in a national average hourly wage of $36.2481 and a Puerto-Rico 
specific average hourly wage of $15.4142. After excluding data of 
hospitals that either submitted aberrant data that failed critical 
edits, or that do not have FY 2008 Worksheet S-3 cost report data for 
use in calculating the FY 2012 wage index, we calculated the FY 2012 
wage index using the occupational mix survey data from 3,168 hospitals. 
Using the Worksheet S-3 cost report data of 3,489 hospitals and 
occupational mix survey data from 3,168 hospitals represents a 90.8 
percent survey response rate. The FY 2012 national average hourly wages 
for each occupational mix nursing subcategory as calculated in Step 2 
of the occupational mix calculation are as follows:

------------------------------------------------------------------------
                                                          Average hourly
          Occupational mix nursing subcategory                 wage
------------------------------------------------------------------------
National RN............................................    $36.075785685
National LPN and Surgical Technician...................     20.860811964
National Nurse Aide, Orderly, and Attendant............     14.619464256
National Medical Assistant.............................     16.443954736
National Nurse Category................................     30.463606009
------------------------------------------------------------------------

    The national average hourly wage for the entire nurse category as 
computed in Step 5 of the occupational mix calculation is 
$30.463606009. Hospitals with a nurse category average hourly wage (as 
calculated in Step 4) of greater than the national nurse category 
average hourly wage receive an occupational mix adjustment factor (as 
calculated in Step 6) of less than 1.0. Hospitals with a nurse category 
average hourly wage (as calculated in Step 4) of less than the national 
nurse category average hourly wage receive an occupational mix 
adjustment factor (as calculated in Step 6) of greater than 1.0.
    Based on the 2007-2008 occupational mix survey data, we determined 
(in Step 7 of the occupational mix calculation) that the national 
percentage of hospital

[[Page 51595]]

employees in the nurse category is 44.31 percent, and the national 
percentage of hospital employees in the all other occupations category 
is 55.69 percent. At the CBSA level, the percentage of hospital 
employees in the nurse category ranged from a low of 29.08 percent in 
one CBSA, to a high of 70.76 percent in another CBSA.
    We compared the FY 2012 occupational mix adjusted wage indices for 
each CBSA to the unadjusted wage indices for each CBSA. As a result of 
applying the occupational mix adjustment to the wage data, the wage 
index values for 209 (53.5 percent) urban areas and 32 (66.7 percent) 
rural areas would increase. One hundred nine (27.9 percent) urban areas 
would increase by 1 percent or more, and 5 (1.3 percent) urban areas 
would increase by 5 percent or more. Seventeen (35.4 percent) rural 
areas would increase by 1 percent or more, and no rural areas would 
increase by 5 percent or more. However, the wage index values for 182 
(46.5 percent) urban areas and 16 (33.3 percent) rural areas would 
decrease. Eighty-nine (22.8 percent) urban areas would decrease by 1 
percent or more, and no urban area would decrease by 5 percent or more. 
Seven (14.6 percent) rural areas would decrease by 1 percent or more, 
and no rural areas would decrease by 5 percent or more. The largest 
positive impacts are 7.83 percent for an urban area and 2.91 percent 
for a rural area. The largest negative impacts are 4.45 percent for an 
urban area and 2.78 percent for a rural area. No urban or rural areas 
are unaffected. These results indicate that a larger percentage of 
rural areas (66.7 percent) would benefit from the occupational mix 
adjustment than do urban areas (53.5 percent). While these results are 
more positive overall for rural areas than under the previous 
occupational mix adjustment that used survey data from 2006, 
approximately one-third (33.3 percent) of rural CBSAs would still 
experience a decrease in their wage indices as a result of the 
occupational mix adjustment.
    The wage index values for FY 2012 (except those for hospitals 
receiving wage index adjustments under section 1886(d)(13) of the Act) 
included in Tables 4A, 4B, 4C, and 4F, which are listed in section VI. 
of the Addendum to this final rule and available via the Internet, 
include the occupational mix adjustment.
    Tables 3A and 3B, which are listed in section VI. of the Addendum 
to this final rule and available via the Internet, list the 3-year 
average hourly wage for each labor market area before the redesignation 
or reclassification of hospitals based on FYs 2010, 2011, and 2012 cost 
reporting periods. Table 3A lists these data for urban areas, and Table 
3B lists these data for rural areas. In addition, Table 2, which is 
listed in section VI. of the Addendum to this final rule and available 
via the Internet, includes the adjusted average hourly wage for each 
hospital from the FY 2006 and FY 2007 cost reporting periods, as well 
as the FY 2008 period used to calculate the FY 2012 wage index. The 3-
year averages are calculated by dividing the sum of the dollars 
(adjusted to a common reporting period using the method described 
previously) across all 3 years, by the sum of the hours. If a hospital 
is missing data for any of the previous years, its average hourly wage 
for the 3-year period is calculated based on the data available during 
that period. The average hourly wages in Tables 2, 3A, and 3B, which 
are listed in section VI. of the Addendum to this final rule and 
available via the Internet, include the occupational mix adjustment. 
The wage index values in Tables 4A, 4B, 4C, and 4D also include the 
national rural and imputed floor budget neutrality adjustment.

H. Revisions to the Wage Index Based on Hospital Redesignations and 
Reclassifications

1. General
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. Hospitals must apply to the MGCRB to 
reclassify 13 months prior to the start of the fiscal year for which 
reclassification is sought (generally by September 1). Generally, 
hospitals must be proximate to the labor market area to which they are 
seeking reclassification and must demonstrate characteristics similar 
to hospitals located in that area. The MGCRB issues its decisions by 
the end of February for reclassifications that become effective for the 
following fiscal year (beginning October 1). The regulations applicable 
to reclassifications by the MGCRB are located in 42 CFR 412.230 through 
412.280. (We refer readers to a discussion of the proximity 
requirements in the FY 2002 IPPS final rule (66 FR 39874 and 39875).)
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use average hourly wage data from 
the 3 most recently published hospital wage surveys in evaluating a 
hospital's reclassification application for FY 2003 and any succeeding 
fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at 42 CFR 412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the labor market area to which the greatest number 
of workers in the county commute, if the rural county would otherwise 
be considered part of an urban area under the standards for designating 
MSAs and if the commuting rates used in determining outlying counties 
were determined on the basis of the aggregate number of resident 
workers who commute to (and, if applicable under the standards, from) 
the central county or counties of all contiguous MSAs. In light of the 
CBSA definitions and the Census 2000 data that we implemented for FY 
2005 (69 FR 49027), we undertook to identify those counties meeting 
these criteria. Eligible counties are discussed and identified under 
section III.H.5. of this preamble.
2. Effects of Reclassification/Redesignation
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals are applicable both to the hospitals deemed 
urban under section 1886(d)(8)(B) of the Act and hospitals that were 
reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) 
of the Act, the wage index values were determined by considering the 
following:
     If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the

[[Page 51596]]

wage data for the redesignated hospitals applies to the redesignated 
hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
     Rural areas whose wage index values would be reduced by 
excluding the wage data for hospitals that have been redesignated to 
another area continue to have their wage index values calculated as if 
no redesignation had occurred (otherwise, redesignated rural hospitals 
are excluded from the calculation of the rural wage index). The wage 
index value for a redesignated rural hospital cannot be reduced below 
the wage index value for the rural areas of the State in which the 
hospital is located.
    CMS also has adopted the following policies:
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the urban area to which 
the hospital is reclassified (subject to the rules described above) and 
the wage index calculation of the urban area where the hospital is 
physically located.
     In cases where hospitals have reclassified to rural areas, 
such as urban hospitals reclassifying to rural areas under 42 CFR 
412.103, the hospital's wage data are: (a) included in the rural wage 
index calculation, unless doing so would reduce the rural wage index; 
and (b) included in the urban area where the hospital is physically 
located. The effect of this policy, in combination with the statutory 
requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural 
areas may receive a wage index based upon the highest of: (1) Wage data 
from hospitals geographically located in the rural area; (2) wage data 
from hospitals geographically located in the rural area, but excluding 
all data associated with hospitals reclassifying out of the rural area 
under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) 
wage data associated with hospitals geographically located in the area 
plus all hospitals reclassified into the rural area.
    In addition, in accordance with the statutory language referring to 
``hospitals'' in the plural under sections 1886(d)(8)(C)(i) and 
1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider 
reclassified hospitals as a group when deciding whether to include or 
exclude them from both urban and rural wage index calculations.
3. FY 2012 MGCRB Reclassifications
a. FY 2012 Reclassification Requirements and Approvals
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in 42 CFR 
412.230 through 412.280.
    At the time this final rule was constructed, the MGCRB had 
completed its review of FY 2012 reclassification requests. Based on 
such reviews, there were 280 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2012. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2012, hospitals 
reclassified during FY 2010 or FY 2011 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 283 hospitals approved for wage index 
reclassifications in FY 2010 and 294 hospitals approved for wage index 
reclassifications in FY 2011. Of all of the hospitals approved for 
reclassification for FY 2010, FY 2011, and FY 2012, based upon the 
review at the time of this final rule, 659 hospitals are in a 
reclassification status for FY 2012.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of a proposed rule. CMS became aware that an error was 
made in the calculation of the proposed wage index out-migration 
adjustment in Table 4J of the FY 2012 IPPS/LTCH PPS proposed rule. This 
error in the calculation affected 104 providers that became eligible to 
receive the out-migration adjustment. We published a correction notice 
in the Federal Register on July 13, 2011 (76 FR 41178), which had a 
display date of July 11, 2011, announcing the corrections to the 
tables. Additionally, we issued a letter to hospitals on July 1, 2011, 
through their fiscal intermediaries/MACs advising that we extended the 
45-day deadline and allowed hospitals a 7-day period from the date of 
display of the correction notice (that is, by July 18, 2011) for 
hospitals that wished to request a revision to an already submitted 
withdrawal/termination request under 42 CFR 412.73, or that wished to 
request a withdrawal of a reclassification or termination of an 
existing 3-year section 1886(d)(10) reclassification that would be 
effective in FY 2012. Hospitals also may cancel prior reclassification 
withdrawals or terminations in certain circumstances. For further 
information about withdrawing, terminating, or canceling a previous 
withdrawal or termination of a 3-year reclassification for wage index 
purposes, we refer the reader to 42 CFR 412.273, as well as the FY 2002 
IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 
50065). Additional discussion on withdrawals and terminations, and 
clarifications regarding reinstating reclassifications and ``fallback'' 
reclassifications, were included in the FY 2008 IPPS final rule (72 FR 
47333).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, terminations, wage index corrections, appeals, 
and the Administrator's review process for FY 2012 are incorporated 
into the wage index values published in the FY 2012 IPPS/LTCH PPS final 
rule. These changes affect not only the wage index value for specific 
geographic areas, but also the wage index value redesignated/
reclassified hospitals receive; that is, whether they receive the wage 
index that includes the data for both the hospitals already in the area 
and the redesignated/reclassified hospitals. Further, the wage index 
value for the area from which the hospitals are redesignated/
reclassified may be affected.
b. Applications for Reclassifications for FY 2013
    Applications for FY 2013 reclassifications are due to the MGCRB by 
September 1, 2011. We note that this is also the deadline for canceling 
a previous wage index reclassification withdrawal or termination under 
42 CFR 412.273(d). Applications and other information about MGCRB 
reclassifications may be obtained, beginning in mid-July 2011, via the 
CMS Internet Web site at: http://cms.hhs.gov/MGCRB/02_instructions_and_applications.asp, or by calling the MGCRB at (410) 786-1174. The 
mailing address of the MGCRB is: 2520 Lord Baltimore Drive, Suite L, 
Baltimore, MD 21244-2670.

[[Page 51597]]

4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act
    Section 1886(d)(8)(B) of the Act requires us to treat a hospital 
located in a rural county adjacent to one or more urban areas as being 
located in the MSA if certain criteria are met. Effective beginning FY 
2005, we use OMB's 2000 CBSA standards and the Census 2000 data to 
identify counties in which hospitals qualify under section 
1886(d)(8)(B) of the Act to receive the wage index of the urban area. 
Hospitals located in these counties have been known as ``Lugar'' 
hospitals and the counties themselves are often referred to as 
``Lugar'' counties. We provide the FY 2011 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section 1886(d)(8)(B) of the Act. For discharges occurring on or 
after October 1, 2011, hospitals located in the rural county in the 
first column of this chart will be redesignated for purposes of using 
the wage index of the urban area listed in the second column.

 Rural Counties Containing Hospitals Redesignated as Urban Under Section
                        1886(d)(8)(B) of the Act
                  [Based on CBSAs and Census 2000 Data]
------------------------------------------------------------------------
              Rural county                             CBSA
------------------------------------------------------------------------
Cherokee, AL...........................  Rome, GA.
Macon, AL..............................  Auburn-Opelika, AL.
Talladega, AL..........................  Anniston-Oxford, AL.
Hot Springs, AR........................  Hot Springs, AR.
Windham, CT............................  Hartford-West Hartford-East
                                          Hartford, CT.
Bradford, FL...........................  Gainesville, FL.
Hendry, FL.............................  West Palm Beach-Boca Raton-
                                          Boynton, FL.
Levy, FL...............................  Gainesville, FL.
Walton, FL.............................  Fort Walton Beach-Crestview-
                                          Destin, FL.
Banks, GA..............................  Gainesville, GA.
Chattooga, GA..........................  Chattanooga, TN-GA.
Jackson, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Lumpkin, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Morgan, GA.............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Peach, GA..............................  Macon, GA.
Polk, GA...............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Talbot, GA.............................  Columbus, GA-AL.
Bingham, ID............................  Idaho Falls, ID.
Christian, IL..........................  Springfield, IL.
DeWitt, IL.............................  Bloomington-Normal, IL.
Iroquois, IL...........................  Kankakee-Bradley, IL.
Logan, IL..............................  Springfield, IL.
Mason, IL..............................  Peoria, IL.
Ogle, IL...............................  Rockford, IL.
Clinton, IN............................  Lafayette, IN.
Henry, IN..............................  Indianapolis-Carmel, IN.
Spencer, IN............................  Evansville, IN-KY.
Starke, IN.............................  Gary, IN.
Warren, IN.............................  Lafayette, IN.
Boone, IA..............................  Ames, IA.
Buchanan, IA...........................  Waterloo-Cedar Falls, IA.
Cedar, IA..............................  Iowa City, IA.
Allen, KY..............................  Bowling Green, KY.
Assumption Parish, LA..................  Baton Rouge, LA.
St. James Parish, LA...................  Baton Rouge, LA.
Allegan, MI............................  Holland-Grand Haven, MI.
Montcalm, MI...........................  Grand Rapids-Wyoming, MI.
Oceana, MI.............................  Muskegon-Norton Shores, MI.
Shiawassee, MI.........................  Lansing-East Lansing, MI.
Tuscola, MI............................  Saginaw-Saginaw Township North,
                                          MI.
Fillmore, MN...........................  Rochester, MN.
Dade, MO...............................  Springfield, MO.
Pearl River, MS........................  Gulfport-Biloxi, MS.
Caswell, NC............................  Burlington, NC.
Davidson, NC...........................  Greensboro-High Point, NC.
Granville, NC..........................  Durham, NC.
Harnett, NC............................  Raleigh-Cary, NC.
Lincoln, NC............................  Charlotte-Gastonia-Concord, NC-
                                          SC.
Polk, NC...............................  Spartanburg, SC.
Los Alamos, NM.........................  Santa Fe, NM.
Lyon, NV...............................  Carson City, NV.
Cayuga, NY.............................  Syracuse, NY.
Columbia, NY...........................  Albany-Schenectady-Troy, NY.
Genesee, NY............................  Rochester, NY.
Greene, NY.............................  Albany-Schenectady-Troy, NY.
Schuyler, NY...........................  Ithaca, NY.
Sullivan, NY...........................  Poughkeepsie-Newburgh-
                                          Middletown, NY.
Wyoming, NY............................  Buffalo-Niagara Falls, NY.
Ashtabula, OH..........................  Cleveland-Elyria-Mentor, OH.
Champaign, OH..........................  Springfield, OH.

[[Page 51598]]

 
Columbiana, OH.........................  Youngstown-Warren-Boardman, OH-
                                          PA.
Cotton, OK.............................  Lawton, OK.
Linn, OR...............................  Corvallis, OR.
Adams, PA..............................  York-Hanover, PA.
Clinton, PA............................  Williamsport, PA.
Greene, PA.............................  Pittsburgh, PA.
Monroe, PA.............................  Allentown-Bethlehem-Easton, PA-
                                          NJ.
Schuylkill, PA.........................  Reading, PA.
Susquehanna, PA........................  Binghamton, NY.
Clarendon, SC..........................  Sumter, SC.
Lee, SC................................  Sumter, SC.
Oconee, SC.............................  Greenville, SC.
Union, SC..............................  Spartanburg, SC.
Meigs, TN..............................  Cleveland, TN.
Bosque, TX.............................  Waco, TX.
Falls, TX..............................  Waco, TX.
Fannin, TX.............................  Dallas-Plano-Irving, TX.
Grimes, TX.............................  College Station-Bryan, TX.
Harrison, TX...........................  Longview, TX.
Henderson, TX..........................  Dallas-Plano-Irving, TX.
Milam, TX..............................  Austin-Round Rock, TX.
Van Zandt, TX..........................  Dallas-Plano-Irving, TX.
Willacy, TX............................  Brownsville-Harlingen, TX.
Buckingham, VA.........................  Charlottesville, VA.
Floyd, VA..............................  Blacksburg-Christiansburg-
                                          Radford, VA.
Middlesex, VA..........................  Virginia Beach-Norfolk-Newport
                                          News, VA.
Page, VA...............................  Harrisonburg, VA.
Shenandoah, VA.........................  Winchester, VA-WV.
Island, WA.............................  Seattle-Bellevue-Everett, WA.
Mason, WA..............................  Olympia, WA.
Wahkiakum, WA..........................  Longview, WA.
Jackson, WV............................  Charleston, WV.
Roane, WV..............................  Charleston, WV.
Green, WI..............................  Madison, WI.
Green Lake, WI.........................  Fond du Lac, WI.
Jefferson, WI..........................  Milwaukee-Waukesha-West Allis,
                                          WI.
Walworth, WI...........................  Milwaukee-Waukesha-West Allis,
                                          WI.
------------------------------------------------------------------------

    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals were permitted to compare the 
reclassified wage index for the labor market area in Table 4C (which 
was listed in section VI. of the Addendum to the proposed rule and 
available via the Internet) into which they would be reclassified by 
the MGCRB to the wage index for the area to which they are redesignated 
under section 1886(d)(8)(B) of the Act. Hospitals could have withdrawn 
from an MGCRB reclassification within 45 days of the publication of the 
FY 2012 proposed rule. As discussed in section III.H.3.a. of this 
preamble, we published a correction notice in the Federal Register on 
July 13, 2011 (76 FR 41178), which had a display date of July 11, 2011, 
announcing corrections to the FY 2012 proposed out-migration adjustment 
in Table 4J. Additionally, we issued a letter to hospitals on July 1, 
2011, through their fiscal intermediaries/MACs advising that we 
extended the 45-day deadline and allowed hospitals a 7-day period from 
the date of display of the correction notice (that is, by July 18, 
2011) for hospitals redesignated under section 1886(d)(8)(B) of the Act 
that also were eligible for an out-migration adjustment to notify CMS 
that they wished to receive the out-migration adjustment instead of 
their redesignation under section 1886(d)(8)(B) of the Act. Section 
1886(d)(8)(B) hospitals that had already notified CMS that they wished 
to receive the out-migration adjustment instead of the section 
1886(d)(8)(B) redesignation could withdraw such notifications.
5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar 
hospitals are treated like reclassified hospitals for purposes of 
determining their applicable wage index and receive the reclassified 
wage index for the urban area to which they have been redesignated. 
Because Lugar hospitals are treated like reclassified hospitals, when 
they are seeking reclassification by the MGCRB, they are subject to the 
rural reclassification rules set forth at 42 CFR 412.230. The 
procedural rules set forth at Sec.  412.230 list the criteria that a 
hospital must meet in order to reclassify as a rural hospital. Lugar 
hospitals are subject to the proximity criteria and payment thresholds 
that apply to rural hospitals. Specifically, the hospital must be no 
more than 35 miles from the area to which it seeks reclassification 
(Sec.  412.230(b)(1)); and the hospital must show that its average 
hourly wage is at least 106 percent of the average hourly wage of all 
other hospitals in the area in which the hospital is located (Sec.  
412.230(d)(1)(iii)(C)). In accordance with the requirements of section 
3137(c) of the Affordable Care Act, beginning with reclassifications 
for the FY 2011

[[Page 51599]]

wage index, a Lugar hospital must also demonstrate that its average 
hourly wage is equal to at least 82 percent of the average hourly wage 
of hospitals in the area to which it seeks redesignation (Sec.  
412.230(d)(1)(iv)(C)).
    Hospitals not located in a Lugar county seeking reclassification to 
the urban area where the Lugar hospitals have been redesignated are not 
permitted to measure to the Lugar county to demonstrate proximity (no 
more than 15 miles for an urban hospital, and no more than 35 miles for 
a rural hospital or the closest urban or rural area for RRCs or SCHs) 
in order to be reclassified to such urban area. These hospitals must 
measure to the urban area exclusive of the Lugar County to meet the 
proximity or nearest urban or rural area requirement. We treat New 
England deemed counties in a manner consistent with how we treat Lugar 
counties. (We refer readers to FY 2008 IPPS final rule with comment 
period (72 FR 47337) for a discussion of this policy.)
6. Reclassifications Under Section 508 of Public Law 108-173
    Section 508 of Public Law 108-173 allowed certain qualifying 
hospitals to receive wage index reclassifications and assignments that 
they otherwise would not have been eligible to receive under the law. 
Although section 508 originally was scheduled to expire after a 3-year 
period, Congress extended the provision several times, as well as 
certain special exceptions that would have otherwise expired. For a 
discussion of the original section 508 provision and its various 
extensions, we refer readers to the FY 2010 notice issued in the 
Federal Register on June 2, 2010 (75 FR 31118). Prior to the enactment 
of the Medicare and Medicaid Extenders Act of 2010 (Pub. L. 111-309) on 
December 15, 2010, the extension of the 508 provision was included in 
sections 3137(a) and 10317 of the Affordable Care Act (Pub. L. 111-
148). Section 3137 of the Affordable Care Act extended, through FY 
2010, section 508 reclassifications as well as certain special 
exceptions. The most recent extension of the provision was included in 
section 102 of the Medicare and Medicaid Extender Act, which extends, 
through FY 2011, section 508 reclassifications as well as certain 
special exceptions. The latest extension of these provisions expires on 
September 30, 2011, and will no longer be applicable effective with FY 
2012.
7. Waiving Lugar Redesignation for the Out-Migration Adjustment
    We have received several inquiries regarding the effect on a 
hospital's deemed urban status when a hospital waives its 
reclassification under section 1886(d)(8) of the Act in order to accept 
an out-migration adjustment to the wage index under section 1886(d)(13) 
of the Act. (We refer readers to a discussion of the out-migration 
adjustment under section III.I. of the preamble of this final rule.) In 
the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25885 and 25886), we 
clarified that Lugar hospitals will be required to waive their Lugar 
urban status in its entirety in order to receive the out-migration 
adjustment. We stated our belief that this represents one permissible 
reading of the statute, given that section 1886(d)(13)(G) of the Act 
states that a hospital with an out-migration adjustment is not 
``eligible'' for a reclassification under subsection (8). Therefore, 
beginning with FY 2012, we proposed that an eligible hospital that 
waives its Lugar status in order to receive the out-migration 
adjustment has effectively waived its deemed urban status and, thus, is 
rural for all purposes under the IPPS, including being considered rural 
for the DSH payment adjustment, effective for the fiscal year in which 
the hospital receives the out-migration adjustment. (We refer readers 
to a discussion of DSH payment adjustment under section IV.G. of this 
preamble.)
    In addition, we proposed to make a minor procedural change that 
would allow a Lugar hospital that qualifies for and accepts the out-
migration adjustment (through written notification to CMS within the 
requisite number of days from the publication of the proposed rule \4\) 
to automatically waive its urban status for the 3-year period for which 
its out-migration adjustment is effective. That is, such a Lugar 
hospital would no longer be required during the second and third years 
of eligibility for the out-migration adjustment to advise us annually 
that it prefers to continue being treated as rural and receive the 
adjustment. We made this proposal in response to public comments we 
received on the FY 2011 IPPS/LTCH PPS proposed rule that discussed the 
burden of this annual request (74 FR 43840). Thus, under the proposed 
procedural change, a Lugar hospital that requests to waive its urban 
status in order to receive the rural wage index in addition to the out-
migration adjustment would be deemed to have accepted the out-migration 
adjustment and agrees to be treated as rural for the duration of its 3-
year eligibility period, unless prior to its second or third year of 
eligibility the hospital explicitly notifies CMS in writing, within the 
required period (generally 45 days from the publication of the proposed 
rule), that it instead elects to return to its deemed urban status and 
no longer wishes to accept the out-migration adjustment.
---------------------------------------------------------------------------

    \4\ Hospitals generally have 45 days from publication of the 
proposed rule to request an out-migration adjustment in lieu of the 
section 1886(d)(8) deemed urban status. As noted in sections 
III.H.3. and III.H.4. of this preamble, due to the correction of the 
FY 2012 proposed out-migration adjustment, we extended the 45 day 
deadline and allowed hospitals a 7-day period from the date of 
display of the July 13, 2011 correction notice (that is, by July 18, 
2011) (76 FR 41178).
---------------------------------------------------------------------------

    Comment: Commenters supported CMS' proposed policy clarification 
that an eligible hospital that waives its Lugar status in order to 
receive the out-migration adjustment has effectively waived its deemed 
urban status and, thus, is rural for all IPPS purposes. Some of the 
commenters stated that this policy provides the flexibility necessary 
to allow hospitals to revert to their true rural status if they wish. 
Commenters also supported the proposed minor procedural change that 
would allow a Lugar hospital that qualifies for and accepts the out-
migration adjustment to automatically waive its urban status for the 3-
year period for which its out-migration adjustment is effective. Some 
commenters asked CMS to clarify whether the procedural change will 
apply to letters already filed for the FY 2012 update, in which a 
request was made to waive Lugar redesignation and to instead receive 
the out-migration adjustment.
    Response: Beginning with FY 2012, we are adopting as final the 
policy that an eligible hospital that waives its Lugar status in order 
to receive the out-migration adjustment has waived its deemed urban 
status and, thus, is rural for all IPPS purposes. In addition, we are 
adopting as final the procedural change that would allow a Lugar 
hospital that qualifies for and accepts the out-migration adjustment to 
automatically waive its urban status for the 3-year period for which 
the out-migration adjustment is effective. This clarified policy and 
procedural change will be effective beginning with the FY 2013 wage 
index. Therefore, hospitals that sent requests to waive Lugar status 
for the out-migration adjustment for FY 2012, and still have 2 or 3 
years of eligibility available for the out-migration adjustment, must 
request again next year for the waiver to apply to the FY 2013 wage 
index. That request would be effective for the remaining years of its 
eligibility.
    At the time hospitals made their decisions with respect to waiving 
Lugar status for the out-migration adjustment for FY 2012, the 
procedural change

[[Page 51600]]

allowing a 3-year waiver was not yet in effect. Therefore, those 
decisions were based on the existing policy in place for the proposed 
rule, which required annual waivers. As discussed in section III.H.4. 
of this preamble, counties remain eligible for a consistent out-
migration adjustment for a period of 3 years. Each year, we revise the 
list of counties to (1) add new counties eligible for an adjustment for 
3 years; (2) remove counties where 3 years have elapsed and the 
counties no longer qualify for an adjustment; or (3) revise the 
adjustment value for counties in cases where 3 years have elapsed and 
the counties, once again, qualify for an adjustment. Some hospitals may 
not know whether they are in the first, second, or third year of the 
out-migration adjustment; and therefore, whether they are able to waive 
deemed urban Lugar status for 1, 2, or 3 years. For these reasons, 
beginning with FY 2013, we intend to make available, shortly after we 
publish the proposed rule, a public use file which will list Lugar/out-
migration hospitals (that is, hospitals that have Lugar status and are 
located in a county that qualifies for an out-migration adjustment), 
and which will identify whether the hospital is in its first, second, 
or third year of eligibility for the out-migration adjustment. We will 
update this file annually and release it to the public after each 
fiscal year's proposed rule.
    Comment: Some commenters expressed concerns with respect to 
hospitals reclassified from urban to rural under section 1886(d)(8)(E) 
of the Act (Sec.  412.103 of the regulations). The commenters expressed 
concern that a hospital reclassified from urban to rural status under 
Sec.  412.103 has to cancel this reclassification to return to Lugar 
status, so that it can then waive its Lugar status to become rural and 
retain a special rural status (such as SCH or MDH), and also receive 
the out-migration adjustment. However, a Sec.  412.103 cancellation 
takes effect only at the beginning of the next cost reporting period, 
whereas waiving Lugar status is effective on October 1. The commenters 
indicated that this presents a problem for hospitals that do not have a 
September 30 cost reporting period end date. The commenters urged CMS 
to create a process by which hospitals can simultaneously cancel a 
Sec.  412.103 reclassification and waive Lugar status.
    Response: In circumstances where a Lugar hospital has acquired 
rural status through Sec.  412.103 in order to be classified by 
Medicare as an SCH or a MDH, we will allow the act of waiving Lugar 
status for the out-migration adjustment to simultaneously waives the 
hospital's deemed urban status and cancel the hospital's acquired rural 
status, thus treating the hospital as a rural provider effective on 
October 1. (We note that there are special rules that apply to rural 
referral centers under Sec.  412.103(g)(1) requiring that urban-to-
rural status be maintained for a certain period of time, in order to 
avoid gaming situations. We are not revising these rules for rural 
referral centers due to these considerations.)
    Comment: Some commenters asked for a policy that would allow 
waivers of Lugar redesignation in all instances--not just when a 
hospital is eligible for the out-migration adjustment.
    Response: The statute provides two methods for a Lugar hospital to 
be treated as rural for Medicare payment purposes: (1) If the hospital 
is eligible for an out-migration adjustment under section 1886(d)(13) 
of the Act; or (2) if the hospital applies for an urban to rural 
reclassification under section 1886(d)(8)(E) of the Act. There are no 
other provisions under the Medicare statute that would allow a Lugar 
hospital to be treated as a rural provider, given that Lugar status is 
a deemed status.
8. Other Geographic Reclassification Issues
a. Requested Reclassification for Single Hospital MSAs
    Section 412.230 of the regulations sets forth criteria for an 
individual hospital to apply for geographic reclassification to a 
higher rural or urban wage index area. Specifically, under Sec.  
412.230(a)(3)(ii), an individual hospital may be redesignated from an 
urban area to another urban area, from a rural area to another rural 
area, or from a rural area to an urban area for the purpose of using 
the other area's wage index value. Such a hospital must also meet other 
criteria. One required criterion (under Sec.  412.230(d)(1)(iii)(C) of 
the regulations) is that the hospital must demonstrate that its own 
average hourly wage is higher than the average hourly wage of hospitals 
in the area in which the hospital is located (108 percent for urban 
hospitals and 106 percent for rural hospitals). In cases in which a 
hospital wishing to reclassify is the only hospital in its MSA, that 
hospital is unable to satisfy this criterion because it cannot 
demonstrate that its average hourly wage is higher than that of the 
other hospitals in the area in which the hospital is located (because 
there are no other hospitals in the area). For hospitals in the 
category described above, our current policy provides an alternative 
that allows hospitals to seek reclassification using the group 
reclassification rules under Sec.  412.232 or Sec.  412.234. 
Specifically, if a hospital is the single hospital in its area for the 
3-year period over which the average hourly wage is calculated for the 
purpose of the comparison under Sec.  412.230(d)(1)(iii)(C), the 
hospital may apply for geographic reclassification as a single hospital 
county group in accordance with the procedures set forth at Sec.  
412.232 or Sec.  412.234. In addition to specifying the average hourly 
wage criteria, these regulations state that the county in which the 
hospital is located must be adjacent to the urban area to which it 
seeks redesignation. In addition, a certain level of economic 
integration needs to exist between the two areas. For example, for 
urban county group reclassifications (for FY 2008 and subsequent 
periods), Sec.  412.234(a)(3)(iv) states that ``hospitals located in 
counties that are in the same Combined Statistical Area (CSA) or Core-
Based Statistical Area (CBSA) * * * as the urban area to which they 
seek redesignation qualify as meeting the proximity requirements for 
reclassification to the urban area to which they seek redesignation.''
    Recently, we have been advised of a single hospital MSA scenario of 
concern to a particular hospital. In this scenario, an urban hospital 
located in an area in which there was only one other hospital had 
previously applied for and was granted a reclassification by the MGCRB 
to an adjacent urban area with a higher wage index. During the 3-year 
reclassification timeframe, the other hospital in its labor market area 
closed. After the expiration of its reclassification, the hospital 
became ineligible for reclassification to that same adjacent urban area 
with a higher wage index because it was no longer able to satisfy the 
wage data comparison criteria to reclassify individually under Sec.  
412.230(d)(1)(iii)(C). In addition, the hospital could not apply for 
redesignation under the urban county group regulation at Sec.  412.234 
because the hospital was not located in the same CSA or CBSA as the 
urban area to which it sought reclassification. In this example, the 
concern that was shared with CMS was that the hospital was 
competitively disadvantaged in competing for labor with neighboring 
hospitals where the hospital had a comparable average hourly wage, 
compared to the other hospitals in its surrounding area, because it 
receives a lower wage index.
    We stated in the proposed rule that we believe that the geographic 
reclassification regulations should not

[[Page 51601]]

be revised to accommodate this situation. We discussed the fact that we 
have repeatedly rejected special rules to accommodate single hospital 
MSAs (69 FR 48915, 49109; 71 FR 47869, 48071 and 48072). In these 
explanations, we have highlighted the fact that hospitals in single 
hospital MSAs not only may be eligible for out-commuting adjustments, 
but that they also may apply to an adjacent MSA within the same CSA 
using the group reclassification rules without meeting the 108-percent 
test. We explained that each year we propose to adopt the OMB's 
statistical area definitions (75 FR 50162), so if a hospital in a 
single hospital MSA cannot meet group reclassification criteria because 
of the CSA standard, it means that OMB has determined that there is not 
a sufficient degree of employment interchange to suggest that the areas 
compete for the same labor. In addition, we explained that when we 
originally adopted the 108-percent test, we noted that ``with respect 
to single hospital MSAs, a hospital in such an MSA receives a wage 
index value that is based entirely on its own wage data and, therefore, 
its actual wage levels. Because such a hospital is clearly not 
disadvantaged by its inclusion in a labor market area where its wage 
index is determined based on its own wage levels, it is appropriate 
under this guideline that a hospital should not be reclassified if it 
is the only one in its area'' (57 FR 39746). In the proposed rule, we 
expressed concern that allowing a hospital representing 100 percent of 
its area's wages to be exempt from the wage data comparison test could 
undermine the 108-percent test for hospitals in other circumstances 
where the standard cannot be met. Finally, we referred to section 
3137(c) of the Affordable Care Act, which prohibits us from altering 
average hourly wage comparison criteria for FY 2012. That provision 
states that ``notwithstanding any other provision of law,'' the MGCRB 
is required to use the ``average hourly wage comparison criteria used 
in making such decisions as of September 30, 2008,'' until the first 
fiscal year beginning on the date that is one year after the Secretary 
submits a report to Congress.
    In the proposed rule, we solicited public comments on this issue. 
In particular, we invited comments on the types of regulatory solutions 
that could be made available to a hospital in this type of situation.
    Comment: Commenters suggested that, among other solutions to this 
issue, the 108 percent test should be waived for hospitals that are the 
single hospital in the MSA, as it is mathematically impossible to be 
108 percent of your own average hourly wage. In addition, commenters 
suggested that establishing one's own wage index or being eligible for 
an out-migration adjustment may not result in adequate compensation for 
a hospital's services. Commenters also noted that, despite the existing 
remedies of the out-migration adjustment and county group 
reclassification, a hospital may still be at a disadvantage and unable 
to compete for labor with a neighboring labor market area that receives 
a higher wage index. Commenters believed that Congress did not intend 
to exclude a hospital in a single hospital MSA from the ability to 
reclassify to another labor market area. Commenters further stated that 
recognizing county boundaries does not always accurately reflect labor 
markets, which is why in 1989 Congress established the reclassification 
process. Therefore, commenters believed the very purpose of Congress 
creating the reclassification process, that is, to give hospitals an 
opportunity to be included in a labor market area in which they compete 
for labor, is not being fulfilled by excluding a hospital in a single 
hospital MSA the ability to seek reclassification.
    Response: While we continue to be concerned regarding the precedent 
that might be set by exempting a category of hospitals from the 108 
percent test, we agree that the current policies for geographic 
reclassification are disparate for hospitals located in single hospital 
MSAs compared to hospitals located in multiple hospital MSAs. We 
acknowledge the commenters' views that this disparity is sometimes a 
disadvantage because hospitals in single hospital MSAs have fewer 
options for qualifying for geographic reclassification than hospitals 
in multiple hospital MSAs. To address the concerns of the commenters, 
in this final rule, we are making a change in our policy in order to 
waive a hospital in a single hospital MSA from the average hourly wage 
comparison criterion under Sec.  412.230(d)(1)(iii)(C) beginning with 
applications for geographic reclassification for the FY 2013 wage 
index. That is, a hospital in a single hospital MSA will be exempt from 
meeting the 108 percent average hourly wage criterion. Accordingly, we 
are amending our regulation at Sec.  412.230 by adding a new paragraph 
(d)(5) to reflect this exception for single hospital MSAs. We note that 
section 3137(b) of Public Law 111-148 requires CMS to submit a report 
on reforming the wage index to Congress by December 31, 2011. As a 
result of this statutory requirement, we are currently studying of the 
entire wage index system, including geographic reclassification. 
Although we are adopting this new policy for hospitals in single 
hospital MSAs for reclassification applications starting with FY 2013, 
we may reevaluate this policy as we formulate a plan to reform the wage 
index system under the requirements of section 3137(b).
b. Requests for Exceptions to Geographic Reclassification Rules
    Over the last several years, CMS has received numerous requests for 
exceptions to current Medicare law and regulation regarding geographic 
reclassification or requests to revise the existing regulations in 
order to allow a hospital or group of hospitals the ability to 
reclassify to a labor market area with a higher wage index. Section 
3137(b) of the Affordable Care Act requires the Secretary to submit a 
report to Congress that includes a ``plan to reform the hospital wage 
index.'' This report to Congress is due by December 31, 2011. As part 
of our efforts in this regard, in the FY 2012 IPPS/LTCH PPS proposed 
rule, we solicited public comments, to be considered only as part of 
our report to Congress and not to be addressed in the FY 2012 IPPS/LTCH 
PPS final rule, on ways to redefine the geographic reclassification 
requirements to more accurately define labor markets.

I. FY 2012 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees

    In accordance with the broad discretion granted to the Secretary 
under section 1886(d)(13) of the Act, as added by section 505 of Public 
Law 108-173, beginning with FY 2005, we established a process to make 
adjustments to the hospital wage index based on commuting patterns of 
hospital employees (the ``out-migration'' adjustment). The process, 
outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an 
increase in the wage index for hospitals located in certain counties 
that have a relatively high percentage of hospital employees who reside 
in the county but work in a different county (or counties) with a 
higher wage index. Such adjustments to the wage index are effective for 
3 years, unless a hospital requests to waive the application of the 
adjustment. A county will not lose its status as a qualifying county 
due to hospital wage index changes during the 3-year period, and 
counties will receive the same wage index increase for those 3 years. 
However, a county that qualifies in any given year may not necessarily 
qualify

[[Page 51602]]

after the 3-year period, or it may qualify but receive a different 
adjustment to the wage index level. Hospitals that receive this 
adjustment to their wage index are not eligible for reclassification 
under section 1886(d)(8) or section 1886(d)(10) of the Act. Adjustments 
under this provision are not subject to the budget neutrality 
requirements under section 1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. Beginning with the FY 2008 wage index, 
we use post-reclassified wage indices when determining the out-
migration adjustment (72 FR 47339).
    For the FY 2012 wage index, we calculated the out-migration 
adjustment using the same formula described in the FY 2005 IPPS final 
rule (69 FR 49064), with the addition of using the post-reclassified 
wage indices, to calculate the out-migration adjustment. This 
adjustment is calculated as follows:
    Step 1--Subtract the wage index for the qualifying county from the 
wage index of each of the higher wage area(s) to which hospital workers 
commute.
    Step 2--Divide the number of hospital employees residing in the 
qualifying county who are employed in such higher wage index area by 
the total number of hospital employees residing in the qualifying 
county who are employed in any higher wage index area. For each of the 
higher wage index areas, multiply this result by the result obtained in 
Step 1.
    Step 3--Sum the products resulting from Step 2 (if the qualifying 
county has workers commuting to more than one higher wage index area).
    Step 4--Multiply the result from Step 3 by the percentage of 
hospital employees who are residing in the qualifying county and who 
are employed in any higher wage index area.
    These adjustments will be effective for each county for a period of 
3 fiscal years. For example, hospitals that received the adjustment for 
the first time in FY 2011 will be eligible to retain the adjustment for 
FY 2012. For hospitals in newly qualified counties, adjustments to the 
wage index are effective for 3 years, beginning with discharges 
occurring on or after October 1, 2011.
    Hospitals receiving the wage index adjustment under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-
migration adjustment. Consistent with our FYs 2005 through 2011 IPPS 
final rules, we are specifying that hospitals redesignated under 
section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) 
of the Act are deemed to have chosen to retain their redesignation or 
reclassification. Hospitals that reclassified under section 1886(d)(10) 
of the Act that wished to receive the out-migration adjustment, rather 
than their reclassification adjustment, had to follow the termination/
withdrawal procedures specified in 42 CFR 412.273 and section III.H.3. 
of the preamble of the FY 2012 proposed rule. Otherwise, they were 
deemed to have waived the out-migration adjustment. Hospitals 
redesignated under section 1886(d)(8)(B) of the Act were deemed to have 
waived the out-migration adjustment unless they explicitly notified CMS 
within 45 days from the publication of the FY 2012 proposed rule that 
they elected to receive the out-migration adjustment instead. As noted 
in sections III.H.3.a. and III.H.4. of this preamble, due to the 
correction of the FY 2012 proposed outmigration adjustment, we extended 
the 45-day deadline and allowed hospitals a 7-day period from the date 
of display of the July 13, 2011 correction notice (that is, by July 18, 
2011) (76 FR 41178).
    Table 4J, which is listed in section VI. of the Addendum to this 
final rule and available via the Internet, lists the out-migration wage 
index adjustments for FY 2012. Hospitals that are not otherwise 
reclassified or redesignated under section 1886(d)(8) or section 
1886(d)(10) of the Act will automatically receive the listed 
adjustment. In accordance with the procedures discussed above, 
redesignated/reclassified hospitals will be deemed to have waived the 
out-migration adjustment unless CMS was otherwise notified within the 
timeframe stated above. In addition, hospitals eligible to receive the 
out-migration wage index adjustment and that withdrew their application 
for reclassification will automatically receive the wage index 
adjustment listed in Table 4J, which is listed in section VI. of the 
Addendum to this final rule and available via the Internet.

J. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the proposed FY 2012 wage index were made 
available on October 4, 2010, through the Internet on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    In the interest of meeting the data needs of the public, beginning 
with the proposed FY 2009 wage index, we post an additional public use 
file on our Web site that reflects the actual data that are used in 
computing the proposed wage index. The release of this new file does 
not alter the current wage index process or schedule. We notified the 
hospital community of the availability of these data as we do with the 
current public use wage data files through our Hospital Open Door 
forum. We encouraged hospitals to sign up for automatic notifications 
of information about hospital issues and the scheduling of the Hospital 
Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated October 13, 2010, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service of the 
availability of the wage index data files and the process and timeframe 
for requesting revisions (including the specific deadlines listed 
below). We also instructed the fiscal intermediaries/MACs to advise 
hospitals that these data were also made available directly through 
their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
the October 4, 2010 wage and occupational mix data files, the hospital 
had to submit corrections along with complete, detailed supporting 
documentation to its fiscal intermediary/MAC by December 6, 2010. 
Hospitals were notified of this deadline and of all other deadlines and 
requirements, including the requirement to review and verify their data 
as posted on the preliminary wage index data files on the Internet, 
through the October 13, 2010 memorandum referenced above.
    In the October 13, 2010 memorandum, we also specified that a 
hospital requesting revisions to its occupational mix survey data was 
to copy its record(s) from the CY 2007-2008 occupational mix 
preliminary files posted to our Web site in October, highlight the 
revised cells on its spreadsheet, and submit its spreadsheet(s) and 
complete

[[Page 51603]]

documentation to its fiscal intermediary/MAC no later than December 6, 
2010.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2011 of any changes to the wage index data as a result of the 
desk reviews and the resolution of the hospitals' early-December 
revision requests. The fiscal intermediaries/MACs also submitted the 
revised data to CMS by mid-February 2011. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 22, 2011. Hospitals had until March 7, 2011, to submit 
requests to the fiscal intermediaries/MACs for reconsideration of 
adjustments made by the fiscal intermediaries/MACs as a result of the 
desk review, and to correct errors due to CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the wage 
index data. Hospitals also were required to submit sufficient 
documentation to support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs were required to transmit any additional revisions 
resulting from the hospitals' reconsideration requests by April 13, 
2011. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagrees with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations was April 20, 2011.
    Hospitals were given the opportunity to examine Table 2, which is 
listed in section VI. of the Addendum to the proposed rule and 
available via the Internet. Table 2 contained each hospital's adjusted 
average hourly wage used to construct the wage index values for the 
past 3 years, including the FY 2008 data used to construct the proposed 
FY 2012 wage index. We noted that the hospital average hourly wages 
shown in Table 2 only reflected changes made to a hospital's data that 
were transmitted to CMS by March 2011.
    We released the final wage index data public use files in early May 
2011 on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp. The May 2011 public use files were made available solely for 
the limited purpose of identifying any potential errors made by CMS or 
the fiscal intermediary/MAC in the entry of the final wage index data 
that resulted from the correction process described above (revisions 
submitted to CMS by the fiscal intermediaries/MACs by April 13, 2011). 
If, after reviewing the May 2011 final public use files, a hospital 
believed that its wage or occupational mix data were incorrect due to a 
fiscal intermediary/MAC or CMS error in the entry or tabulation of the 
final data, the hospital had to send a letter to both its fiscal 
intermediary/MAC and CMS that outlined why the hospital believed an 
error existed and provided all supporting information, including 
relevant dates (for example, when it first became aware of the error). 
CMS and the fiscal intermediaries (or, if applicable, the MACs) had to 
receive these requests no later than June 6, 2011.
    Each request also had to be sent to the fiscal intermediary/MAC. 
The fiscal intermediary/MAC reviewed requests upon receipt and 
contacted CMS immediately to discuss any findings.
    After the release of the May 2011 wage index data files, changes to 
the wage and occupational mix data were only made in those very limited 
situations involving an error by the fiscal intermediary/MAC or CMS 
that the hospital could not have known about before its review of the 
final wage index data files. Specifically, neither the fiscal 
intermediary/MAC nor CMS approved the following types of requests:
     Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 13, 2011.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 22, 
2011 wage index public use files.
     Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or the MAC or CMS 
during the wage index data correction process.
    Verified corrections to the wage index data received timely by CMS 
and the fiscal intermediaries or the MACs (that is, by June 6, 2011) 
were incorporated into the final wage index in the FY 2012 IPPS/LTCH 
PPS final rule, which will be effective October 1, 2011.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2012 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's (or, if applicable, 
the MAC's) decision with respect to requested changes. Specifically, 
our policy is that hospitals that do not meet the procedural deadlines 
set forth above will not be permitted to challenge later, before the 
Provider Reimbursement Review Board, the failure of CMS to make a 
requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, 
No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. 
Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 
2000 IPPS final rule (64 FR 41513) for a discussion of the parameters 
for appeals to the PRRB for wage index data corrections.
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage and occupational mix data to the fiscal intermediary's (or, 
if applicable, the MAC's) attention. Moreover, because hospitals had 
access to the final wage index data by early May 2011, they had the 
opportunity to detect any data entry or tabulation errors made by the 
fiscal intermediary or the MAC or CMS before the development and 
publication of the final FY 2012 wage index by August 2011, and the 
implementation of the FY 2012 wage index on October 1, 2011. If 
hospitals availed themselves of the opportunities afforded to provide 
and make corrections to the wage and occupational mix data, the wage 
index implemented on October 1 should be accurate. Nevertheless, in the 
event that errors are identified by hospitals and brought to our 
attention after June 6, 2011, we retain the right to make midyear 
changes to the wage index under very limited circumstances.
    Specifically, in accordance with 42 CFR 412.64(k)(1) of our 
existing regulations, we make midyear corrections to the wage index for 
an area only if a hospital can show that: (1) The fiscal intermediary 
or the MAC or CMS made an error in tabulating its data; and (2) the 
requesting hospital could not have known about the error or did not 
have an opportunity to correct the error, before the beginning of the 
fiscal year. For purposes of this provision, ``before the beginning of 
the fiscal year'' means by the June 6 deadline for making corrections 
to the wage data for the following fiscal year's wage index. This 
provision is not available to a hospital seeking to revise another 
hospital's data that may be affecting the requesting hospital's wage 
index for the labor market area. As indicated earlier, because CMS 
makes the wage index data available to hospitals on the CMS Web site 
prior to publishing both the proposed and final IPPS rules, and the 
fiscal intermediaries or the MACs notify hospitals directly of any wage 
index data changes after completing their desk reviews, we do not 
expect that midyear corrections will be necessary. However,

[[Page 51604]]

under our current policy, if the correction of a data error changes the 
wage index value for an area, the revised wage index value will be 
effective prospectively from the date the correction is made.
    In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 
412.64(k)(2) to specify that, effective on October 1, 2005, that is, 
beginning with the FY 2006 wage index, a change to the wage index can 
be made retroactive to the beginning of the Federal fiscal year only 
when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS 
made an error in tabulating data used for the wage index calculation; 
(2) the hospital knew about the error and requested that the fiscal 
intermediary (or, if applicable, the MAC) and CMS correct the error 
using the established process and within the established schedule for 
requesting corrections to the wage index data, before the beginning of 
the fiscal year for the applicable IPPS update (that is, by the June 6, 
2011 deadline for the FY 2012 wage index); and (3) CMS agreed that the 
fiscal intermediary (or, if applicable, the MAC) or CMS made an error 
in tabulating the hospital's wage index data and the wage index should 
be corrected.
    In those circumstances where a hospital requested a correction to 
its wage index data before CMS calculated the final wage index (that 
is, by the June 6, 2011 deadline), and CMS acknowledges that the error 
in the hospital's wage index data was caused by CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the data, 
we believe that the hospital should not be penalized by our delay in 
publishing or implementing the correction. As with our current policy, 
we indicated that the provision is not available to a hospital seeking 
to revise another hospital's data. In addition, the provision cannot be 
used to correct prior years' wage index data; and it can only be used 
for the current Federal fiscal year. In other situations where our 
policies would allow midyear corrections, we continue to believe that 
it is appropriate to make prospective-only corrections to the wage 
index.
    We note that, as with prospective changes to the wage index, the 
final retroactive correction will be made irrespective of whether the 
change increases or decreases a hospital's payment rate. In addition, 
we note that the policy of retroactive adjustment will still apply in 
those instances where a judicial decision reverses a CMS denial of a 
hospital's wage index data revision request.

K. Labor-Related Share for the FY 2012 Wage Index

    Section 1886(d)(3)(E) of the Act directs the Secretary to adjust 
the proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related: ``The Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of hospitals' costs which are attributable to wages and wage-
related costs of the DRG prospective payment rates * * *'' We refer to 
the portion of hospital costs attributable to wages and wage-related 
costs as the labor-related share. The labor-related share of the 
prospective payment rate is adjusted by an index of relative labor 
costs, which is referred to as the wage index.
    Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of 
the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this ``would result in lower payments to a 
hospital than would otherwise be made.'' However, this provision of 
Public Law 108-173 did not change the legal requirement that the 
Secretary estimate ``from time to time'' the proportion of hospitals' 
costs that are ``attributable to wages and wage-related costs.'' We 
believe that this reflected Congressional intent that hospitals receive 
payment based on either a 62-percent labor-related share, or the labor-
related share estimated from time to time by the Secretary, depending 
on which labor-related share resulted in a higher payment.
    In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43850 
through 43856), we rebased and revised the hospital market basket for 
operating costs. We established a FY-2006-based IPPS hospital market 
basket to replace the FY 2002-based IPPS hospital market basket, 
effective October 1, 2009. In that final rule, we presented our 
analysis and conclusions regarding the frequency and methodology for 
updating the labor-related share for FY 2010. We also recalculated a 
labor-related share of 68.8 percent, using the FY 2006-based IPPS 
market basket, for discharges occurring on or after October 1, 2009. In 
addition, we implemented this revised and rebased labor-related share 
in a budget neutral manner, but consistent with section 1886(d)(3)(E) 
of the Act, we did not take into account the additional payments that 
would be made as a result of hospitals with a wage index less than or 
equal to 1.0 being paid using a labor-related share lower than the 
labor-related share of hospitals with a wage index greater than 1.0.
    The labor-related share is used to determine the proportion of the 
national IPPS base payment rate to which the area wage index is 
applied. In this final rule, as we proposed, we are not making any 
further changes to the national average proportion of operating costs 
that are attributable to wages and salaries, fringe benefits, contract 
labor, the labor-related portion of professional fees, administrative 
and business support services, and all other labor-related services 
(previously referred to in the FY 2002-based IPPS market basket as 
labor-intensive).
    Therefore, for FY 2012, we are continuing to use a labor-related 
share of 68.8 percent for discharges occurring on or after October 1, 
2011. Tables 1A and 1B, which are published in section VI. of the 
Addendum to this final rule and available via the Internet, reflect 
this labor-related share. We note that section 403 of Public Law 108-
173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to 
provide that the Secretary must employ 62 percent as the labor-related 
share unless this employment ``would result in lower payments to a 
hospital than would otherwise be made.'' Therefore, for all IPPS 
hospitals whose wage indices are less than 1.0000, we applied the wage 
index to a labor-related share of 62 percent of the national 
standardized amount. For all IPPS hospitals whose wage indices are 
greater than 1.0000, we applied the wage index to a labor-related share 
of 68.8 percent of the national standardized amount. For Puerto Rico 
hospitals, the national labor-related share will always be 62 percent 
because the national wage index for all Puerto Rico hospitals is less 
than 1.0. As we proposed, in this final rule, we are continuing to use 
a labor-related share for the Puerto Rico-specific standardized amounts 
of 62.1 percent for discharges occurring on or after October 1, 2011. 
This Puerto Rico labor-related share of 62.1 percent was also adopted 
in the FY 2010 IPPS/LTCH PPS final rule (74 FR 43857) at the time the 
FY 2006-based hospital market basket was established, effective October 
1, 2009. Consistent with our methodology for determining the national 
labor-related share, we added the Puerto Rico-specific relative weights 
for wages and salaries, fringe benefits, contract labor, the labor-
related portion of professional fees, administrative and business 
support services, and all other labor-related services (previously 
referred to in the FY 2002-based IPPS market

[[Page 51605]]

basket as labor-intensive) to determine the labor-related share. Puerto 
Rico hospitals are paid based on 75 percent of the national 
standardized amounts and 25 percent of the Puerto Rico-specific 
standardized amounts. The labor-related share of a hospital's Puerto 
Rico-specific rate will be either the Puerto Rico-specific labor-
related share of 62.1 percent or 62 percent, depending on which results 
in higher payments to the hospital. If the hospital has a Puerto Rico-
specific wage index of greater than 1.0, we will set the hospital's 
rates using a labor-related share of 62.1 percent for the 25 percent 
portion of the hospital's payment determined by the Puerto Rico 
standardized amounts because this amount will result in higher 
payments. Conversely, a hospital with a Puerto Rico-specific wage index 
of less than 1.0 will be paid using the Puerto Rico-specific labor-
related share of 62 percent of the Puerto Rico-specific rates because 
the lower labor-related share will result in higher payments. The 
Puerto Rico labor-related share of 62.1 percent for FY 2012 is 
reflected in the Table 1C, which is published in section VI. of the 
Addendum to this final rule and available via the Internet.

IV. Other Decisions and Changes to the IPPS for Operating Costs and GME 
Costs

A. Hospital Inpatient Quality Reporting (IQR) Program

1. Background
a. Overview
    CMS is seeking to promote higher quality and more efficient 
healthcare for Medicare beneficiaries. This effort is supported by the 
adoption of an increasing number of widely-agreed upon quality 
measures. CMS has worked with relevant stakeholders to define measures 
of quality in almost every setting and measures various aspects of care 
for almost all Medicare beneficiaries. These measures assess structural 
aspects of care, clinical processes, patient experiences with care, 
and, increasingly, outcomes.
    CMS has implemented quality measure reporting programs for multiple 
settings of care. To measure the quality of hospital inpatient 
services, CMS implemented the Hospital Inpatient Quality Reporting 
(IQR) Program (formerly referred to as the Reporting Hospital Quality 
Data for Annual Payment Update (RHQDAPU) Program). In addition, CMS has 
implemented quality reporting programs for hospital outpatient 
services, the Hospital Outpatient Quality Reporting (OQR) Program 
(formerly referred to as the Hospital Outpatient Quality Data Reporting 
Program (HOP QDRP)), and for physicians and other eligible 
professionals, the Physician Quality Reporting System (formerly 
referred to as the Physician Quality Reporting Program Initiative 
(PQRI)). CMS has also implemented quality reporting programs for home 
health agencies and skilled nursing facilities that are based on 
conditions of participation, and an end-stage renal disease quality 
incentive program (76 FR 628 through 646) that links payment to 
performance.
    In implementing the Hospital IQR Program and other quality 
reporting programs, we have focused on measures that have high impact 
and support CMS and HHS priorities for improved quality and efficiency 
of care for Medicare beneficiaries. Our goal for the future is to align 
the clinical quality measure requirements of the Hospital IQR Program 
with various other programs, including those authorized by the Health 
Information Technology for Economic and Clinical Health (HITECH) Act so 
that the burden for reporting will be reduced.
    We also are implementing a Hospital Value-Based Purchasing (VBP) 
Program under section 1886(o) of the Act. Earlier this year, we issued 
a final rule (76 FR 26490 through 26547) (the Hospital Inpatient VBP 
Program final rule) that implemented the Hospital VBP Program. We 
proposed additional policies for the Hospital VBP Program in section 
IV.B. of the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25926 through 
25928) and in section XVI. of the CY 2012 OPPS/ASC proposed rule (76 FR 
42354 through 42365). In the Hospital Inpatient VBP Program proposed 
rule (76 FR 2454 through 2491), we proposed that hospitals would 
receive value-based incentive payments if they meet performance 
standards with respect to measures for a performance period for the 
fiscal year involved. The measures under the Hospital VBP Program must 
be selected from the measures specified under the Hospital IQR Program. 
The Hospital VBP Program will apply to payments for discharges 
occurring on or after October 1, 2012, in accordance with section 
1886(o) of the Act.
    The Hospital IQR Program is intertwined with the Hospital VBP 
Program because the measures and reporting infrastructure for both 
programs will overlap. We view the Hospital VBP Program as the next 
step in promoting higher quality care for Medicare beneficiaries by 
transforming Medicare into an active purchaser of quality health care 
for its beneficiaries. As we stated in the Hospital Inpatient VBP 
Program proposed rule (76 FR 2455), in developing that proposed rule as 
well as other value-based payment initiatives, we applied the following 
principles for the development and use of measures and scoring 
methodologies:
    Purpose:
     We view value-based purchasing as an important step to 
revamping how care and services are paid for, moving increasingly 
toward rewarding better value, outcomes, and innovations instead of 
merely volume.
    Use of Measures:
     Public reporting and value-based payment systems should 
rely on a mix of standards, process, outcomes, and patient experience 
of care measures, including measures of care transitions and changes in 
patient functional status. Across all programs, we seek to move as 
quickly as possible to the use of primarily outcome and patient 
experience measures. To the extent practicable and appropriate, outcome 
and patient experience measures should be adjusted for risk or other 
appropriate patient population or provider characteristics.
     To the extent possible and recognizing differences in 
payment system maturity and statutory authorities, measures should be 
aligned across public reporting and payment systems under Medicare and 
Medicaid. The measure sets should evolve so that they include a focused 
core set of measures appropriate to the specific provider category that 
reflects the level of care and the most important areas of service and 
measures for that provider.
     The collection of information should minimize the burden 
on providers to the extent possible. As part of that effort, we will 
continuously seek to align our measures with the adoption of meaningful 
use standards for health information technology (HIT), so the 
collection of performance information is part of care delivery.
     To the extent practicable, measures used by CMS should be 
nationally endorsed by a multi-stakeholder organization. Measures 
should be aligned with best practices among other payers and the needs 
of the end users of the measures.
    We invited public comment on these principles.
    Comment: Many commenters supported CMS' measure selection 
principles for the Hospital IQR Program and the Hospital VBP Program. 
The commenters believed that these principles reflect the efficacy of 
quality measure reporting, reduce data collection burdens and 
facilitate alignment of measures across Medicare programs. Furthermore, 
the commenters applauded CMS' overarching goal of

[[Page 51606]]

improving the quality and cost-effectiveness of care provided in health 
care institutions.
    Response: We appreciate the commenters' support. We will continue 
implementing these principles to reach our goal to foster quality 
improvement, establish strong and effective quality standards, and 
systematically link quality to payment in various healthcare settings.
    Comment: Many commenters overwhelmingly supported our efforts to 
enhance healthcare quality transparency through the public reporting of 
quality measures.
    Response: We appreciate the commenters' support of public reporting 
of quality measures.
    Comment: Many commenters stated that with the increasing number of 
measures across the Medicare and Medicaid programs, CMS should align 
the measures adopted for various Medicare programs whenever possible to 
reduce the hospital reporting burden. One commenter further suggested 
that future measure reporting alignment across payers would reduce the 
burden of quality reporting and also allow for the meaningful 
comparison of healthcare quality.
    Response: We recognize that the addition of manually chart-
abstracted measures to the Hospital IQR Program over time has increased 
the reporting burden on hospitals. Aligning and harmonizing measures 
across Medicare programs and implementing electronic measure reporting 
are high priority goals for us, and we seek to further these goals as 
we select measures for our programs. We agree with the commenters 
regarding the importance of measure alignment across our programs in 
order to provide meaningful comparative information for beneficiaries, 
and we have sought to collect and utilize all-patient data for the 
measures used in our programs wherever possible. Currently, we collect 
all-patient data for all of the chart-abstracted and survey-based 
measures for the Hospital IQR, and Hospital OQR Programs. We also agree 
that alignment of measure reporting requirments across payers would 
also reduce burden among providers responding to multiple reporting 
requirements. CMS has adopted many measures that are in widespread use 
in the industry and by other payers, and will continue to do so when 
feasible and practicable.
    Comment: One commenter encouraged CMS to articulate the 
relationship between the measures selected for the Hospital IQR Program 
and the framework laid out in the National Quality Strategy.
    Response: In March 2011, HHS issued a Report to Congress entitled 
``National Strategy for Quality Improvement in Health Care [National 
Quality Strategy].'' The National Quality Strategy was developed with 
input from stakeholders across the health care system, including 
Federal and State agencies, local communities, provider organizations, 
clinicians, patients, businesses, employers, and payers. The National 
Quality Strategy is located at: http://www.healthcare.gov/center/reports/nationalqualitystrategy032011.pdf.
    The purpose of the National Quality Strategy is to provide a 
strategic plan for improving health care, of which measurement is an 
integral component. The National Quality Strategy promotes three 
overarching aims--Better Care (improving overall quality by making 
health care more patient-centered reliable, accessible and safe), 
Healthy People/Healthy Communities (improving the health of the U.S. 
population by supporting proven interventions to address behavioral, 
social and, environmental determinants of health in addition to 
delivering higher-quality care), and Affordable Care (reducing the cost 
of quality health care for individuals, families, employers, and 
government). The NQS also lists six priorities to target in furthering 
these goals: (1) Making care safer by reducing harm caused in the 
delivery of care; (2) ensuring that each person and family are engaged 
as a partner in their care; (3) promoting effective communication and 
coordination of care; (4) promoting the most effective prevention and 
treatment practices for the leading causes of mortality, starting with 
cardiovascular disease; (5) working with communities to promote wide 
use of best practices to enable healthy living; and (6) making quality 
care more affordable for individuals, families, employers, and 
governments by developing and spreading new health care delivery 
models.
    Our measure selection activity for the Hospital IQR Program 
directly addresses the first five of these six priorities. For example, 
the selection of Hospital Acquired Condition (HAC) measures, 
Healthcare-Associated Infection (HAI) measures, and AHRQ Patient Safety 
Indicators (PSIs) and Inpatient Quality Indicators (IQIs) addresses the 
first priority of safer healthcare, and reduction of harm. The 
selection of the HCAHPS survey addresses the second priority of 
patient/family engagement. The risk-adjusted 30-day readmission and 30-
day mortality measures address effective coordination of care. The 
current process of care measures for AMI, HF, PN, and Surgical Care 
address effective prevention and treatment practices. Lastly, the 
structural measures adopted for the Hospital IQR Program address 
encouragement of best practices. To the extent that the measures we 
have adopted for Hospital IQR are used in CMS value-based purchasing 
programs, alternative payment demonstrations, and the evaluation of new 
delivery system models, the measures also address the sixth priority 
area of the National Quality Strategy.
    Comment: One commenter expressed concern about the overlap in the 
use of the same HACs in the Hospital IQR and Hospital VBP Programs. The 
commenter suggested that CMS adopt mutually exclusive HAC measures so 
that hospitals are not penalized for the same HAC measures adopted for 
various Medicare programs.
    Response: We do not agree with the commenter's view that the 
implementation of the same HAC measures in both the Hospital VBP and 
Hospital IQR Programs would penalize hospitals twice with respect to 
these measures. Under section 1886(o)(1)(C)(ii)(I) of the Act, a 
hospital that is subject to the payment reduction under the Hospital 
IQR Program with respect to a fiscal year is excluded from the Hospital 
VBP Program for that year.
    Also, as we stated in the Hospital Inpatient VBP Program final rule 
(76 FR 26504), we view the program authorized by section 3008 of the 
Affordable Care Act and the Hospital VBP Program as being related but 
separate efforts to reduce HACs. Although the Hospital VBP Program is 
an incentive program that provides incentive-based payments to 
hospitals based on quality performance, the program established by 
section 3008 of the Affordable Care Act creates a payment adjustment 
resulting in payment reductions for the lowest performing hospitals.
    We also view programs that could potentially affect a hospital's 
Medicaid payment as separate from programs that could potentially 
affect a hospital's Medicare payment, although we intend to monitor the 
various interactions of programs authorized by the Affordable Care Act 
and their overall impact on providers and suppliers.
    Comment: A few commenters suggested that CMS should adopt NQF-
endorsed measures whenever possible. A commenter further noted that if 
CMS adopts non-NQF-endorsed measures, these measures should be formally 
tested prior to their inclusion in the Hospital IQR Program. Another 
commenter stated that if CMS considers

[[Page 51607]]

adopting measures that are endorsed by organizations other than the 
NQF, CMS should ensure that such organizations demonstrate strong 
consensus activities from consumers, healthcare organizations, 
physicians and other relevant professionals, purchasers and payers, and 
the organizations should have demonstrated expertise in healthcare 
quality measurement. A commenter suggested that CMS seek expedited NQF 
review of non-NQF-endorsed measures under consideration.
    Response: We thank the commenters for all their suggestions for 
measure endorsement. We have generally adopted NQF-endorsed measures 
whenever possible. For non-NQF endorsed measures developed by CMS, we 
use a consensus-based measure development process that includes broad 
stakeholder input, and as part of this development process, we test 
feasibility, validity, and reliability whenever feasible and 
practicable.
    Section 3001(a)(2) of the Affordable Care Act amended section 
1886(b)(3)(B)(viii) of the Act to provide a different standard for 
quality measures included in the Hospital IQR Program for payments 
beginning with FY 2013. Under the amended provision of the Act, for 
payments beginning with FY 2013, each measure specified by the 
Secretary must be endorsed by a consensus entity that has a contract 
with the Secretary under section 1890(a) of the Act (currently the 
NQF), except in certain circumstances. Specifically, in the case of a 
specified area or medical topic determined appropriate by the Secretary 
for which a feasible and practical measure has not been endorsed by the 
consensus entity, the Secretary may specify a measure that is not 
endorsed by the consensus entity if due consideration is given to 
measures that have been endorsed or adopted by a consensus organization 
identified by the Secretary.
    We thank the commenters for suggesting that we attempt to expedite 
NQF review of non-NQF-endorsed measures under consideration for the 
Hospital IQR Program, and we will consider doing so for measures for 
which CMS is the steward.
    Comment: One commenter expressed concerns about the sufficiency of 
the risk-adjustment methods for the proposed process of care and 
outcome measures. The commenter recommended that CMS and AHRQ convene 
an expert panel to develop risk-adjustment for the measures used in the 
Hospital IQR, Hospital Readmissions Reduction and Hospital VBP 
Programs. Commenters stated that risk-adjustments should include 
patient demographic factors (for example, age, sex, race, and 
socioeconomic status), severity of illness, and types of services being 
provided.
    Response: The current 30-day outcome measures and AHRQ PSIs and 
IQIs in the Hospital IQR Program are NQF-endorsed, and are risk 
adjusted using NQF-endorsed risk adjustment methodologies that include 
clinical risk factors. The current NQF policy for risk adjustment does 
not encourage risk adjustment for non-clinical patient demographic 
factors, because doing so may obscure disparities in care provided by 
hospitals to disadvantaged groups. The risk adjustment methodology 
employed in the NQF-endorsed outcome measures adopted for the Hospital 
IQR Program, therefore, would follow these principles.
    Most of the outcome measures used in these programs are restricted 
to a specific condition or procedure, and therefore do not need to be 
adjusted for the type of service being provided as suggested by one of 
the commenters. Other outcome measures, such as the HACs, assess 
``never events'' or serious reportable events that would not be 
appropriate to risk adjust for either clinical or demographic factors. 
CMS and AHRQ both participate in Measure Application Partnership 
workgroups convened by the NQF. These workgroups are tasked with 
issuing recommendations to HHS on various aspects of measurement (such 
as appropriate risk adjustment) for consideration in HHS' programs.
    Comment: Some commenters urged CMS to focus heavily on outcome 
measures.
    Response: We agree with the commenters. The adoption of outcome 
measures has always been and will remain as a priority goal for the 
Hospital IQR and Hospital VBP Programs.
    We thank the commenters for their comments on our measure 
development principles, and we will consider these comments as we 
develop and select measures in the future.
b. Statutory History and History of Measures Adopted for the Hospital 
IQR Program
    We refer readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule 
(74 FR 43860) and the FY 2011 IPPS/LTCH PPS final rule (75 FR 50180) 
for detailed discussions of the history of the Hospital IQR Program, 
including the statutory history and the measures we have adopted for 
the Hospital IQR measure set through FY 2014.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25891), we sought 
comments on an option that would allow us from time to time to consider 
a range of consensus endorsement entities or bodies that can assist us 
with our measure development process. We believe that this approach 
would provide for a diverse endorsement process and the best body of 
evidence to support measures used in our quality programs.
    Comment: Several commenters recommended that CMS use the NQF as the 
sole consensus entity. These commenters stated that the NQF, which is 
composed of healthcare stakeholders, has developed a robust measurement 
evaluation system for the measure's importance, scientific 
acceptability, feasibility and usability, and their endorsed measures 
are gold standards. Other commenters recommended the NQF, Hospital 
Quality Alliance (HQA), and Measure Application Partnership (MAP) as 
consensus endorsement entities for assisting CMS in the measure 
development process. These commenters considered these organizations as 
the primary consensus groups for hospital quality reporting. These 
commenters believed that the HQA, composed of public and private 
partners, can appropriately select NQF-endorsed measures that best 
assess quality in high priority areas. These commenters also pointed 
out that the MAP was created under the Affordable Care Act, and aimed 
to recommend a coordinated set of measures for acute hospital, 
physician and long-term care hospital quality reporting. One commenter 
requested clarification as to which other entities are being considered 
by CMS for inclusion in its list(s) of consensus endorsement entities.
    Response: We thank the commenters for their suggestions. Under 
section 1886(b)(3)(B)(viii)(IX) of the Act, for payments beginning with 
FY 2013, each measure specified by the Secretary under the Hospital IQR 
Program must be endorsed by the entity with a contract under section 
1890(a) of the Act, except in certain circumstances. This contract is 
currently held by the NQF, and for this reason, we generally look to 
the NQF for endorsement of the measures we are considering for the 
Hospital IQR Program. However, in the case of a specified area or 
medical topic determined appropriate by the Secretary for which a 
feasible and practical measure has not been endorsed by the consensus 
entity, the Secretary may specify a measure that is not endorsed by the 
consensus entity if due consideration is given to measures that have 
been endorsed or adopted by a consensus organization identified by the 
Secretary.

[[Page 51608]]

    We also note that we give consideration to suggestions from other 
organizations such as the HQA, and the newly convened MAP, as well as 
from public comment received through rulemaking. As stated in the 
proposed rule, we strive to align measures where possible and 
appropriate across programs.
c. Maintenance of Technical Specifications for Quality Measures
    The technical specifications for the Hospital IQR Program measures, 
or links to Web sites hosting technical specifications, are contained 
in the CMS/The Joint Commission Specifications Manual for National 
Hospital Inpatient Quality Measures (Specifications Manual). This 
Specifications Manual is posted on the CMS QualityNet Web site at 
https://www.QualityNet.org. We maintain the technical specifications by 
updating this Specifications Manual semiannually, or more frequently in 
unusual cases, and include detailed instructions and calculation 
algorithms for hospitals to use when collecting and submitting data on 
required measures. These semiannual updates are accompanied by 
notifications to users, providing sufficient time between the change 
and the effective date in order to allow users to incorporate changes 
and updates to the specifications into data collection systems.
    The technical specifications for the HCAHPS patient experience of 
care survey are contained in the current HCAHPS Quality Assurance 
Guidelines manual, which is available at the HCAHPS On-Line Web site, 
http://www.hcahpsonline.org. We maintain the HCAHPS technical 
specifications by updating the HCAHPS Quality Assurance Guidelines 
manual annually, and include detailed instructions on survey 
implementation, data collection, data submission and other relevant 
topics. As necessary, HCAHPS Bulletins are issued to provide notice of 
changes and updates to technical specifications in HCAHPS data 
collection systems.
    Comment: One commenter requested that CMS exercise its 
administrative authority to add the new FDA-approved Fidaxomicin off-
cycle via Release Note to the current Specification Manual for National 
Hospital Inpatient Quality Measures (3.3a), Medication List--Appendix 
C--Table 2.1 ``Antimicrobial Medications--for hospital discharges as of 
April 1, 2011.''
    Response: We convene Technical Expert Panels (TEPs) for measure 
development and maintenance in order to ensure that our measures 
reflect current science, evidence-based clinical practice guidelines, 
and best practices. We will take this suggestion under consideration 
during our measure maintenance process, which informs changes to the 
Specification Manual.
d. Public Display of Quality Measures
    Section 1886(b)(3)(B)(viii)(VII) of the Act, as amended by section 
3001(a)(2) of the Affordable Care Act, requires that the Secretary 
establish procedures for making information regarding measures 
submitted available to the public after ensuring that a hospital has 
the opportunity to review its data before they are made public. In the 
FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25891 through 25892), we 
proposed to display information regarding the measures (such as names 
of measures for which data will be displayed in the future) on the 
Hospital Compare Web site under this provision, and invited public 
comment on this proposal. We will continue our current practice of 
reporting data from the Hospital IQR Program as soon as it is feasible 
on CMS Web sites such as the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov, after a 30-day preview period.
    The Hospital Compare Web site is an interactive Web tool that 
assists beneficiaries by providing information on hospital quality of 
care to those who need to select a hospital. It further serves to 
encourage beneficiaries to work with their doctors and hospitals to 
discuss the quality of care hospitals provide to patients, thereby 
providing an additional incentive to hospitals to improve the quality 
of care that they furnish. The Hospital IQR Program currently includes 
process of care measures, risk-adjusted outcome measures, the HCAHPS 
patient experience-of-care survey, and structural measures, all of 
which are featured on the Hospital Compare Web site.
    However, information that may not be relevant to or easily 
understood by beneficiaries and information for which there are 
unresolved display issues or design considerations for inclusion on 
Hospital Compare may be made available on other CMS Web sites that are 
not intended to be used as an interactive Web tool, such as http://www.cms.hhs.gov/HospitalQualityInits/. Publicly reporting the 
information in this manner, though not on the Hospital Compare Web 
site, allows CMS to meet the requirement under section 
1886(b)(3)(B)(viii)(VII) of the Act for establishing procedures to make 
information regarding measures submitted under the Hospital IQR Program 
available to the public following a preview period. In such 
circumstances, affected parties are notified via CMS listservs, CMS e-
mail blasts, national provider calls, and QualityNet announcements 
regarding the release of preview reports followed by the posting of 
data on a Web site other than Hospital Compare.
    Comment: Many commenters overwhelmingly supported the increasing 
transparency in public reporting and appreciated CMS's principles for 
selecting measures. The commenters believed that these principles 
reflect practical aspects of quality data reporting such as reducing 
the burden of data collection on providers as well as aligning measures 
across programs. The commenters stated that CMS should ensure that this 
performance measure information is meaningful in improving patient care 
outcomes. Some commenters stated that more consumer education on 
performance measure data displayed on Hospital Compare is needed for 
meaningful interpretation of the data and identification of 
opportunities to improve patient outcomes.
    Response: We greatly appreciate the commenters' support of public 
quality reporting and agree that consumer education is an ongoing 
process. We continuously strive to improve the user-friendliness of 
Hospital Compare Web site design and educate Medicare beneficiaries in 
understanding healthcare quality and healthcare trends. For example, we 
conduct periodic consumer testing to find out consumer preference for 
measure domains, understanding of measures and associated explanatory 
text. We believe that the reporting of various hospital quality metrics 
incentivizes hospitals to assess their patient care performance and 
identify opportunities to improve patient outcomes. In addition, the 
healthcare information released on Hospital Compare has become a 
popular resource for beneficiaries when they need to make decisions 
regarding their healthcare.
    Comment: A few commenters opposed our intention to display measure 
names for which data will be displayed in the future on the Hospital 
Compare Web site. The commenters believed that the display of more 
descriptive information on future measures would help consumers better 
understand what the future measures are. The commenters believed that 
displaying only the measure names would not be helpful to consumers who 
need to choose a hospital for medical care.
    Response: We use the Hospital Compare ``spotlight'' section to

[[Page 51609]]

highlight upcoming changes to the site, including the addition of new 
measures, topics, and future potential Hospital VBP Program measures. 
The measure names alone are not intended to drive consumer choice 
regarding which hospital to select, but we believe that highlighting 
names of measures to be added to Hospital Compare introduces possible 
new topic areas that consumers can discuss with their physicians in 
choosing a hospital. We also provide information about why the new 
measure topic may be important to know about.
    Comment: Some commenters stated that data display on Hospital 
Compare should cater to consumers who visit Hospital Compare for 
information related to short-term healthcare decisions.
    Response: We interpret the commenters' statements to mean that the 
information displayed on the Hospital Compare should provide 
information to help consumers to make informed decisions regarding 
inpatient acute care services (for example, treatments, tests, 
procedures or surgeries) that may be provided by a hospital. Hospital 
Compare is designed to be a consumer-oriented Web site where consumers 
can obtain information on how well hospitals provide care to their 
patients. The Web site displays quality data on process of care and 
outcome measures for heart attack, heart failure, pneumonia and 
surgical care as measured by the Surgical Care Improvement Project 
(SCIP). In the future, we will display data on other topics, such as 
Hospital-Associated Infections (HAIs) and complications of care. We 
will continue to post data to the Web site in a manner that is easy for 
consumers of the data to understand.
    Comment: A few commenters opposed CMS' current practice of 
publishing performance measure information on Web sites other than 
Hospital Compare for information that may not be relevant to or easily 
understood by beneficiaries and information for which there are 
unresolved display issues or design considerations for inclusion on 
Hospital Compare. The commenters were concerned that it would be 
difficult for providers and consumers to navigate and track information 
on multiple sites and supported Hospital Compare as the sole source for 
public display of quality reporting. The commenters recommended 
Hospital Compare be the sole Web site for display of quality data and 
supported continued improvement in the Hospital Compare Web site to 
make its data comprehensive and meaningful to consumers.
    Response: We believe that Hospital Compare should be the primary 
vehicle for displaying hospital quality data reported for the Hospital 
IQR Program. As we stated in the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50185), the data we display on Web sites other than Hospital Compare 
is displayed on a temporary basis because of pending display design and 
other unresolved issues so as to not confuse beneficiaries who intend 
to use data in making healthcare decisions. Once an appropriate display 
mechanism has been determined, the information is added to the Hospital 
Compare Web site.
    Comment: One commenter noted that results displayed on Hospital 
Compare should always exclude results based on a small number of cases 
or those results that may be misinterpreted by consumers.
    Response: Currently, hospital-level process of care measures based 
on fewer than 25 cases are displayed with a footnote indicating that 
the number of cases may be too few for meaningful comparisons to be 
made. Hospital-level risk-adjusted outcome measure rates based on fewer 
than 25 cases are not displayed at all. This minimum case threshold may 
be subject to change in the future to match the minimum case threshold 
for the various measures established for the Hospital VBP Program. We 
thank the commenter for this suggestion.
    Comment: One commenter suggested the standalone display of the PSI-
12 Post-operative PE and DVT measure due to its significance as an 
indicator of hospital quality for Medicare beneficiaries undergoing 
surgeries that may put them at risk for thromboembolism.
    Response: We appreciate this comment. We have not finalized the 
display options for the AHRQ PSI and IQI composite measures, in which 
PSI-12 is included. We will take this suggestion into consideration for 
the display of the AHRQ measures.
    Comment: One commenter suggested that public reporting should be 
presented in different formats to meet the needs of consumers, 
healthcare providers and researchers.
    Response: We are exploring options as to how best meet the needs of 
our multiple stakeholders, including beneficiaries and researchers. A 
new Web site, http://www.data.medicare.gov, allows researchers and 
other interested parties to view and manipulate multiple data sources, 
including downloadable databases from hospitals, nursing homes and 
dialysis facilities.
    Comment: One commenter asked whether the data displayed on Hospital 
Compare included data from Medicare Advantage affiliated hospitals.
    Response: Section 1886(b)(3)(B)(viii)(VII) of the Act requires that 
the Secretary establish procedures for making information regarding 
measures submitted under the Hospital IQR Program available to the 
public. The Hospital IQR Program applies to subsection (d) hospitals, 
many of which treat beneficiaries enrolled in Medicare Advantage (MA) 
plans. With respect to the process of care measures, the data are 
collected, and subsequently displayed, on all patients, including these 
MA beneficiaries. However, the claims-based measures are currently 
calculated using only Medicare Part A fee for service claims and do 
not, for that reason, capture MA beneficiary data. In the future, we 
hope to collect outcome measure data on all patients.
    After consideration of the public comments we received, we are 
finalizing our proposal to display information regarding the measures 
(such as names of measures for which data will be displayed in the 
future) on the Hospital Compare Web site.
2. Retirement of Hospital IQR Program Measures
a. Considerations in Retiring Quality Measures From the Hospital IQR 
Program
    We generally retain measures from the previous year's Hospital IQR 
Program measure set for subsequent years' measure sets. We previously 
retired one ``topped out'' measure, PN-1: Oxygenation Assessment for 
Pneumonia, from the Hospital IQR Program on the basis of high unvarying 
performance among hospitals, because measures with very high 
performance among hospitals present little opportunity for improvement, 
and do not provide meaningful distinctions in performance for 
consumers.
    We also have retired one measure from the Hospital IQR Program 
because it no longer ``represent[ed] the best clinical practice,'' as 
required under section 1886(b)(3)(B)(viii)(VI) of the Act. We stated 
that when there is reason to believe that the continued collection of a 
measure as it is currently specified raises potential patient safety 
concerns, it is appropriate for CMS to take immediate action to remove 
a measure from the Hospital IQR Program and not wait for the annual 
rulemaking cycle. Therefore, we adopted the policy (74 FR 43864 and 
43865) that we would promptly retire such a measure, confirm

[[Page 51610]]

the retirement in the next IPPS rulemaking cycle, and notify hospitals 
and the public of the decision to promptly retire measures through the 
usual hospital and QIO communication channels used for the Hospital IQR 
Program. These channels include memos, e-mail notification, and 
QualityNet Web site postings.
    As we stated in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50185), 
among the criteria that we consider when determining whether to retire 
Hospital IQR Program measures are the following: (1) Measure 
performance among hospitals is so high and unvarying that meaningful 
distinctions and improvements in performance can no longer be made; (2) 
performance or improvement on a measure does not result in better 
patient outcomes; (3) a measure does not align with current clinical 
guidelines or practice; (4) the availability of a more broadly 
applicable (across settings, populations, or conditions) measure for 
the topic; (5) the availability of a measure that is more proximal in 
time to desired patient outcomes for the particular topic; (6) the 
availability of a measure that is more strongly associated with desired 
patient outcomes for the particular topic; (7) collection or public 
reporting of a measure leads to negative unintended consequences other 
than patient harm. These criteria were suggested by commenters during 
rulemaking, and we agreed that these criteria should be among those 
considered in evaluating Hospital IQR Program measures for retirement.
b. Retirement of Hospital IQR Program Measures for the FY 2014 Payment 
Determination and Subsequent Years
    In order to reduce the reporting burden on hospitals, and in 
particular, the burden associated with reporting chart-abstracted 
measures, we have considered options to accommodate the expansion of 
the measure set through the retirement of additional Hospital IQR 
measures. Specifically, we have considered retiring one or more of the 
measures suggested by various commenters that were listed in the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43865). We noted in that 
final rule that commenters recommended for retirement 11 Hospital IQR 
Program chart-abstracted measures. Seven of these 11 measures were 
recommended by commenters for retirement based on their performance 
being uniformly high nationwide, with little variability among 
hospitals (topped-out measures). Based on our own analysis, we 
concluded that these measures are topped out and for this reason, we 
proposed not to include them in the FY 2013 Hospital VBP Program 
measure set (76 FR 2460). These measures are listed below:
 AMI-1 Aspirin at arrival
 AMI-3 ACEI/ARB for left ventricular systolic dysfunction
 AMI-4 Adult smoking cessation advice/counseling
 AMI-5 Beta-blocker prescribed at discharge
 HF-4 Adult smoking cessation advice/counseling
 PN-4 Adult smoking cessation advice/counseling
 SCIP INF-6 Appropriate Hair Removal

    The methodology we used to determine that these measures are topped 
out is detailed in the Hospital VBP Program proposed rule (76 FR 2460). 
In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25892), we proposed 
to retire these topped out measures from the Hospital IQR measure set. 
In addition, we proposed to not include an eighth measure in the FY 
2013 Hospital VBP Program measure set because we believe that inclusion 
of this measure would result in the unintended consequence of 
inappropriate antibiotic use (76 FR 2462). This measure is PN-5c Timing 
of receipt of initial antibiotic following hospital arrival. In the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 25892), we also proposed to 
retire this measure from the Hospital IQR Program because of the 
potential for this negative unintended consequence.
    For these reasons, we proposed to retire these eight measures from 
the Hospital IQR measure set for FY 2014 and subsequent years, and that 
hospitals would no longer be required to submit data on these measures 
starting with January 1, 2012 discharges. We invited public comment on 
this proposal.
    Comment: Several commenters supported the CMS measure retirement 
criteria and the proposed retirement of the 8 proposed topped out 
measures to reduce burden. The commenters encouraged CMS to replace 
process measures with comparable outcome measures whenever possible.
    Response: We thank the commenters for their support and agree with 
the suggestion that, when possible, process measures should be replaced 
by suitable outcome measures.
    Comment: A few commenters suggested that CMS should proceed 
cautiously in its decisions whether to retire topped-out measures or 
measures no long supported by scientific evidence. Some commenters 
recommended the continuation of data collection for topped out measures 
because they were concerned that there may be unintended consequences, 
such as a deterioration of the standard of care, if data collection and 
monitoring are discontinued.
    Response: We believe it is appropriate to retire measures based on 
our measure retirement criteria. Retirement using these criteria also 
meets our goals of minimizing the reporting burden, and staying current 
with the latest scientific evidence. Furthermore, we believe that in 
many cases, the proposed topped out measures have been integrated into 
standard hospital clinical practices and for this reason, we believe it 
is unlikely that the types of beneficiary care addressed by these 
measures would deteriorate as a result of their retirement from the 
Hospital IQR Program measure set. However, as explained below, we have 
decided not to retire four of the eight measures we proposed to retire. 
Instead, we will retain these measures in the Hospital IQR Program but 
suspend data collection on them. We believe this will address the 
commenters' concern that we proceed cautiously when deciding whether to 
retire measures.
    Comment: A few commenters opposed the retirement of the quality 
measures that have been deemed clinically meaningful or that were part 
of long-standing measure sets. A commenter suggested that CMS consider 
including topped out measures in composite measures. Commenters were 
concerned that the retirement of these measures may disrupt quality 
improvement efforts in hospitals. A commenter noted that quality 
measurement in general has the optimal impact on quality of care and 
patient outcomes when multiple related metrics are used. Another 
commenter believed that topped out measures that are NQF-endorsed 
should stay in the Hospital IQR Program until the NQF has retired them.
    Response: While we are dedicated to the care and safety of our 
beneficiaries, we are also concerned with the burden placed on 
hospitals in order to collect data for the Hospital IQR Program. We do 
not believe we should continue collecting measures simply because they 
are part of a long standing measure set or that it would be generally 
meaningful to combine topped out measures into a composite topped out 
measure. Our decision to retire a measure from the Hospital IQR Program 
would not preclude a hospital from continuing to improve its own 
performance on the measure. Moreover, as discussed below, we are 
keeping four of the measures we proposed for retirement in the Hospital 
IQR Program, but are suspending the data submission requirements for 
these

[[Page 51611]]

measures. This approach will reduce data collection burdens on 
hospitals, but will enable us to resume data collection should we 
observe abrupt declines in adherence to these measures.
    Comment: A few commenters supported the retirement of AMI-4, HF-4, 
and PN-4 because they are topped out. A few commenters stated that 
these 3 measures and the PN-5c measure do not meet the The Joint 
Commission accountability measure criteria and should be retired. 
Another commenter requested clarification on the reason for retiring 
PN-5c since this measure has been a high priority in hospitals which 
have geared up training efforts for this measure.
    Response: We thank the commenters for supporting our proposal to 
retire these four measures, and we are finalizing our proposal to 
retire these measures beginning with January 1, 2012 discharges. The 
three adult smoking cessation counseling measures (AMI-4, HF-4, and PN-
4) are no longer NQF-endorsed. They are also topped out, which provides 
us with some assurance that these processes have been incorporated into 
routine hospital care. With respect to the PN-5c measure, we believe 
that the continued collection of this measure might lead to the 
unintended consequence of antibiotic overuse, which is a practice that 
could negatively affect beneficiary health and one that should not be 
incentivized through the Hospital IQR Program. Should we decide in the 
future that the clinical evidence supports the re-adoption of one or 
more of these measures into the Hospital IQR Program measure set, we 
will propose to re-adopt the measure(s) in rulemaking.
    Comment: One commenter suggested that CMS establish policies to 
retire a quality measure midyear if the measure is found to have 
unintended serious consequences.
    Response: We appreciate this suggestion. Our current policy is to 
immediately suspend collection of a measure when there is reason to 
believe that continued collection of the measure raises patient safety 
concerns. In these circumstances, we will take action outside of the 
rulemaking cycle, and then confirm the retirement in the next IPPS 
rulemaking cycle. We will also disseminate this information to 
hospitals and the public through the usual hospital and QIO 
communication channels used for the Hospital IQR Program, including the 
QualityNet Web site, e-mail blasts, memos and other information 
postings as needed.
    Comment: One commenter recommended that the following four measures 
also be considered for retirement: HF-1 (because it is a ``check the 
box'' measure and is not related to the quality of the discharge 
process), SCIP-Inf-2 (because it is a process measure which can be 
replaced by its outcome measure which is the Surgical Site Infection 
measure scheduled for implementation for FY 2014), SCIP-INF-VTE-1 and 
SCIP-VTE-2 (because these 2 proposed VTE measures are already included 
in the VTE measure set for FY 2015) and PN-3b (because of the 
incompatible EHR integration with the clinical workflow).
    Response: We thank the commenter for these recommendations and will 
evaluate them in our measure review for future rulemaking.
    Comment: Many commenters agreed that the retirement of all eight 
measures would result in a reduction in chart abstraction burden for 
hospitals. However, a few commenters were particularly concerned about 
retiring AMI-1, AMI-3, AMI-5, and SCIP Infection-6 because they have 
been designated as accountability measures by The Joint Commission.\5\ 
The commenters agreed that these measures should not be used in the 
Hospital VBP Program but urged CMS to keep these measures in the 
Hospital IQR Program and continue their display on Hospital Compare in 
order to prevent a decline in adherence to the important care processes 
assessed by these measures that are clinically associated with better 
outcomes. Commenters supported the cessation of data collection for 
these measures that we proposed for retirement (AMI-1, AMI-3, AMI-5, 
and SCIP INF-6) in order to ease the data collection burden.
---------------------------------------------------------------------------

    \5\ Accountability measures are defined by the Joint Commission 
as measures that: (1) Support a strong link between the measure and 
improved outcomes; (2) accurately assess the relevant clinical 
process; and (3) have minimal unintended adverse consequences if 
implemented.
---------------------------------------------------------------------------

    Response: We have been persuaded by these commenters that it might 
be premature to retire these measures (AMI-1, AMI-3, AMI-5 and SCIP 
INF-6) from the Hospital IQR Program. As the commenters pointed out, 
these measures, unlike the other four measures we proposed to retire, 
have been defined by The Joint Commission as measures of 
accountability. In addition, these measures, unlike three of the other 
four measures, are currently still endorsed by the NQF.
    We are sensitive, however, to comments noting how the continued 
adoption of chart-abstraction measures over time has increased the 
burden to hospitals. Therefore, in an effort to balance our goal to 
incentivize high quality care with the goal to work where possible to 
minimize the data collection burden for hospitals, we have decided to 
retain these measures in the Hospital IQR Program but to suspend data 
collection on them until such time that the evidence shows that 
hospital adherence to these practices has unacceptably declined. In 
these circumstances, we would resume data collection using the same 
form and manner and on the same quarterly schedule that we finalized 
for these and other chart abstracted measures for the applicable period 
of collection, providing at least 3 months of notice prior to resuming 
data collection. Hospitals would be notified of this via CMS listservs, 
CMS e-mail blasts, national provider calls, and QualityNet 
announcements. In addition, we would comply with any requirements 
imposed by the Paperwork Reduction Act before resuming data collection 
of these 4 measures.
    In summary, based upon the public comments we received, we are 
retiring the following four measures beginning with January 1, 2012 
discharges:

 AMI-4 Adult smoking cessation advice/counseling
 HF-4 Adult smoking cessation advice/counseling
 PN-4 Adult smoking cessation advice/counseling
 PN-5c Timing of receipt of initial antibiotic following 
hospital arrival
    We are suspending data collection for the following four measures 
beginning with January 1, 2012 discharges:
 AMI-1 Aspirin at arrival
 AMI-3 ACEI/ARB for left ventricular systolic dysfunction
 AMI-5 Beta-blocker prescribed at discharge
 SCIP INF-6 Appropriate Hair Removal
3. Measures for the FY 2014 and FY 2015 Hospital IQR Payment 
Determinations
a. Considerations in Expanding and Updating Quality Measures Under the 
Hospital IQR Program
    In general, we seek to adopt measures for the Hospital IQR Program 
that promote better, safer, more efficient care. Our measure 
development and selection activities for the Hospital IQR Program take 
into account national priorities, such as those established by the 
National Priorities Partnership, HHS Strategic Plan, the National 
Strategy for Quality Improvement in Healthcare, as well as other widely 
accepted criteria established in medical literature. (We refer readers 
to the following Web sites regarding these priorities: http://

[[Page 51612]]

www.nationalprioritiespartnership.org/(National Priorities 
Partnership); http://www.hhs.gov/secretary/about/priorities/priorities.html (HHS Strategic Plan); and http://www.healthcare.gov/center/reports/quality03212011a.html (National Strategy for Quality 
Improvement in Healthcare)). To the extent practicable, we have sought 
to adopt measures which have been endorsed by a national consensus 
organization, recommended by multi-stakeholder organizations, and 
developed with the input of providers, purchasers/payers and other 
stakeholders. Because measures for the Hospital VBP Program must be 
selected from the measures specified for the Hospital IQR Program, the 
measures to be selected for inclusion in the Hospital VBP Program also 
reflect these priorities. In addition, we believe it is important to 
expand the pool of measures to include measures that are directed 
toward improving patient safety. This goal is supported by at least two 
Federal reports documenting that tens of thousands of patients do not 
receive safe care in the nation's hospitals.\6\ \7\
---------------------------------------------------------------------------

    \6\ OEI-06-09-00090, ``Adverse Events in Hospitals: National 
Incidence Among Medicare Beneficiaries.'' Department of Health and 
Human Services, Office of Inspector General, November 2010.
    \7\ 2009 National Healthcare Quality Report, pp. 107-122. 
``Patient Safety,'' Agency for Healthcare Research and Quality.
---------------------------------------------------------------------------

    Section 3001(a)(2) of the Affordable Care Act amended the Act by 
adding a new section 1886(b)(3)(B)(viii)(VIII) of the Act. This section 
states that, ``[e]ffective for payments beginning with fiscal year 
2013, with respect to quality measures for outcomes of care, the 
Secretary shall provide for such risk adjustment as the Secretary 
determines to be appropriate to maintain incentives for hospitals to 
treat patients with severe illnesses or conditions.'' Section 
3001(a)(2) of the Affordable Care Act also added new sections 
1886(b)(3)(B)(viii)(IX)(aa) and (bb) of the Act. These sections state 
that ``* * * effective for payments beginning with fiscal year 2013, 
each measure specified by the Secretary under this clause shall be 
endorsed by the entity with a contract under section 1890(a) [of the 
Act],'' and ``[i]n the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible and 
practical has not been endorsed by the entity with a contract under 
section 1890(a) [of the Act], the Secretary may specify a measure that 
is not so endorsed as long as due consideration is given to measures 
that have been endorsed or adopted by a consensus organization 
identified by the Secretary.'' In the FY 2011 IPPS/LTCH PPS final rule, 
we established that all of the measures adopted in that rule for the FY 
2013 and FY 2014 payment determinations meet these standards (75 FR 
50200).
    We have previously acknowledged the data collection burden for 
hospitals participating in the Hospital IQR Program, and reiterated our 
desire to expand the Hospital IQR Program measure set while minimizing 
burden and seeking to provide alternative mechanisms for data 
submission (75 FR 50189). We also stated that in future expansions and 
updates to the Hospital IQR Program measure set, we would be taking 
into consideration several important goals. These goals include: (a) 
Expanding the types of measures beyond process of care measures to 
include an increased number of outcome measures, efficiency measures, 
and patients' experience of care measures; (b) expanding the scope of 
hospital services to which the measures apply; (c) considering the 
burden on hospitals in collecting chart-abstracted data; (d) 
harmonizing the measures used in the Hospital IQR Program with other 
CMS quality programs to align incentives and promote coordinated 
efforts to improve quality; (e) seeking to use measures based on 
alternative sources of data that do not require chart abstraction or 
that utilize data already being reported by many hospitals, such as 
data that hospitals report to clinical data registries, or all-payer 
claims databases; and, (f) weighing the relevance and utility of the 
measures compared to the burden on hospitals in submitting data under 
the Hospital IQR Program.
    Specifically, we give priority to measures that assess performance 
on: (a) Conditions that result in the greatest mortality and morbidity 
in the Medicare population; (b) conditions that are high volume and 
high cost for the Medicare program; and, (c) conditions for which wide 
cost and treatment variations have been reported, despite established 
clinical guidelines. We have used and continue to use these criteria to 
guide our decisions regarding what measures to add to the Hospital IQR 
Program measure set. In addition, in selecting measures, we seek to 
address the six quality aims of effective, safe, timely, efficient, 
patient-centered, and equitable healthcare. Current and long term 
priority topics include: prevention and population health; safety; 
chronic conditions; high cost and high volume conditions; elimination 
of health disparities; HAIs and other adverse healthcare outcomes; 
improved care coordination; improved efficiency; improved patient and 
family experience of care; effective management of acute and chronic 
episodes of care; reduced unwarranted geographic variation in quality 
and efficiency; and adoption and use of interoperable HIT.
    Hospital IQR Program measures were initially based solely on a 
hospital's submission of chart-abstracted quality measure data. 
However, in recent years we have adopted measures that do not require 
chart abstraction, including structural measures and claims-based 
measures that we can calculate using other data sources. This approach 
supports our goal of expanding the measures for the Hospital IQR 
Program while minimizing the burden on hospitals and, in particular, 
without significantly increasing the chart abstraction burden.
    In addition to structural measures and claims-based measures, we 
previously noted that registries are potential alternative sources of 
hospital data for the Hospital IQR Program. (A registry is a collection 
of clinical data for purposes of assessing clinical performance, 
quality of care, and opportunities for quality improvement.) We 
envisioned that instead of requiring hospitals to submit the same data 
to CMS that many hospitals are already submitting to registries, we 
would collect the data directly from the registries. This could enable 
the expansion of the Hospital IQR Program measure set without 
increasing the burden of data collection for those hospitals 
participating in the registries. We have previously adopted structural 
measures of registry participation, and we continue to evaluate the 
feasibility of leveraging registry-based data collection mechanisms for 
the Hospital IQR Program.
    We also stated our intention to explore mechanisms for data 
submission using electronic health records (EHRs) (73 FR 48614; 74 FR 
43866, 43892; and 75 FR 50189). Establishing such a system will require 
interoperability between EHRs and CMS data collection systems, 
additional infrastructure development on the part of hospitals and CMS, 
and the adoption of standards for capturing, formatting, and 
transmitting the data elements that make up the measures. However, once 
these activities are accomplished, the adoption of measures that rely 
on data obtained directly from EHRs will enable us to expand the 
Hospital IQR Program measure set with less cost and burden

[[Page 51613]]

to hospitals. We believe that automatic collection and reporting of 
data through EHRs will greatly simplify and streamline reporting for 
various CMS quality reporting programs and that at a future date, 
currently targeted to be FY 2015, hospitals will be able to switch 
solely to EHR-based reporting of data that are currently manually 
chart-abstracted and submitted to CMS for the Hospital IQR Program.
    We reiterate our commitment to pursue our goals to expand and 
update quality measures under the Hospital IQR Program and also to 
minimize burden. We note that in addition to the input we described 
above, we take into consideration the measures adopted by the Hospital 
Quality Alliance (HQA) as well as an array of input from the public. 
The HQA is a national public-private collaboration that is committed to 
making meaningful, relevant, and easily understood information about 
hospital performance accessible to the public and to informing and 
encouraging efforts to improve quality. We appreciate HQA's integral 
efforts to improve hospital quality of care and its support of our 
public quality reporting programs.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50191 through 
502192), we finalized our proposal to adopt measures for the Hospital 
IQR Program for three consecutive payment determinations. The intent of 
this policy was to provide greater certainty for hospitals to plan to 
meet future reporting requirements and implement related quality 
improvement efforts. In addition to giving hospitals more advance 
notice in planning quality reporting, this 3-year approach also 
provides more time for us to prepare, organize and implement the 
infrastructure needed to collect data on the measures and make payment 
determinations. We indicated, however, that these preliminary measure 
sets could still be updated through the rulemaking process should we 
need to respond to agency and/or legislative changes.
    Finally, in section IV.A.5.a.(2) of the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50219 through 50220), we adopted a proposal to make 
Hospital IQR Program payment determinations beginning with FY 2013 
using one calendar year of data for chart-abstracted measures. We will 
use this approach, which synchronizes the quarters for which data on 
these measures must be submitted during each year with the quarters 
used to make payment determinations with respect to a fiscal year 
beginning with January 1, 2011 discharges. However, it will not affect 
our payment determinations until FY 2013.
    Section 1886(o)(2)(A) of the Act requires the Secretary to select 
measures, other than readmission measures, for the Hospital VBP Program 
from the measures specified under the Hospital IQR Program. Section 
1886(o)(2)(B)(i)(I) of the Act states that, for FY 2013, the selected 
measures must cover at least the following five specified conditions or 
procedures: Acute myocardial infarction (AMI), Heart failure (HF), 
Pneumonia (PN), Surgeries, as measured by the Surgical Care Improvement 
Project (SCIP), and HAIs, as measured by the prevention metrics and 
targets established in the HHS Action Plan to Prevent Healthcare-
Associated Infections [HAIs] (or any successor HHS plan). Section 
1886(o)(2)(B)(i)(II) of the Act provides that, for FY 2013, measures 
selected for the Hospital VBP Program must also be related to the 
Hospital Consumer Assessment of Healthcare Providers and Systems survey 
(HCAHPS).
    In selecting measures for the Hospital IQR Program, we are mindful 
of the conceptual framework of the Hospital VBP Program. We will focus 
on selecting measures that we believe will also meet the Hospital VBP 
Program measure inclusion criteria and advance the goals of the 
Hospital VBP Program by targeting hospitals' ability to improve patient 
care and patient outcomes.
    In addition, in order to support HHS priorities such as patient 
safety, reduction of HAIs, and readmissions, and to meet more of the 
widespread goals of the Affordable Care Act in terms of improving the 
quality of care provided to Medicare beneficiaries, in the FY 2012 
IPPS/LTCH PPS proposed rule we proposed to adopt measures for the FY 
2014 and FY 2015 Hospital IQR payment determinations. However, we noted 
that the final measure sets to be used for these years' payment 
determinations could be changed via future rulemaking. This allows us 
the flexibility to accommodate changes in program needs and legislative 
changes. We invited public comment on these proposals.
    Comment: Some commenters were pleased to see CMS's move to align 
measures used for various Medicare programs in order to reduce the 
reporting burden. Some commenters supported the alignment of all new 
measures with the objectives of the National Priorities Partnership, 
the HHS Strategic Plan, and the National Strategy for Quality 
Improvement in Healthcare, while other commenters recommended aligning 
reporting approaches across payers to reduce the burden of quality 
reporting and to also allow for meaningful comparisons across payers.
    Response: We appreciate the commenters' support of our ongoing 
alignment strategy. We may consider an approach to align measures 
across payers in the future.
    Comment: Many commenters strongly opposed the adoption of 
additional chart-abstracted measures because they believed these 
measures would increase hospital burden. One commenter urged CMS to 
limit its adoption of new chart-abstracted measures to a maximum of 
three per payment determination. Some commenters recommended that CMS 
either: stop adopting additional new chart-abstracted measures 
altogether; propose to adopt new chart-abstracted measures only if it 
simultaneously proposes to retire the same number of measures; or 
retire chart-abstracted measures when related outcome measures could 
instead be used.
    A commenter suggested that CMS should monitor whether the adoption 
of new measures for the Hospital IQR Program would create redundancy in 
terms of what data is being collected. This commenter cited the 
following measures and measure topics included in the table of measures 
and topics under consideration for future implementation (76 FR 25899 
through 25901) which was included the FY 2012 IPPS/LTCH PPS proposed 
rule as examples of potentially duplicative measures: Timing of 
Antibiotic Prophylaxis; Selection of Antibiotic Prophylaxis; Pre-
Operative Beta Blockade; and Duration of Prophylaxis.
    A few commenters cited several other examples of measures that they 
believed are already duplicative. Specifically, these commenters 
believed that the 30-day mortality rate and 30-day readmission rate 
measures for AMI, HF, and PN were duplicative of the 9 chart-abstracted 
process measures currently included in the Hospital IQR measure set for 
these 3 conditions, and that for this reason, the chart-abstracted 
measures could be retired. Commenters further noted that the periodic 
evaluation of measures for redundancy would significantly reduce the 
administrative burden for hospitals while maintaining incentive for 
hospitals to focus on their quality improvement efforts.
    Commenters also suggested that the HAC measure (Vascular Catheter-
Associated Infections) is so similar to the CLABSI measure that it is 
redundant for CMS to include both of these measures in the Hospital IQR 
Program measure set. These commenters believed that it is unnecessary 
and potentially confusing and inefficient to

[[Page 51614]]

collect data on these two measures simultaneously.
    Response: We agree that chart-abstracted measures are burdensome 
for hospitals to collect. As soon as we can obtain quality data from 
EHRs, we intend to limit the adoption of chart-abstracted measures for 
future payment determinations. To ease the burden before then, we are 
finalizing our proposal to retire four chart-abstracted measures 
beginning with January 1, 2012 discharges. Additionally, we are 
finalizing a policy in this final rule under which the collection of 
data on four chart-abstracted measures will be suspended until such 
time that the clinical evidence indicates that hospital adherence to 
these practices has unacceptably declined. We also continuously seek to 
harmonize and align measure specifications where applicable in an 
effort to reduce the incidence of duplicative measures both within and 
across programs. We also seek to reduce redundancy in measurement. We 
will carefully consider whether the measures cited by commenters 
significantly overlap with each other and, for that reason, whether 
some of the measures cited should be retired.
    Comment: One commenter suggested that for initial transition into 
EHR reporting, CMS should limit the number of electronic measures that 
could be collected via EHR technology.
    Response: We are mindful of the potential challenges that could be 
faced by hospitals during a transition to EHR-based reporting. We will 
keep these challenges in mind as we develop our proposals for adopting 
measures that can be reported through EHRs.
    Comment: In response to our projected timeframe for transitioning 
to EHR-based data collection, a commenter noted that given the slow 
progress of EHR software development, it was premature to anticipate 
that Hospital IQR Program measures could be collected via EHRs by 2015.
    Response: We believe FY 2015 is a reasonable transition date for 
switching from chart-abstracted measures to EHR-based reporting for the 
Hospital IQR Program because that is the year when certain hospitals 
will become subject to payment adjustments if they do not demonstrate 
meaningful use of certified EHR technology. For this reason, we believe 
that these hospitals will be EHR-technology-ready by FY 2015.
    Comment: A few commenters supported using registries and the EHR 
reporting mechanism to ease burden and to obtain robust clinical data. 
Some commenters believed that registries assist hospitals in managing 
specific patient populations more effectively. A commenter noted that 
reporting to a registry is not the long term solution to advance the 
reporting of the increasingly complex quality data, but could be an 
interim solution. A few commenters opposed using registries and 
believed that registry-based measures would create an extra burden for 
hospitals. These commenters explained that many registries require data 
collection from the medical record only, whereas other registries 
require the collection and submission of a significant number of data 
elements. Another commenter noted that registry-based reporting would 
not be meaningful when EHR-based reporting becomes more common in FY 
2015.
    Response: We believe that registries, in general, hold promise for 
less burdensome quality reporting, and that is why we adopted several 
structural measures that monitor participation in systematic clinical 
database registries for the Hospital IQR Program. We agree that 
registry requirements may vary. We also agree that registries could 
serve as an interim solution until we implement wide-spread EHR-based 
reporting for the Hospital IQR Program.
    Comment: Some commenters encouraged CMS to consistently evaluate 
the relevancy and need to modify quality measures in its quality 
reporting expansion efforts, for small rural hospitals with limited 
resources.
    Response: We thank the commenter for this suggestion. In general, 
we seek to adopt measures that are broadly applicable to all hospitals, 
including small rural hospitals. However, we are mindful of the 
challenges faced by small rural hospitals with limited resources.
    In summary, we will continue to pursue goals regarding the 
expansion and updating of quality measures under the Hospital IQR 
Program while minimizing burden. We will take into account the public 
comments we received on this issue, including the possible uses of EHRs 
and registries in the Hospital IQR Program. We also note that in 
accordance with the policy we are finalizing in this final rule to 
suspend data collection on four measures (AMI-1, AMI-3, AMI-5, and 
SCIP-6), the measure set for FY 2014 and/or FY 2015 that we finalize in 
this final rule might change if we resume the collection of data on one 
or more of these measures.
b. Hospital IQR Program Measures for the FY 2014 Hospital IQR Payment 
Determination
(1) Retention of 56 Hospital IQR Program Measures Finalized in the FY 
2011 IPPS/LTCH PPS Final Rule for the FY 2014 Payment Determination
    We previously finalized 60 measures for the FY 2014 Hospital IQR 
Program measure set. In general, we retain measures used in prior 
payment determinations for subsequent payment determinations unless 
otherwise stated. However, as we discussed above, in the FY 2012 IPPS/
LTCH PPS proposed rule (76 FR 25892), we proposed to retire 8 measures 
from the FY 2014 measure set and to retain the remaining 52 of the 60 
quality measures finalized in the FY 2011 IPPS/LTCH PPS final rule for 
the FY 2014 payment determination. We invited public comment on our 
proposal to retain these 52 measures for the FY 2014 payment 
determination. We note that in this final rule we are finalizing a 
policy under which we will retain four of the eight measures we 
proposed to retire and will retain but suspend data collection for the 
other four measures.
    Comment: One commenter was concerned about the burden of chart-
abstraction of two Hospital IQR measures: ED-1: Median time from 
emergency department arrival to time of departure from the emergency 
room for patients admitted to the hospital; and ED-2: Median time from 
admit decision to time of departure from the emergency department for 
emergency department patients admitted to the inpatient status. To 
reduce the chart-abstraction burden for these measures, the commenter 
suggested that patients with principal diagnosis codes unrelated to the 
cause for the ED visit be excluded from the denominator.
    Response: We share the commenter's concern regarding the burden 
hospitals face to collect data on Hospital IQR measures. We acknowledge 
that patients seek medical attention in the hospital ED for a variety 
of reasons, some of which may not appear to be linked with a discharge 
diagnosis. We will consider whether it is appropriate to modify the ED 
throughput measures to exclude patients with a principal diagnosis code 
seemingly unrelated to the cause for the ED visit in the denominator. 
In such case, we will seek an NQF ad hoc review to have the new 
specifications endorsed. However, we believe that all patients, 
regardless of chief complaint or discharge diagnosis, should have 
access to timely and efficient care.
    Comment: One commenter recommended that for the Surgical Site 
Infection (SSI) measure that was

[[Page 51615]]

finalized in the FY 2011 IPPS/LTCH final rule for the FY 2014 payment 
determination, CMS should limit the surgical procedures to not more 
than two and increase the number of surgical procedures gradually in 
the future.
    Response: We thank the commenter for the suggestion. In the measure 
Specifications Manual, there are currently 395 SCIP procedures summed 
up into 6 stratifications: cardiac surgery, other cardiac surgery, hip 
arthroplasty, colon surgery, hysterectomy and vascular surgery. We are 
working with CDC on the collection of the Surgical Site Infection data. 
The data collection is consistent with the specifications, and as 
recommended by the CDC, we will be collecting data on 2 surgical 
procedure categories. This will not only reduce burden, but will allow 
the CDC to collect data in a phased roll out. Consistent with current 
NQF harmonization efforts underway for this measure, and based on 
recommendations by CDC, we will be collecting Surgical Site Infection 
data only for colon and abdominal hysterectomy procedures via NHSN for 
the FY 2014 payment determination.
    Comment: A commenter stated that current mortality and readmissions 
outcome measures in the Hospital IQR Program pose challenges for 
hospitals. Other commenters stated that the hierarchical regression 
model on which these measures are based includes a risk-adjustment 
methodology that hospitals cannot replicate or validate. These 
commenters believed that this hampered hospitals from generating 
internal reports to assess performance and that hospitals have to wait 
for CMS to provide the information annually.
    Response: Although it provides some challenges to hospitals, we 
believe that there are several reasons supporting our conclusion that 
hierarchical modeling, which is NQF-endorsed, is the appropriate 
statistical approach for calculating the hospital outcome measures: 30-
day risk-adjusted all-cause readmission and mortality measures. This 
conclusion is based on the structure of the data and the underlying 
assumption that hospital quality of care influences 30-day mortality/
readmission rates. First, patients are clustered within hospitals and, 
therefore, have a shared exposure to the hospital quality and 
processes. The use of hierarchical modeling accounts for the clustering 
of patients within hospitals. Second, hierarchical models distinguish 
within-hospital variation and between-hospital variation to estimate 
the hospital's contribution to the risk of mortality or readmission. 
This allows for an estimation of the hospital's influence on patient 
outcomes. Finally, within hierarchical models we can account for both 
differences in case mix and sample size to fairly profile hospital 
performance. If we did not use hierarchical modeling we could 
overestimate variation and potentially misclassify hospitals' 
performance.
    This approach to calculating the numerator, therefore, although 
more complex than that used for logistic regression, is more 
statistically accurate and fairer to hospitals. We agree that hospitals 
currently cannot replicate the RSMRs or RSRRs independently. Although 
hospitals have access to the inclusion/exclusion criteria and risk-
adjustment coefficients used; the model requires the input of patient 
longitudinal data across care settings and data from the entire 
national sample to estimate the hospital-specific effects used in the 
calculations. We will consider whether it is operationally possible to 
provide these data to hospitals and whether sharing these data would be 
consistent with patient privacy considerations.
    Comment: A few commenters opposed the retention of the HAC measure: 
Manifestations of Poor Glycemic Control and the two Global Immunization 
measures (Immunization for Influenza and Immunization for Pneumonia) 
because they believed that these measures are more appropriate to 
collect at the physician level.
    Response: We disagree with the commenters' belief that the measures 
are better suited for the physician office. The HAC measure, 
manifestation of poor glycemic control, has ICD-9 codes that are 
specific to a secondary diagnosis in the hospital, not to ambulatory 
settings. Certain acute illnesses and procedures, such as influenza or 
surgery, can cause blood glucose to become uncontrolled in some 
patients. In these instances, a patient may react to high or low blood 
sugar with adverse events such as coma, or a secondary illness or 
infection. In response to the comments on the two Global Immunization 
measures, we believe that the acute care setting offers a unique 
opportunity to assess a patient's immunization status and offer a 
service they may not otherwise receive.
    Comment: A commenter stated that the current AMI and HF measures 
adopted for the FY 2014 payment determination are not well-aligned with 
current evidence and treatment guidelines for AMI or HF that are 
reflected in the current performance measures developed by the American 
Heart Association/American College of Cardiology/Physician Consortium 
for Performance Improvement. The commenter also stated that the HF-1 
discharge instruction measure does not have a valid process outcome 
link.
    Response: We are interested in the heart failure measure set 
referenced by the commenter, and we included these measures in our list 
of measures under future consideration for this program. However, the 
AMI and HF measures proposed for retention in the Hospital IQR measure 
set were developed using the most up to date clinical evidence. The CMS 
TEP convened as part of our measure maintenance work for these measures 
includes members and guideline authors from both the American Heart 
Association and the American College of Cardiology. We look to TEPs to 
inform us of vital changes to the guidelines, assuring our measures are 
scientifically credible. We believe that the processes assessed by the 
HF-1 measure, which assesses whether discharge instructions for heart 
failure patients were issued, are vital in assuring that patients are 
appropriately informed of activities and behaviors that promote health 
and positive outcomes.
    Comment: A commenter recommended that CMS separate the IQI-11 
Abdominal aortic aneurysm (AAA) mortality rate (with or without volume) 
measure into two distinct measures: one measure for those patients 
undergoing elective repair and one measure for those undergoing 
emergency or urgent repair. The commenter believed that this measure 
should be stratified by open surgical and endovascular repair, and that 
the risk-adjustment model should be tested prospectively for accuracy.
    Response: We thank the commenter for this suggestion. AAA repair is 
a technically difficult procedure with a relatively high mortality rate 
(we refer readers to http://www.qualityindicators.ahrq.gov/modules/iqi_resources.aspx). We have adopted the measure as it is currently 
specified by the Agency for Healthcare Research and Quality, and 
endorsed by the NQF which includes both elective and emergent cases and 
is not stratified. We believe that the measure is appropriately risk-
adjusted to account for differences in risk factors in the elective and 
emergent populations undergoing this procedure.
    After consideration of the public comments we received, we are 
finalizing the retention of 56 measures that we finalized in the FY 
2011 IPPS/LTCH PPS final rule for the FY 2014 payment determination. We 
note that this number includes the four measures which, as discussed 
above, we are also

[[Page 51616]]

retaining but on which we are suspending data collection.
(2) Additional Hospital IQR Program Measures for the FY 2014 Payment 
Determination
(A) CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures
    HAIs are among the leading causes of death in the U.S. CDC 
estimates that as many as 2 million infections are acquired each year 
in hospitals and result in approximately 90,000 deaths per year.\8\ It 
is estimated that more Americans die each year from HAIs than from auto 
accidents and homicides combined. HAIs not only put the patient at 
risk, but also increase the days of hospitalization required for 
patients and add considerable healthcare costs.
---------------------------------------------------------------------------

    \8\ McKibben L, Horan T, Guidance on public reporting of 
healthcare-associated infections: Recommendations of the Healthcare 
Infection Control Practices Advisory Committee. AJIC 2005; 33:217-26
---------------------------------------------------------------------------

    HAIs are largely preventable with widely publicized interventions 
such as better hygiene and advanced scientifically tested techniques 
for surgical patients. Therefore, the public reporting of HAIs has been 
of great interest to many healthcare consumers and advocacy 
organizations because it promotes awareness and permits health care 
consumers to choose the hospitals with lower HAI rates, as well as 
gives hospitals an incentive to improve infection control efforts. To 
maximize the efficiency and improve the coordination of HAI prevention 
efforts across the Department, HHS established in 2008 a senior-level 
Steering Committee for the Prevention of Healthcare-Associated 
Infections. In 2009, the Steering Committee, along with scientists and 
program officials across the government, developed the HHS Action Plan 
to Prevent HAIs providing a roadmap for HAI prevention in acute care 
hospitals. In the first iteration of the Action Plan, the Steering 
Committee chose to focus on infections in acute care hospitals because 
the associated morbidity and mortality was most severe in that setting 
and the scientific information on prevention and the capacity to 
measure improvement was most complete. Thus, prevention of HAIs in 
acute care hospitals became the first phase of the Action Plan and it 
focuses on six high priority HAI-related areas.
    In addition, the Steering Committee included in the Action Plan 
five-year goals for nine specific measures of improvement tied to the 
six HAI prevention priority areas. Since the release of the first 
Action Plan in June 2009, the Steering Committee has been developing a 
successor plan in collaboration with public and private partners which 
is expected to incorporate advances in science and technology and 
expand the scope to the outpatient environment. The successor plan is 
also expected to address the health and safety of healthcare personnel, 
as well as the risks of influenza transmission from healthcare 
personnel to patients. The second Action Plan is due for publication in 
2011.
    We also note that the House Committee on Appropriations asked in a 
2009 Report that CMS include in its ``pay for reporting'' system two 
infection control measures developed by the Hospital Quality Alliance 
(HQA)--Central line-associated bloodstream infections and a surgical 
site infection rate (H. Rep. No. 111-220, at 159 (2009)). In the 
report, the Committee stated that ``if the measures are included in 
Hospital Compare, the public reporting of the data is likely to reduce 
HAI occurrence, an outcome demonstrated in previous research.''
    In the FY 2011 IPPS/LTCH PPS final rule, we adopted the two HAI 
measures identified by the House Committee on Appropriations in its 
2009 report: Central Line [catheter] Associated Blood Stream Infection 
(CLABSI) measure, and Surgical Site Infection (SSI) measure. The CLABSI 
measure is currently being collected as part of the FY 2013 Hospital 
IQR measure set, and data submission on the measure began with January 
2011 events.\9\ The Surgical Site Infection (SSI) measure is currently 
part of the FY 2014 Hospital IQR measure set, and data submission on 
the measure will begin with January 2012 events.
---------------------------------------------------------------------------

    \9\ The CDC captures HAI data based on the onset of an event, 
rather than based on the discharge date.
---------------------------------------------------------------------------

    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25894 through 
25896), we proposed to adopt two additional HAI measures for the FY 
2014 Hospital IQR measure set. These measures are: (1) Central Line 
Insertion Practices, or CLIP (which is NQF  298 and 
operationalized by the CDC for collection through the NHSN); and (2) 
Catheter Associated Urinary Tract Infection (CAUTI) (NQF  
138). Both measures are high priority HAI measures that are included 
among the prevention metrics established in the HHS Action Plan To 
Prevent HAIs which, as we noted above, underscores the importance of 
reducing HAIs. As detailed below, both measures also meet Hospital IQR 
Program statutory requirements for measure selection.
    Furthermore, both measures are currently collected by the NHSN, 
which is a secure, Internet-based surveillance system maintained and 
managed by the CDC, and can be used by all types of healthcare 
facilities in the U.S., including acute care hospitals, long term acute 
care hospitals, psychiatric hospitals, rehabilitation hospitals, 
outpatient dialysis centers, ambulatory surgery centers, and long term 
care facilities. The NHSN enables healthcare facilities to collect and 
use data about HAIs, adherence to clinical practices known to prevent 
HAIs, the incidence or prevalence of multidrug-resistant organisms 
within their organizations, and other adverse events. Some States use 
NHSN as a means for healthcare facilities to submit patient-level data 
on the measures mandated through their specific State legislation. 
Currently, 28 States require hospitals to report HAIs using NHSN, and 
CDC provides support to more than 4,000 hospitals that are using NHSN. 
NHSN data collection occurs via a Web-based tool hosted by CDC provided 
free of charge to providers. In addition, data submission for HAI 
measures through EHRs may be possible in the near future.
    Comment: A commenter encouraged CMS to include only those HACs that 
could reasonably be prevented. A commenter requested clarification on 
how the proposed HAI measures differ from the ``never events'' 
currently being reported.
    Response: In our selection of HACs, we have to meet the 
requirements under section 1886(d)(4)(D) of the Act. Section 
1886(d)(4)(D) of the Act specifies that by October 1, 2007, the 
Secretary was required to select, in consultation with the CDC, at 
least two conditions that: (a) Are high cost, high volume, or both; (b) 
are assigned to a higher paying MS-DRG when present as a secondary 
diagnosis (that is, conditions under the MS-DRG system that are CCs or 
MCCs); and (c) could reasonably have been prevented through the 
application of evidence based guidelines. Under this provision, the 
HACs we select must be reasonably preventable. Many of the HACs also 
are ``never events'' or serious reportable events defined by the NQF. 
The HAI measures, unlike the HACs, are designed to look at more than 
ICD codes. The CDC criteria for the HAIs rely on chart-abstracted and 
point of care assessments to identify HAIs. Many of these infections 
can be identified during the acute stay, before hospital discharge, 
thereby providing a more real time view of the patient.
    Comment: A commenter suggested that CMS should propose to adopt 
only outcome HAI measures rather than

[[Page 51617]]

process HAI measures. Furthermore, the commenter recommended that CDC 
should streamline the amount of information required for collection 
within HAI modules to ease the data collection burden for providers.
    Response: We agree with the commenters regarding the preference for 
outcome measures over process of care measures. For example, we discuss 
below our decision to not finalize the proposed CLIP measure because we 
have been persuaded by commenters that the CLABSI measure already 
adopted for the Hospital IQR Program is sufficiently related and 
captures the outcome of the process of care. We have shared the comment 
regarding streamlining data collection with the CDC.
(i) Central Line Insertion Practice Adherence Percentage (CLIP)
    Central line associated blood stream infections (CLABSIs) can be 
prevented through proper management of the central line. The CDC's 
Healthcare Infection Control Practices Advisory Committee (CDC/HICPAC) 
Guidelines for the Prevention of Intravascular Catheter-Related 
Infections recommends evidence-based central line insertion practices 
known to reduce the risk of subsequent central line-associated 
bloodstream infection.\10\ These include hand-washing by inserters, use 
of maximal sterile barriers during insertion, proper use of a skin 
antiseptic prior to insertion, and allowing that skin antiseptic to dry 
before catheter insertion. Despite the scientific evidence supporting 
these practices, several reports suggest that adherence to these 
practices remains low in United States hospitals. The proposed CLIP 
process measure is a companion measure to the previously adopted CLABSI 
measure, and it assesses the extent to which a facility employs 
practices consistent with CDC/HICPAC recommendations that are known to 
reduce CLABSI. There are 2 States that currently require facilities to 
report to NHSN at least one month of CLIP data.
---------------------------------------------------------------------------

    \10\ O'Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard 
SO, Maki DG, et al., Guidelines for the Prevention of Intravascular 
Catheter-Related Infections. MMWR 2002; 51 (No. RR-10:1-26).
---------------------------------------------------------------------------

    The CLIP measure is used in State reporting initiatives and is an 
NQF-endorsed measure (NQF  298) that is operationalized for 
collection by the CDC via the NHSN. Therefore, the measure meets the 
selection criteria under section 1886(b)(3)(B)(viii)(IX)(aa) of the 
Act. This CLIP prevention metric is also listed in the HHS Action Plan 
To Prevent HAIs and, as we detailed above, has been widely identified 
as a high priority for public reporting.
    Comment: A few commenters strongly believed that the CLABSI measure 
in the Hospital IQR Program is a valid, well-constructed, and risk-
adjusted outcome measure. These commenters pointed out that the 
decreasing incidence of central line-associated infections was 
attributed to the implementation of this measure in early 2011 in 
conjunction with other ongoing patient safety infection initiatives. 
Some commenters noted the current CLABSI rates have been excellent.
    Commenters opposed the adoption of the CLIP measure because they 
believed that it is labor-intensive to collect, hard to validate, and 
does not address the need for quick removal of the central line which 
is the key to reducing CLABSI. Based on these reasons, the commenters 
opposed the adoption of the proposed CLIP measure, which is a process 
measure, because the outcome itself (CLABSI) is being already reported 
by hospitals. Furthermore, one commenter suggested that if CMS adopts 
the measure, it should clarify that the measure is only applicable to 
high risk units such as ICUs where central lines are generally placed 
and should only apply to hospitals with bad CLABSI outcomes. A 
commenter suggested that the measure be risk-adjusted based on the 
morbidity of the patient at the time of admission. A few commenters 
recommended delaying the adoption of the proposed CLIP measure until FY 
2015 to allow time to refine its specifications. Some commenters 
requested the removal of the CLABSI HAC claims measure if the CLIP 
measure is implemented. A commenter believed that the proposed time 
frame to begin data collection does not allow proper time for hospitals 
to assure the collection of these elements for all the central line 
insertions.
    Response: We agree with the commenters that the existing CLABSI 
outcome measure is preferable because it captures the outcome that the 
process of care measure (CLIP) is designed to prevent. Therefore, by 
measuring the outcome, we are inherently assessing the effectiveness of 
central line insertion and maintenance processes being employed by the 
facility. Consistent with our goal to shift toward outcome measures, we 
are not finalizing our proposal to adopt the CLIP measure for the 
Hospital IQR measure set.
    Comment: A few commenters asked CMS for clarification whether the 
CLIP measure developed by the Institute for Healthcare Improvement 
(IHI) or the CDC/NHSN CLIP measure is being proposed for adoption into 
the Hospital IQR measure set.
    Response: We proposed to adopt the CDC CLIP measure, and we believe 
that it is an operationalization of the NQF-endorsed CLIP measure (NQF 
 0298) for which IHI (not CDC) is the steward. Although the 
NQF-endorsed CLIP measure was developed by the IHI, it is based upon 
the CDC prevention guidelines for preventing Central Line Associated 
Blood Stream Infections. However, the CDC specifications for the 
measure do not require that the hospital report its daily monitoring of 
central lines. For the reasons stated previously, we will not be 
adopting the proposed CLIP measure for the Hospital IQR Program at this 
time.
(ii) Catheter Associated Urinary Tract Infection (CAUTI)
    The urinary tract is the most common site of HAI, accounting for 
more than 30 percent of infections reported by acute care 
hospitals.\11\ Healthcare-associated urinary tract infections (UTIs) 
are commonly attributed to catheterization of the urinary tract. CAUTI 
can lead to such complications as cystitis, pyelonephritis, gram-
negative bacteremia, prostatitis, epididymitis, and orchitis in males 
and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI cause discomfort to the patient, 
prolonged hospital stay, and increased cost and mortality. Each year, 
more than 13,000 deaths are associated with UTIs.\12\ Prevention of 
CAUTIs is discussed in the CDC/HICPAC document, Guideline for 
Prevention of Catheter-associated Urinary Tract Infections. The NQF-
endorsed CAUTI measure we proposed is currently collected by the NHSN 
as part of State-mandated reporting and surveillance requirements for 
hospitals. There are 3 States that require facilities to report to NHSN 
at least one month of CAUTI data.
---------------------------------------------------------------------------

    \11\ Klevens RM, Edward JR, et al., Estimating Health Care-
Associated Infections and Deaths in U.S. Hospitals, 2002. Public 
Health Reports 2007; 122:160-166.
    \12\ Wong ES., Guideline for Prevention of Catheter-Associated 
Urinary Tract Infections. Infect Control 1981; 2:126-30.
---------------------------------------------------------------------------

    Section 1886(b)(3)(B)(viii)(IX)(aa) of the Act requires that 
effective for payments beginning with FY 2013, each measure specified 
by the Secretary for inclusion in the Hospital IQR Program be endorsed 
by the entity with a contract under section 1890(a) of the Act, unless 
the exception set forth in section 1886(b)(3)(B)(viii)(IX)(bb) of the

[[Page 51618]]

Act applies. The NQF currently holds the contract under section 1890(a) 
of the Act, and the NQF has endorsed this CAUTI measure (NQF  
138). For this reason, we believe that this measure satisfies the 
endorsement requirement applicable to the Hospital IQR Program. This 
proposed measure is currently risk stratified, and therefore is 
consistent with section 1886(b)(3)(B)(viii)(VIII) of the Act. Risk 
stratification means that it is calculated using different categories 
of patients with varying risk of developing an infection. At the time 
of the FY 2012 IPPS/LTCH PPS proposed rule, this CAUTI measure (NQF 
 138) was undergoing measure maintenance review by the NQF and 
we note that the review may result in changes to the specifications. We 
invited public comment on our proposal to adopt these two HAI measures 
into the Hospital IQR Program for the FY 2014 payment determination. We 
proposed that hospitals would begin submitting data on these measures 
beginning with events that occur on or after January 1, 2012. We also 
proposed that hospitals use the NHSN infrastructure and protocols, as 
well as the specifications (available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf) to report the measures for Hospital IQR 
Program purposes. The proposed reporting mechanism for these HAI 
measures is discussed in greater detail in section IV.A.5.i. of the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 25919 through 25920).
    Comment: Many commenters supported the CAUTI measure and suggested 
that CMS monitor a CAUTI project initiative that is underway to test 
the effects of collecting data for both device days and patient days, 
each of which might have different implications for the urinary tract 
infection rate. Several commenters cautioned against using device days 
as the measure denominator because that might have the unintended 
consequence of artificially inflating the UTI rate.
    Response: We thank the commenters for the suggestions. We will 
monitor this project as suggested by the commenter. Currently, we seek 
to adopt the measures targeted in the 2009 HHS Action Plan To Prevent 
HAIs. These measures include the proposed NQF-endorsed CAUTI measure 
and that measure is based on device days. We do not believe that 
reporting a measure by device days would have a negative effect on 
patient care or result in patient harm.
    Comment: A commenter remarked that the measure might encourage 
hospitals to reduce the CAUTI incidence rate, but would not completely 
bring the rate down to zero. The commenter also noted that it would be 
difficult to diagnose every UTI at the time of admission without 
increasing the volume of potentially unnecessary screenings. The 
commenter believed that the pressure to remove catheters quickly in the 
ICU and post-surgery can have unintended consequences and 
complications. Several commenters stated that the CAUTI measure should 
have exclusions for patients considered to be high-risk to avoid 
unintended consequences (for example, removal of catheter too quickly). 
Commenters believed that this measure should also include a data 
capture point for catheter reinsertion to collect the rate of repeat 
instrumentation and infection risk for those with early catheter 
removal.
    Response: We thank the commenters for these suggestions. As stated 
above, UTI is the leading cause of HAIs in the acute care setting, and 
significantly reducing UTIs is a component of the HHS Action Plan To 
Prevent HAIs, and we have proposed to use the metric that is listed in 
the Action Plan. We do not believe that the screening of catheterized 
patients according to the NQF-endorsed specifications for this measure 
will cause undue treatment or patient harm. To date, there are no 
published studies that we are aware of that recommend a urinary 
catheter be maintained in ICU and post-surgical patients. We also thank 
the commenters' suggestions for a catheter reinsertion measure. 
However, we are not aware of such NQF-endorsed measure. We are adopting 
the measure as currently specified in order to support the reduction 
efforts of the HHS Action Plan. However, we have forwarded these 
suggestions to the CDC.
    Comment: A few commenters recommended that CMS delay the adoption 
of this proposed measure to FY 2015 or until: (1) The CDC has addressed 
the validation and implementation issues; (2) all hospitals have 
attested to the installation of fully functional EHR systems; (3) 
hospitals and States have had enough time to develop the proper 
infrastructure to report these data (only 3 States currently require 
hospitals to report these data); and (4) the measure is risk-adjusted 
based on the morbidity of the patient at the time of admission.
    Response: We disagree with these recommendations. The measure is 
NQF-endorsed with appropriate risk-stratification as previously 
described. We have been working in collaboration with the CDC, and are 
assured that the measure is ready for implementation in the Hospital 
IQR Program beginning with January 1, 2012 discharges. The data are 
collected via the NHSN, and hospitals do not need a fully functional 
EHR system in order to submit data to the NHSN.
    Comment: A commenter suggested that CMS retire the current claims-
based Catheter-Associated Urinary Tract Infection HAC measure once the 
proposed CAUTI measure is adopted for the Hospital IQR Program.
    Response: We agree that the claims-based CAUTI measure and the NHSN 
CAUTI measure may overlap. However, because the topic of HAIs is of 
great importance, and a large quantity of data for the NHSN version of 
the measure will not be available to CMS for some time, we will 
continue to utilize the claims-based measure until such time as the 
NHSN version is available to CMS. We will seek an appropriate time to 
retire the claims-based version of the measure, taking into account the 
needs of and impact on other programs, such as the Hospital VBP 
Program.
    After consideration of the public comments we received, we are 
finalizing the CAUTI measure that we proposed to adopt for the FY 2014 
payment determination.
(B) New Claims-Based Measure
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25896 through 
25897), we proposed to add the following new claim-based measure to the 
Hospital IQR Program measure set for the FY 2014 payment determination: 
Medicare Spending per Beneficiary. The details of this measure are 
discussed below.
(i) Medicare Spending per Beneficiary Measure
    Healthcare costs consume an ever-increasing amount of our Nation's 
resources, straining family, business, and government budgets. 
Healthcare costs take up a growing share of Federal and State budgets 
and imperil the governments' long-term fiscal outlooks. In the U.S., 
the sources of inefficiency that are leading to rising healthcare costs 
include payment systems that reward medical inputs rather than 
outcomes. Medicare is transforming from a system that rewards volume of 
service to one that rewards efficient, effective care and reduces 
delivery system fragmentation.
    In order to further this transformation and help address the 
critical issue of health care costs, in the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25896 through 25897) we proposed to add a measure 
of Medicare spending per beneficiary to the Hospital IQR Program 
measure set for the FY 2014 payment determination. This proposed 
Medicare

[[Page 51619]]

spending per beneficiary measure addressing the cost of care is a type 
of measure that is not currently included in the Hospital IQR Program. 
We are not aware that the NQF or any other consensus organizations 
under section 1886(b)(3)(B)(viii)(IX) of the Act have currently 
endorsed any Medicare spending per beneficiary measures. We will give 
due consideration under section 1886(b)(3)(B)(viii)(IX)(bb) of the Act 
to any Medicare spending per beneficiary measures that become endorsed 
in the future. It is important that the cost of care be explicitly 
measured so that, in conjunction with other quality measures included 
in the Hospital IQR Program, we can recognize hospitals that are 
involved in the provision of high quality care at lower cost.
    We proposed that this Medicare spending per beneficiary measure 
would be calculated using claims data for hospital discharges occurring 
between May 15, 2012 and February 14, 2013. Therefore, the addition of 
this proposed measure would not increase the data submission burden on 
hospitals. We outline below the methodology that we proposed to use to 
calculate the measure.

 The Medicare Spending per Beneficiary Episode

    As we stated in the proposed rule, in order to calculate the 
Medicare spending per beneficiary for each hospital, we believe that it 
is necessary to determine: (1) The timeframe, or length of the 
``spending per beneficiary episode'' during which Medicare payments 
would be aggregated; (2) the types of Medicare payments to be 
aggregated over this timeframe; and (3) how to adjust or standardize 
these payments across hospitals (for example, risk adjustment).

 Length of the Medicare Spending per Beneficiary Episode

    Encouraging delivery of coordinated care in an efficient manner is 
an important goal which can best be achieved through inclusion of 
Medicare payments made outside the timeframe of the hospital inpatient 
stay. We proposed to use an episode that runs from three days prior to 
an inpatient PPS hospital admission (the index admission) through 90 
days post hospital discharge.
    We also sought public comment on an alternative 30-day time period 
for the initial implementation of this measure that would be more 
consistent with the 30-day time period currently in use for some 
outcome measures.
    We received numerous public comments on the proposed length of the 
Medicare spending per beneficiary episode.
    Comment: The majority of commenters stated an episode spanning 90 
days post-discharge was too long to represent factors which are within 
hospitals' control, and that a shorter period would focus on factors 
which are more directly influenced by the hospital. Commenters noted 
physician care and patient compliance with post-discharge instructions 
as examples of factors which are outside the hospital's control. 
Several commenters suggested a 30-day post-discharge period would be 
more appropriate. Several commenters noted that a 30-day post-discharge 
period would be consistent with the measures used in the Hospital 
Readmissions Reduction Program. One commenter noted that it would be 
consistent with the bundling pilot included in the Affordable Care Act. 
Many commenters suggested a 15-day post-discharge period, and a few 
suggested a 7- or 15-day post-discharge period. Three commenters 
suggested no more than 14 days, with one suggesting that this shorter 
period would simplify separation of episodes for complex patients.
    Response: We are accepting the suggestions that we align the length 
of the spending per beneficiary episode with other agency initiatives, 
including the post-discharge period that applies to the readmission 
measures under the Hospital IQR Program and the one we are adopting in 
this final rule for the readmission measures we are finalizing for the 
Hospital Readmissions Reduction Program, for the initial implementation 
of this measure. We also believe that a shorter length will allow 
hospitals to gain experience with this measure while we consider 
whether it would be appropriate to propose to hold them accountable for 
coordinating services over a longer post-discharge period. Therefore, 
we are adopting a shorter length of the Medicare spending per 
beneficiary episode than we proposed for the Medicare spending per 
beneficiary measure to be included in the FY 2014 Hospital IQR Program. 
We also believe that a shorter Medicare spending per beneficiary 
episode will enable us to include a larger number of episodes in the 
measure calculation because admissions occurring more than 30 days 
after a discharge will now represent new index admissions, rather than 
having the Medicare payments associated with them attributed back to 
the first index admission. This will potentially allow more opportunity 
for hospitals to improve their performance on the measure.
    We are finalizing a Medicare spending per beneficiary episode which 
spans from 3 days prior to hospital admission through 30 days post 
hospital discharge, for the initial implementation of this measure. Our 
intent is to revisit the episode length in future rulemaking as we gain 
more experience with this measure and as hospitals gain more experience 
in redesigning care processes and coordinating patient care in the 
post-hospital discharge period, and we will strongly consider 
lengthening the Medicare spending per beneficiary episode.
    Comment: A few commenters suggested that a 90-day post-discharge 
period was not long enough. One commenter suggested that an episode of 
1 year or more post-discharge would be required in order to realize 
savings achieved by selection of treatment alternatives which are more 
costly initially. Another commenter suggested that a minimum of 6 
months would be necessary to recognize system-wide cost savings across 
all Part A and Part B payments and stated that a 90-day post-discharge 
period, if adopted, should only count inpatient hospital costs, in 
recognition that other provider types do not have similar incentives 
and that readmissions could likely be reduced over 90 days.
    Response: We acknowledge that including a longer post-discharge 
period in the Medicare spending per beneficiary episode could recognize 
system-wide cost savings. However, we are going to implement a 30-day 
post-discharge period for the measure for the FY 2014 Hospital IQR 
Program for the reasons discussed above. We intend to revisit the 
episode length in the future in order to determine whether a longer 
Medicare spending per beneficiary post-discharge window would be 
appropriate for incentivizing greater efficiency, care coordination, 
and care transitions.
    Comment: One commenter expressed strong support for the 90-day 
post-discharge period, noting that it encourages the teamwork and care 
coordination that is necessary to achieve the delivery of high quality, 
efficient healthcare.
    Response: We agree that a 90-day episode would encourage teamwork 
and cooperation for the provision of quality care to Medicare 
beneficiaries. However, we are finalizing a 30-day post discharge 
window in order for hospitals to gain experience with the measure, and 
work toward redesign of care processes, while we consider whether it 
would be appropriate to propose to hold them accountable for 
coordinating services over a longer post-discharge period.

[[Page 51620]]

    Comment: Several commenters requested clarification as to whether 
the spending per beneficiary measure was intended to measure general 
per-beneficiary spending or to measure the per-beneficiary spending of 
specific hospitals. These commenters suggested that a 90-day post 
discharge period was appropriate for inclusion in an episode to measure 
general per-beneficiary spending, but that if that spending was to be 
attributed to a specific hospital, then a shorter period, such as 7 or 
15 days would be more appropriate.
    Response: The intent of the Medicare spending per beneficiary 
measure is to measure hospital-specific Medicare spending per 
beneficiary, as compared to the median Medicare spending amount across 
all hospitals nationally. We believe that a comparison of individual 
hospitals' spending to hospital spending on a national level will best 
allow hospitals to recognize where opportunities for improved 
efficiencies exist. We do not believe that display of general per 
beneficiary spending would achieve this intent, because it would not 
indicate to hospitals how their individual Medicare spending per 
beneficiary amount compares to other hospitals.
    After consideration of all public comments we received on the 
length of the Medicare spending per beneficiary episode, we are 
finalizing a Medicare spending per beneficiary episode, spanning from 3 
days prior to hospitalization through 30-days post discharge. We are 
finalizing the policy that only discharges occurring within 30 days 
before the end of the performance period will be counted as index 
admissions for purposes of calculating episodes. We intend to revisit 
the length of the Medicare spending per beneficiary episode as we gain 
more experience with the use of this measure and as hospitals 
increasingly focus on working to redesign care processes and to 
coordinate with other providers of care, in the interest of providing 
the highest-quality, most efficient coordinated care possible to the 
beneficiaries they serve.

 Medicare Payments Included in the Spending per Beneficiary 
Episode

    In order to calculate the Medicare spending per beneficiary, it is 
necessary to define the Medicare payments included in the spending per 
beneficiary episode. Subject to the adjustments described below, we 
proposed to include all Medicare Part A and Part B payments made for 
services provided to the beneficiary during the episode, including 
payments made by beneficiaries that we can determine using our claims 
data, such as Part B deductibles and coinsurance amounts. We believe 
that this comprehensive inclusion of Medicare Part A and Part B 
spending emphasizes the importance of care coordination in improving 
patient care. Encouraging delivery of coordinated care in an efficient 
manner over an extended time period is an important goal which can best 
be achieved through the inclusion of comprehensive Medicare Part A and 
Part B spending.
    We also proposed that transfers, readmissions, and additional 
admissions that began during the post discharge period of an index 
admission would be included in the episode used for calculating the 
measure.
    We proposed to exclude from the Medicare spending per beneficiary 
calculation episodes where at any time during the episode the 
beneficiary is not enrolled in both Medicare Part A and Medicare Part 
B, including if the beneficiary is enrolled in a Medicare Advantage 
plan at any time during the episode or becomes deceased. We also 
proposed to exclude any episodes where the beneficiary is covered by 
the Railroad Retirement Board, and where Medicare is a secondary payer. 
We also proposed to exclude episodes where the beneficiary is not 
enrolled in both Medicare Part A and Medicare Part B, for the 90 days 
prior to the episode, because we would not be able to capture all the 
data necessary for the severity of illness adjustment discussed later 
in this preamble. The rationale for exclusion of these episodes from 
the calculation of the Medicare spending per beneficiary is that we do 
not have full payment data to identify and standardize spending which 
would otherwise be attributable to these episodes.
    We received numerous public comments on the payments proposed for 
inclusion in the Medicare spending per beneficiary measure.
    Comment: Almost half of the commenters requested clarification of 
the proposed handling of transfer cases, and many requested 
clarification of the proposed handling of readmissions. One commenter 
requested clarification of the proposed handling of cases in which the 
beneficiary's primary insurance becomes Medicaid during the episode, 
due to exhaustion of Medicare Part A benefits.
    Response: We proposed to include in the spending per beneficiary 
episode all Medicare Part A and Part B payments made for services 
provided to the beneficiary during the episode that we can determine 
using our claims data. Readmissions and transfers would have been 
attributed to the hospital at which the index hospitalization occurred 
as long as they occurred during the post-discharge window of the index 
admission. For example, Medicare payments for any of the following 
which happened during the hospital stay or the post-discharge window 
would have been included in the Medicare spending per beneficiary 
episode: A beneficiary was transferred from the subsection (d) hospital 
to another subsection (d) hospital for the purposes of receiving 
inpatient services; a beneficiary was transferred from the subsection 
(d) hospital to a post-acute care setting, such as a SNF, LTCH, or 
home; a beneficiary was readmitted to the same subsection (d) hospital; 
and/or the beneficiary was admitted to a different subsection (d) 
hospital. As noted above, we are finalizing a Medicare spending per 
beneficiary episode, spanning from 3 days prior to hospitalization 
through 30-days post discharge, in response to public comment.
    Based on public comment, however, we have reconsidered the proposed 
handling of transfers from one subsection (d) hospital to another, as 
discussed below. We also note that, in response to public comment, we 
have reconsidered whether statistical outliers should be included in 
the Medicare spending per beneficiary amount, and we will exclude them, 
as discussed below. To clarify our proposal regarding beneficiaries 
whose primary insurance becomes Medicaid during the episode, due to 
exhaustion of Medicare Part A benefits, we will not include Medicaid 
payments made for services rendered to those beneficiaries during the 
episode, because this is a measure of Medicare spending per 
beneficiary, not Medicaid spending. We will include all Medicare Part A 
payments made before benefits are exhausted and all Medicare Part B 
payments made during the episode, consistent with our policy for 
inclusion of all Medicare Part A and Part B payments, with the 
exception of statistical outliers, as discussed below, in the 
calculation of hospitals' Medicare spending per beneficiary amounts in 
all cases. We intend to analyze the impact of including episodes in 
which beneficiaries' primary insurance changes to Medicaid in this 
measure and will consider refinements to this policy in the future. We 
will also include Medicare payments made for services rendered to 
beneficiaries who are eligible for both Medicare and Medicaid in the 
Medicare spending per beneficiary amount.
    Comment: Several commenters stated that inclusion of Medicare 
payments for all Part A and Part B services occurring

[[Page 51621]]

during the post-discharge period would penalize hospitals for ensuring 
that patients receive necessary post-discharge follow-up care.
    Response: We do not believe that inclusion of all Part A and Part B 
Medicare spending during the Medicare spending per beneficiary episode 
will penalize hospitals for ensuring that beneficiaries receive needed 
post-discharge care. The measure's purpose is to assess the amount of 
payments Medicare makes surrounding an inpatient hospital stay at a 
subsection (d) hospital, as compared to a national benchmark. We 
believe that hospitals which provide quality inpatient care and 
appropriate discharge planning and work with providers and suppliers on 
appropriate follow-up care will realize efficiencies and perform well 
on the measure, because the Medicare beneficiaries they serve will have 
a reduced need for excessive post-discharge services. We believe that 
including a 30-day post-discharge period, as compared to a shorter 
post-discharge period, such as 7 or 14 days, will further reduce the 
risk that hospitals might delay needed post-discharge care.
    Comment: Six commenters expressed the opinion that readmissions 
should be excluded from the measure, and four of those commenters 
believed that the Affordable Care Act prohibits inclusion of 
readmissions in this measure. Two of those commenters noted that 
readmissions are addressed in other measures. One commenter suggested 
that readmissions should not be attributed to the hospital at which the 
index admission occurred, and another commenter suggested that 
readmissions should not be treated as index admissions, for the 
purposes of creating new, distinct episodes. Six commenters suggested 
that unrelated readmissions should be excluded, and one commenter 
suggested that unrelated readmissions should not be attributed to the 
hospital where the index hospitalization occurred.
    Response: We disagree with the interpretation that the inclusion of 
Medicare spending for readmissions is contrary to the intent of the 
Affordable Care Act that the Hospital VBP Program may not include 
measures of readmissions. The Medicare spending per beneficiary measure 
is not a measure of readmission rates, but rather it is a measure of 
total Medicare spending per beneficiary, relative to a hospital stay. A 
Medicare spending per beneficiary measure is required by the Affordable 
Care Act to be included in the Hospital VBP Program, and therefore, in 
the Hospital IQR Program. We believe that the Medicare payments made 
for readmissions must be attributable to the index hospital stay, in 
order: to fully capture Medicare spending relative to a hospital stay; 
to encourage the provision of comprehensive inpatient care, discharge 
planning, and follow-up; and to strengthen incentives to reduce 
readmissions.
    With regard to exclusion of unrelated readmissions, we acknowledge 
the commenters who suggested that unforeseen events which are unrelated 
to the hospital stay could occur. However, we note that the measure is 
consistent with all cause readmission measures and that determinations 
of the degree of relatedness of each subsequent hospital stay to an 
initial hospitalization could be subjective and prohibitively complex. 
We believe that inclusion of all readmissions in the episode 
attributable to the index hospital stay is the best way to encourage 
quality inpatient care, care coordination, and care transitions. We 
note that all hospitals will be subject to the same method of 
calculation of their Medicare spending per beneficiary amounts, as 
compared to the median Medicare spending per beneficiary amount across 
all hospitals, so we do not believe that inclusion of all readmissions 
will notably disadvantage any individual hospital. We also note that, 
in response to public comment, we will exclude statistical outliers 
from the calculation of the Medicare spending per beneficiary amount, 
as discussed below.
    We agree with the commenter who suggested that a readmission 
occurring during a Medicare spending per beneficiary episode should not 
represent a new index hospitalization, for the purpose of generating a 
new Medicare spending per beneficiary episode. We also acknowledge the 
importance of aligning payment initiatives across CMS. Based on our 
consideration of the comments we received, we are shortening the 
proposed post-discharge period included in the Medicare spending per 
beneficiary episode to 30 days in this final rule, which is consistent 
with the Hospital Readmissions Reduction Program.
    Comment: One commenter stated that no services for conditions 
unrelated to the index hospitalization should be attributed to the 
hospital at which that hospitalization occurred.
    Response: We acknowledge the fact that health events which are 
unrelated to the hospital stay could occur and require treatment post-
discharge, during the Medicare spending per beneficiary episode. 
However, we believe that determinations of the degree of relatedness of 
each subsequent hospital stay to an initial hospitalization would be 
subjective and prohibitively complex. In order to capture the potential 
efficiencies which hospitals might achieve through provision of 
comprehensive, high-quality inpatient care, discharge planning, and 
care transitions, we believe that it is necessary to capture all Part A 
and Part B Medicare payments which occur during the Medicare spending 
per beneficiary episode surrounding the hospital stay. We also note 
that all hospitals will be subject to the same method of calculation of 
their Medicare spending per beneficiary amounts, as compared to the 
median Medicare spending per beneficiary amount across all hospitals, 
so we do not believe that inclusion of all post-discharge follow-up 
care will notably disadvantage any individual hospital. Again, we note 
that, in response to public comment, we will exclude statistical 
outliers from the calculation of the Medicare spending per beneficiary 
amount, as discussed below.
    Comment: Four commenters stated that transfer cases should be 
excluded, in order to avoid penalizing hospitals often called upon to 
receive transfers, because follow-up care may be received in a region 
outside the influence of the hospital receiving the transfer, and for 
consistency with the Hospital Readmissions Reduction Program.
    Response: The comments regarding attribution of Medicare payments 
for hospitalizations resulting in acute to acute transfers, and 
specifically, the potential impact on hospitals who transfer patients 
to another subsection (d) hospital or those who receive large numbers 
of transfers, have persuaded us that that the attribution of Medicare 
payments for hospitalizations resulting in acute to acute transfers 
requires further consideration. At this time, we will exclude cases 
involving acute to acute transfers from being considered index 
admissions. A case involving an acute to acute transfer will therefore 
not generate a new Medicare spending per beneficiary episode. This 
means that neither the hospital which transfers a patient to another 
subsection (d) hospital, nor the receiving subsection (d) hospital will 
have an index admission attributed to them for an acute-to-acute 
transfer case. The rationale for exclusion of these acute to acute 
transfer cases as index admissions is that CMS wishes to perform 
further analysis of hospital impacts and explore potential unintended 
consequences of attribution of the Medicare spending per beneficiary 
episode relative to the cases

[[Page 51622]]

to either the transferring or the receiving hospital. Therefore, at 
this time we will exclude acute-to-acute transfer cases from being 
counted as index admissions, and these cases will not create a new 
Medicare spending per beneficiary episode. However, if a patient is 
readmitted during the post-discharge window and then transferred to 
another acute care hospital, we will attribute these costs to the 
hospital where the original index admission occurred.
    For example, if a beneficiary is hospitalized in a subsection (d) 
hospital (Hospital A), then discharged from that hospital to home or to 
another subacute level of care, such as a SNF, then that 
hospitalization would represent an index admission, and the Medicare 
Part A and Part B payments (with the exception of statistical outliers) 
which are made during the Medicare spending per beneficiary episode 
spanning from 3 days prior to admission through 30 days post discharge 
(including payments to a subacute facility) would be included in the 
Medicare spending per beneficiary amount attributed to Hospital A. We 
would also include, in the total Part A and Part B payments attributed 
to hospital A, any Medicare payments made for the beneficiary's 
readmission to the same or a different subsection (d) hospital during 
the 30 day post-discharge window, including any case where during that 
subsequent hospitalization, the beneficiary is transferred to another 
subsection (d) hospital.
    Comment: Several commenters offered their views regarding the 
importance of looking at Medicare spending concurrently with other 
measures of quality, and potential unintended consequences of a measure 
which is specific to Medicare spending. These commenters stated that 
the scope of the measure should not be Medicare spending alone, but 
that spending data should be tied to other measures. One commenter 
suggested that the measure should assess conformity toward an endorsed 
care process. Several commenters stated that an efficiency measure 
should measure cost concurrently with quality or outcomes measures, and 
three commenters stated that Medicare spending data could be 
misinterpreted in the absence of quality data.
    One commenter stated that the measure should be implemented for FY 
2014, but should be adjusted to tie in a new HCAHPS measure of care 
transitions. Three commenters stated that a spending-only measure could 
result in the unintended consequence of efforts to cut cost by limiting 
needed care, and another commenter suggested that it could result in a 
risk of hospital avoidance of complex patients. One commenter stated 
that the measure would penalize hospitals that work to keep all but the 
sickest patients out of the hospital. One commenter stated that the 
measure would result in physicians placing more patients into inpatient 
care, post hospital discharge, in order to assure proper care 
transitions, and one commenter questioned the measure's inclusion in a 
quality reporting program when it does not inherently measure quality.
    Response: We agree with the commenters that it is useful to view a 
measure of Medicare spending per beneficiary in conjunction with other 
quality measures. We will provide explanatory language on Hospital 
Compare, in order to assist beneficiaries in interpreting the Medicare 
spending per beneficiary measure data. We also note that we developed 
this measure with the intent of including it in the Hospital VBP 
Program, where it will represent the first measure in a new Efficiency 
domain. Under that program, we will weight and combine the Efficiency 
domain with the other, individual domain scores, in order to calculate 
each hospital's Total Performance Score (TPS). This procedure for 
calculating a TPS ensures that spending per beneficiary makes up only a 
portion of the TPS, and that the remainder is based on hospitals' 
performance on the other measures.
    We disagree that Medicare spending per beneficiary should be tied 
to a new HCAHPS measure. The Affordable Care Act requires the inclusion 
of efficiency measures, and specifically the inclusion of a measure of 
Medicare spending per beneficiary, in the Hospital VBP Program, which 
in turn, means that the measure must also be adopted for the Hospital 
IQR Program. We believe the intent of this statutory mandate is for 
Medicare spending to be independently measured.
    The data for the Medicare spending per beneficiary measure will be 
posted on Hospital Compare, along with the other hospital quality 
measure data available on that Web site. We will also provide 
explanatory language, in order to assist beneficiaries in interpreting 
the Medicare spending per beneficiary measure data. We appreciate the 
commenters' concerns regarding unintended consequences of a spending 
per beneficiary measure, and will monitor for any utilization changes 
which may result from this measure.
    We disagree that the measure will penalize hospitals that work to 
keep all but the sickest beneficiaries out of the hospital. We proposed 
to utilize the primary diagnoses and comorbidities from claims 
submitted during the 90-days preceding the Medicare spending per 
beneficiary episode to risk-adjust Medicare payments made for services 
provided to beneficiaries during an inpatient hospital stay and during 
the Medicare spending per beneficiary episode surrounding the stay. We 
believe that this will adequately account for hospital treatment of 
complex patients. We also disagree with the comment that the measure 
provides an incentive for increased discharges from hospitals to other 
inpatient settings. We believe that hospitals will have an incentive to 
coordinate care and discharge beneficiaries to the most appropriate 
setting, including utilizing less-costly outpatient levels of care for 
post-discharge care. With regard to inclusion of the Medicare spending 
per beneficiary in a quality reporting program, we disagree with the 
comment that it does not belong in the program. We believe that 
hospitals' provision of quality, coordinated care will result in more 
efficient and effective delivery of care for Medicare beneficiaries and 
provides an incentive to eliminate unnecessary services. Therefore, we 
believe that a measure of Medicare spending per beneficiary is a 
measure of quality.
    Comment: Two commenters objected to the use of an episode in the 
Medicare spending per beneficiary measure because they believed that it 
did not meet the intent of the Affordable Care Act to measure spending 
per beneficiary.
    Response: The Affordable Care Act requires that the Hospital VBP 
Program include measures of efficiency, including Medicare spending per 
beneficiary. As we expand the Hospital VBP Program Efficiency domain, 
we will consider adding additional measures of efficiency, which could 
include measures of internal hospital efficiencies, through future 
rulemaking.
    Comment: One commenter suggested that spending for Medicare 
Advantage beneficiaries should be included in the measure, because non-
managed care beneficiaries are costlier.
    Response: We do not have evidence that managed care beneficiaries 
are less expensive. In order to minimize burden on hospitals, CMS has 
proposed the Medicare spending per beneficiary measure as a claims-
based measure. Therefore, we cannot include spending for managed care 
beneficiaries in the measure calculation since we do not have fee-for-
service claims for these patients. In order to fairly compare 
hospitals' spending, we have proposed

[[Page 51623]]

to exclude from the measure any episodes in which we do not have 
complete Medicare FFS claims data, such as those enrolled in Medicare 
Advantage plans. We will account for the complexities and resulting 
costs associated with caring for Medicare beneficiaries who have 
complex conditions by risk-adjusting for beneficiary age and severity 
of illness.
    Comment: One commenter suggested that Medicare payments for drugs 
should be included, because expenditure on a new technology, for 
example, could offset future costs for drugs.
    Response: We appreciate this comment and will take it into 
consideration in future rulemaking for the Medicare spending per 
beneficiary measure. At this time, we are able to include Part A and 
Part B payments, so payments for Part B drugs will be included in the 
Medicare spending per beneficiary amount. We will consider whether to 
propose to include Medicare payments made under the Medicare Part D 
drug payment system in the future.
    Comment: Two commenters stated that a hospital cost efficiency 
measure should be limited to hospital resource use, such as resources 
used to treat HAIs and falls, or provision of appropriate lengths of 
stay.
    Response: We disagree with these comments. The Affordable Care Act 
requires that the Hospital VBP Program include measures of efficiency, 
including Medicare spending per beneficiary. We do not believe that a 
measure of hospital resource use, rather than Medicare payments, as 
suggested by the commenters, would meet the intent of the law that we 
include a measure of Medicare spending per beneficiary. As we expand 
the Hospital VBP Program Efficiency domain, we will consider adding 
additional measures of efficiency, which could include measures of 
internal hospital efficiencies, through future rulemaking.
    Comment: One commenter stated that CMS policies should not punish 
the most efficient states and that CMS should seek savings from 
providers and regions that use the highest levels of respurces to care 
for patients.
    Response: We agree that efficient providers should not be 
penalized, and we believe they will be incentivized under this measure. 
We are finalizing our proposal to calculate hospitals' Medicare 
spending per beneficiary ratios as compared to the median spending 
across all hospitals; therefore, we believe that hospitals who 
demonstrate efficiencies in the provision of care for their patients 
will perform well on the measure, regardless of where the hospital is 
located.
    Comment: Two commenters stated that there was no scientific or 
evidentiary support for the measure.
    Response: We recognize that this Medicare spending per beneficiary 
measure is a new type of measure for the Hospital IQR and Hospital VBP 
Programs. A measure of Medicare spending per beneficiary is is mandated 
by the Affordable Care Act, so we developed a measure to capture 
Medicare payments made in an episode surrounding a hospital stay, in 
order to compare hospitals' individual spending to spending across all 
hospitals. We considered many factors in developing the measure and 
outlined in detail our methodology in the proposed rule. We believe 
that this measure will provide an incentive to hospitals to redesign 
care systems in order to better coordinate and provide high-quality, 
cost-efficient care to Medicare beneficiaries. As we gain more 
experience with the use of this new type measure for the Hospital IQR 
Program, we will continue to analyze and refine the measure as 
appropriate, based on that experience.
    Comment: Several commenters recommended that the scope of Medicare 
payments included in the Medicare spending per beneficiary be narrowed. 
MedPAC suggested focus on a subset of episode costs associated with the 
stay, such as the stay itself and post acute care provided during a 
shortened post-discharge period. Two commenters suggested use of 
condition-specific measures to address costs associated with diagnoses 
such as acute myocardial infarction (AMI), heart failure (HF), or 
pneumonia. One commenter suggested that the measure should be better 
targeted, consistent with the Hospital Readmissions Reduction Program 
and the bundling pilot, and another commenter suggested that the 
measure should use criteria similar to those required for the bundling 
pilot. One commenter suggested that the measure be limited to inpatient 
hospital spending over 90 days, in an effort to reduce readmissions 
through care coordination, but with the recognition that other types of 
providers do not have the same incentives to reduce Medicare spending.
    Response: We appreciate the commenters suggestion that the Medicare 
spending per beneficiary measure should be aligned with measures used 
in other Medicare payment incentive programs. We believe that inclusion 
of Medicare spending for all Part A and Part B services in the 
calculation of the hospital's Medicare spending per beneficiary amount 
aligns with the aim of reducing readmissions under the Hospital 
Readmissions Reduction Program. We also note that the bundling pilot is 
under development and we will seek to align the Hospital VBP Program 
with that program as it develops.
    We appreciate the comments regarding the use of targeted or 
condition-specific measures in the interest of aligning with other CMS-
initiatives. While the Affordable Care Act does not limit the Secretary 
to adopting only one efficiency measure, it does specify that the 
efficiency measures must include a measure of Medicare spending per 
beneficiary, not per condition. At this time, we believe that inclusion 
of Medicare spending related to hospital stays for all diagnoses is the 
best approach to enable hospitals identify where opportunities for 
improved coordination and efficiency exist, by measuring hospitals' 
individual Medicare spending per beneficiary amount, as compared to 
Medicare spending per beneficiary on a national basis. We will consider 
adding condition-specific measures to the Hospital IQR Program and to 
the Efficiency domain in the Hospital VBP Program in the future, 
through rulemaking. We have shortened the post-discharge period during 
which Medicare payments will be included in the calculation of the 
Medicare spending per beneficiary amount in order to more closely align 
the measure with the Hospital Readmissions Reduction Program and other 
related initiatives.
    We disagree with the comment that only inpatient payments should be 
counted toward the Medicare spending per beneficiary amount. As we 
explained above, we do not believe that inclusion of inpatient hospital 
payments only will sufficiently address the need for care coordination 
and care transitions across all settings, in the interest of providing 
the highest-quality, most efficient care to Medicare beneficiaries.
    Comment: Some commenters stated that CMS should collect more data 
regarding the impact of inclusion of spending for post-acute care 
services in the measure, due to variability in access across different 
geographic areas, prior to including spending for these services in the 
measure. Two commenters suggested that no post-discharge services 
should be included in the measure, and expressed their belief that 
post-discharge services are not within a hospital's control. A few 
commenters stated that the measure should address processes or outcomes 
which are under

[[Page 51624]]

hospital control, and that all Medicare spending within a 90-day post-
discharge period is not under hospital control. A few commenters 
expressed that post-discharge payments depend more on physician 
management, beneficiary compliance with care planning, and community 
resources than they depend on care coordination by the hospital.
    Response: We acknowledge the comments that geographic variability 
in access to post-acute care services exists. However, we believe that 
hospitals have a responsibility to encourage the highest-quality, most 
coordinated and efficient care for the beneficiaries they serve, 
regardless of their geographic location.
    We disagree with commenters who stated that Medicare spending for 
post-discharge services is outside the hospitals' control, even within 
a 90-day post-discharge period. (As previously discussed, we are 
finalizing a 30-day post-discharge period for the initial 
implementation of this measure.) We believe that as hospitals focus on 
working to redesign care systems and to coordinate with other providers 
of care they can have a significant impact on the quality and 
efficiency of services provided to the Medicare beneficiaries they 
serve. As a result, we plan to revisit the issue of expanding the 
episode duration by lengthening the period of time post discharge in 
future rulemaking. We acknowledge that physician management, 
beneficiary compliance with post-discharge instructions, and 
availability of community resources contribute to Medicare spending 
after hospital discharge. However, we believe that hospitals have a 
significant influence on Medicare spending during the episode 
surrounding a hospitalization, through the provision of appropriate, 
high-quality care before and during inpatient hospitalization and 
through proper hospital discharge planning, care coordination, and care 
transitions. We believe that this measure will add an additional 
incentive for hospitals to apply this influence in ways that will 
promote the provision of the highest quality, most efficient care for 
hospitalized Medicare beneficiaries.
    After consideration of all public comments we received on our 
proposals regarding which Medicare payments we will include in the 
Medicare spending per beneficiary episode, we are finalizing the 
inclusion of Medicare payments for all Part A and Part B services 
rendered to Medicare beneficiaries during the Medicare spending per 
beneficiary episode, with the exception of statistical outliers, in the 
Medicare spending per beneficiary amount, which we will attribute to 
the hospital at which the index admission occurred. We will exclude 
cases involving acute to acute transfers from being counted as index 
admissions. A case involving an acute to acute transfer will therefore 
not generate a new Medicare spending per beneficiary episode. This 
means that neither the hospital which transfers a patient to another 
subsection (d) hospital, nor the receiving subsection (d) hospital will 
have an index admission attributed to them for purposes of creating a 
Medicare spending per beneficiary episode. However, if a patient is 
readmitted during the post-discharge window and then transferred to 
another acute care hospital, we will attribute these costs to the 
hospital where the original index admission occurred.
    We will attribute Medicare payments for acute to subacute 
transfers, such as discharges from a subsection (d) hospital to a SNF, 
IRF, or LTCH, to the index admission, as proposed.

 Adjusting the Medicare Payments Included in the Spending per 
Beneficiary Episode

    Section 1886(o)(2)(B)(ii) of the Act requires that a Medicare 
spending per beneficiary measure adopted for the Hospital VBP Program 
be ``adjusted for factors such as age, sex, race, severity of illness, 
and other factors that the Secretary determines appropriate.'' 
Consistent with these statutory requirements, we proposed to adjust the 
proposed Medicare spending per beneficiary measure for age and severity 
of illness. We proposed to adjust for severity of illness based on the 
hierarchical condition categories (HCCs) for the period 90 days prior 
to the episode and based on the MS-DRG during the index admission. 
Adding the MS-DRG to the use of the HCC improves the severity of 
illness adjustment and better standardizes the data, allowing for more 
valid comparisons of Medicare spending per beneficiary amounts across 
hospitals. Note that we would exclude episodes where the beneficiary is 
not enrolled in both Medicare Part A and Medicare Part B, for the 90 
days prior to the episode because we would not be able to capture all 
the data necessary for the severity of illness adjustment.
    We did not propose to adjust the Medicare spending per beneficiary 
for sex and race, consistent with our understanding of NQF's position 
strongly discouraging adjusting measures based on these factors.
    In addition, we proposed to exclude geographic payment rate 
differences (for example, based on the wage index and geographic 
practice cost index) in order to standardize the spending per 
beneficiary. We did not propose to adjust for geographic differences in 
spending that are unrelated to geographic payment rate differences. 
However, we sought comment on whether there are geographic factors 
other than payment rate differences that should be considered in the 
spending per beneficiary measure. We also proposed to standardize 
spending by excluding the portion of IPPS payments resulting from the 
payment differentials caused by hospital-specific rates, IME, and DSH. 
We did not propose to exclude spending for hospitals that are paid 
Hospital-Specific Rates, rather we proposed to exclude the differential 
additional spending that results from the use of the hospital-specific 
rates. Making these adjustments allows for more valid comparisons of 
Medicare spending per beneficiary amounts across hospitals. For 
example, without adjusting for geographic payment rate differences, a 
hospital might have higher or lower spending per beneficiary amounts 
compared to other hospitals based on its wage index and not its 
performance.
    Comment: The majority of commenters supported the proposal to 
adjust for beneficiary age and severity, as well as for geographic and 
hospital-specific payment differences. Many commenters suggested that 
payment standardization should also go further, to adjust for 
beneficiary demographic and socioeconomic factors, including sex, race, 
working status, disability status, and Medicaid eligibility.
    Response: We appreciate the comments supporting the severity of 
illness and age adjustments proposed. We disagree with the comments 
that risk-adjustment for the Medicare spending per beneficiary measure 
should include further adjustment for socioeconomic factors. Consistent 
with NQF's position on not adjusting for potential demographic (sex or 
race) or socioeconomic factors, we believe that the best adjustment for 
a payment measure is based on the beneficiaries' underlying health 
status, not demographic or socioeconomic factors. We intend to further 
analyze the implications of risk-adjustment for additional factors; 
however at this time, we feel that for initial implementation, 
consistency with the NQF position is the best approach to risk-
adjusting the Medicare spending per beneficiary measure. As we 
proposed, we will take into account the underlying health status and 
acuity levels for all patients before the episode in risk-adjusting

[[Page 51625]]

because these factors reflect the complexities these patients may 
present.
    Comment: Three commenters suggested that physician services should 
be risk-adjusted, as well as the hospital services.
    Response: We agree with these commenters. We intend to adjust total 
Medicare Part A and Part B payments for services received during 
hospitalization as well as for those received during the episode 
surrounding the hospital stay.
    Comment: One commenter stated that there is little evidence that 
the use of the diagnosis categories used for hierarchical condition 
category (HCC) scores accurately quantify severity. Three commenters 
suggested that HCCs should look back further than 90 days, and one 
stated that they should factor in not only primary diagnoses, but also 
comorbities.
    Response: First, we are clarifying that we are not applying the 
HCCs in a hierarchical manner, in which some diagnoses would in effect 
cancel others out. Rather, we are utilizing the diagnosis codes, both 
primary diagnoses and comorbidities, from the 90 days preceding the 
Medicare spending per beneficiary episode to risk adjust the Medicare 
Part A and Part B payments for services received during the Medicare 
spending per beneficiary episode. We believe that this approach is 
sensitive to all of the diagnoses most directly affecting the hospital 
stay. In addition, we will perform a risk adjustment for the 
beneficiary's age. We are open to future refinements to the risk-
adjustment methodology, including potentially looking back further than 
90 days for risk adjustment to the Medicare spending per beneficiary 
episode calculation, in future rulemaking.
    Comment: Some commenters suggested that CMS should also exclude 
from the calculation of the Medicare spending per beneficiary measure 
any payment differences resulting from other policy or incentive 
payments, including payment differences for physician services rendered 
in Federally-qualified health centers (FQHC), rural health center 
(RHC), and Outpatient PPS (OPPS) settings, new technology add-ons, sole 
community providers, and Medicare-dependent hospitals, as well as 
incentives from the Hospital VBP Program, meaningful use under the EHR 
Incentive Program, PQRS, or other current or future incentive payment 
adjustments.
    Response: We agree with the commenters that Medicare payment 
incentives, including the Hospital VBP Program, meaningful use under 
the EHR Incentive Program, PQRS, should not be factored in to the 
Medicare spending per beneficiary amount. They will not be included, in 
order to avoid penalizing high-quality and efficient hospitals. 
Likewise, we will exclude hospital-specific rates from the Medicare 
spending per beneficiary amount, so payment differentials for sole 
community hospitals and Medicare-dependent hospitals would not be 
included. We are excluding these payment adjustments from the 
calculation of the Medicare spending per beneficiary amount because we 
believe that they represent differences in the Medicare payments made 
to these types of hospitals, rather than differences resulting from 
hospitals' choices in provision of care or coordination of post-
discharge services.
    We disagree with the comment that the Medicare spending per 
beneficiary amount should be adjusted for the differential amount paid 
for physician services rendered in RHCs, FQHCs, or OPPS setting. First, 
we believe that adjustment for these ``site of services'' differences 
would undermine the ability of this measure to meaningfully capture 
differences in Medicare spending per beneficiary related to inpatient 
hospitalizations. Also, we do not believe that adjusting out such 
differences would result in a significant impact to any hospital's 
Medicare spending per beneficiary amount or their subsequent value-
based incentive payment amount. Physician services make up only a 
portion of the Medicare payments which are summed to calculate a 
hospital's Medicare spending per beneficiary amount, so the 
differential impact of physician services on the measure would be 
further minimized. In addition we are moving to a 30-day post-discharge 
period, which we believe will further reduce the impact of any payment 
differentials resulting from the receipt of physician services in 
various settings.
    We are therefore not adjusting out differential payments made for 
physician services based on site of service such as RHCs, FQHCs, or 
OPPS settings. We appreciate the comments on adjusting for the new-
technology add-on payment. We intend to address this payment through 
future rulemaking, prior to the implementation of the FY 2014 Hospital 
VBP Program payment adjustment, and we will seek to align with other 
CMS incentive programs in addressing new technology add-on payments.
    Comment: Four commenters stated that CMS should adjust for hospital 
case mix, in order to avoid penalizing hospitals serving specific 
populations, such as transplant centers or areas with high levels of 
chronic illness. One commenter suggested that CMS could adjust for 
underuse, or hospitals' failure to provide needed care, in order to 
avoid setting a benchmark reflecting underuse, and for overuse, or 
excessive use of healthcare services, due to poverty by stratifying the 
beneficiaries into cohorts reflecting disability status and Medicaid 
eligibility status.
    Response: We disagree that an additional adjustment should be made 
to the Medicare spending per beneficiary amount to account for hospital 
case mix. As we proposed, we are applying a severity adjustment on a 
per-beneficiary basis, so hospitals serving large proportions of 
Medicare beneficiaries with complex conditions will not be 
disadvantaged.
    We appreciate the comment regarding stratifying beneficiaries 
according to disability and Medicaid eligibility status, as a method to 
avoid setting benchmarks and making comparisons which are not 
appropriate for all populations. At this time, we are implementing this 
measure with adjustments for beneficiary age and severity of illness, 
which is consistent with NQF's position on not risk-adjusting potential 
race, socioeconomic, or gender disparities. Stratification of 
beneficiaries is an approach which we may consider in future 
refinements to the risk adjustment methodology, through future 
rulemaking. We intend to analyze the risk-adjustment methodology, as we 
gain experience with this measure, for potential changes to the 
methodology we are finalizing for the initial implementation.
    Comment: Two commenters suggested that CMS convene a panel to 
determine the best risk-adjustment strategy. One commenter suggested 
that no further risk adjustment beyond what was proposed should be 
undertaken without further analysis.
    Response: We agree that a panel may be a useful tool in achieving 
consensus on a strategy. We are open to suggestions for future 
refinements to the Medicare spending per beneficiary measure, for 
future fiscal years' payment adjustments. However, at this time 
convening a panel would delay implementation of this important measure 
emphasizing coordination and efficiency in the delivery of health care 
services to Medicare beneficiaries.
    After considering all public comments we received on our proposals 
for adjusting the Medicare payments included in the Medicare spending 
per beneficiary episode, we are finalizing our proposal to adjust the 
Medicare spending per beneficiary amount for beneficiary age and 
severity of illness,

[[Page 51626]]

as calculated by applying the hierarchical condition categories which 
apply to the beneficiary during the 90 days preceding the Medicare 
spending per beneficiary episode. We will also adjust for geographic 
payment differences such as wage index and geographic practice cost 
differences. We will further adjust for Medicare payment differences 
resulting from hospital-specific rates, IME and DSH payments, as 
proposed. In addition, in response to public comment as discussed 
above, we will exclude statistical outliers and Medicare payment 
incentives, including the Hospital VBP Program, meaningful use under 
the EHR Incentive Program, and PQRS incentives, from the calculation of 
the Medicare spending per beneficiary amount.

 Calculating a Hospital's Medicare Spending per Beneficiary 
Amount

    For each subsection (d) hospital participating in the Hospital IQR 
Program, we proposed to add together all the adjusted Medicare Part A 
and Part B payments, as defined above, with the exception of 
statistical outliers, included in all the Medicare spending per 
beneficiary episodes, as defined above, for that hospital. We would 
then divide this sum by the total number of Medicare spending per 
beneficiary episodes for that hospital. The resulting amount would 
constitute the hospital's Medicare spending per beneficiary amount for 
the period. The discharge period that we proposed to apply the proposed 
measure for the FY 2014 Hospital IQR Program is May 15, 2012 through 
February 14, 2013.
    Comment: A few commenters questioned whether CMS has sufficient 
internal controls to ensure accurate calculation of a complex measure 
spanning time and service areas. Three commenters expressed concern 
that outliers would skew the calculation.
    Response: We acknowledge that a Medicare spending per beneficiary 
measure is new to the Hospital IQR Program. However, we will have in 
place internal checks to ensure that calculations are complete and 
accurate. Hospitals wil also have an opportunity to review and correct 
any information made public about them, with respect to this measure. 
We agree with the commenters' suggestion that statistical outliers 
should be excluded, so that low-volume hospitals are not potentially 
disadvantaged by one or two anomalous high-cost outliers having a 
significant impact on their Medicare spending per beneficiary amount. 
We will exclude them from the calculation of individual hospitals' 
Medicare spending per beneficiary amount and from the calculation of 
the median Medicare spending per beneficiary amount across hospitals.
    Comment: Nine commenters requested that the data used to calculate 
the Medicare spending per beneficiary amount be made public in time for 
public comment, and so that hospitals and advocacy groups could check 
CMS' calculations. One commenter suggested that a relative-value unit 
(RVU) system be used for simplicity and transparency in calculating 
standardized payment amounts.
    Response: We appreciate the suggestion that an RVU system could be 
used for the calculation of a Medicare spending per beneficiary amount 
and may consider such an approach for future refinements through 
rulemaking. We understand the importance of hospital access to data 
used to calculate the Medicare spending per beneficiary measure. In 
response to these comments, we intend to make a public use file 
available, so that hospitals can determine their own historical 
Medicare spending per beneficiary amounts and identify the drivers of 
those amounts.
    After considering the public comments received on our proposals for 
calculating a hospital's Medicare spending per beneficiary amount, we 
are finalizing calculation of a Medicare spending per beneficiary 
amount which is inclusive of most Medicare Part A and Part B payments 
made for services provided to Medicare beneficiaries during the 
Medicare spending per beneficiary episode. In addition to the 
exclusions we identified above, we will exclude statistical outliers 
from the calculation of individual hospitals Medicare spending per 
beneficiary amounts and from the calculation of the median Medicare 
spending per beneficiary amount across hospitals. We intend to make a 
public use file available so that hospitals may determine their own 
historical Medicare spending per beneficiary amounts.

 Calculating a Hospital's Medicare Spending per Beneficiary 
Ratio

    We proposed to calculate a hospital's Medicare spending per 
beneficiary ratio as the hospital's Medicare spending per beneficiary 
amount divided by the median Medicare spending per beneficiary amount 
across all hospitals.
    As noted above, we also proposed to adopt this proposed measure for 
the Hospital VBP Program FY 2014 measure set. The proposed method for 
scoring and incorporating this Medicare spending per beneficiary ratio 
into the hospital's TPS for the Hospital VBP Program, as part of a new 
Efficiency domain, is fully described in section IV.B.3.b.(3)(C) of the 
FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25928) and the method we are 
adopting is fully described in section IV.B.3.b.(3)(C) of this final 
rule. The proposed weighting for the Efficiency domain is proposed in 
the FY 2012 OPPS/ASC proposed rule.
    Comment: One commenter suggested that CMS use the mean, rather than 
the median spending per beneficiary amount for the purposes of 
calculating the Medicare spending per beneficiary ratio, stating that 
the mean is less sensitive to being skewed by outliers.
    Response: We disagree with the comment that the median is more 
sensitive to being skewed by outliers than the mean is. That is why we 
proposed to use the median for the purposes of comparison and 
calculation of the Medicare spending per beneficiary ratio. 
Furthermore, we are finalizing our proposal to exclude outliers from 
the calculations.
    Comment: MedPAC suggested that CMS should align incentives for 
hospitals and post-acute care providers to reduce readmissions, toward 
an end goal of alignment of incentives across the sectors, in order to 
improve the quality and reduce the cost of episodes of care, and to 
reduce the number of unnecessary inpatient episodes.
    Response: We agree that alignment of incentives is an important 
goal. We will keep that goal in mind as we work to refine the Medicare 
spending per beneficiary measure. However, we acknowledge that this 
measure alone would not be a sufficient vehicle to fully accomplish 
that goal.
    After consideration of the public comments received on our proposal 
for calculating a hospital's Medicare spending per beneficiary ratio, 
we are finalizing our proposal to calculate individual hospitals' 
Medicare spending per beneficiary ratios as their individual Medicare 
spending per beneficiary amount divided by the median Medicare spending 
per beneficiary amount across all hospitals.
    In summary, after consideration of all public comments we received, 
we are finalizing the following policies related to the inclusion of 
the Medicare spending per beneficiary measure in the Hospital IQR 
Program.
    We are finalizing a Medicare spending per beneficiary episode, 
spanning from three days prior to hospitalization through 30-days post 
discharge. We are finalizing the policy that only discharges occurring 
within 30 days before the end of the performance period will be counted 
as index admissions.

[[Page 51627]]

    We are finalizing the inclusion of all Medicare Part A and Part B 
payments for services rendered to Medicare beneficiaries during the 
Medicare spending per beneficiary episode, with the exception of 
statistical outliers, in the Medicare spending per beneficiary amount, 
which we will attribute to the hospital at which the index admission 
occurred. We are finalizing that cases involving acute to acute 
transfers will be excluded from being counted as index admissions and 
that those cases will not generate new Medicare spending per 
beneficiary episodes.
    We are finalizing our proposal to adjust the Medicare spending per 
beneficiary amount for beneficiary age and for severity of illness, as 
calculated by applying the hierarchical condition categories which 
apply to the beneficiary during the 90 days preceding the Medicare 
spending per beneficiary episode. We are finalizing our proposal to 
adjust for geographic payment differences such as wage index and 
geographic practice cost differences. We are finalizing our proposal to 
adjust for Medicare payment differences resulting from hospital-
specific rates, IME and DSH payments, and to adjust for Medicare 
payment incentives, including Hospital VBP Program, meaningful use 
under the EHR Incentive Program, and PQRS.
    We are finalizing calculation of a Medicare spending per 
beneficiary amount which is inclusive of all Medicare Part A and Part B 
payments made for services provided to Medicare beneficiaries during 
the Medicare spending per beneficiary episode surrounding an index 
hospitalization, excluding statistical outliers. We intend to make a 
public use file available so that hospitals may determine their own 
historical Medicare spending per beneficiary amount.
    We are finalizing our proposal to calculate individual hospitals' 
Medicare spending per beneficiary ratios as their individual Medicare 
spending per beneficiary amount divided by the median Medicare spending 
per beneficiary amount across all hospitals.
    We note that after consideration of the comments, this measure is 
also being finalized for inclusion in the Hospital VBP Program, and 
this discussion is located in section IV.B.3.b. of this final rule.
(C) New Web-Based Structural Measure
    Structural measures assess the characteristics and capacity of the 
provider to deliver quality health care. In the FY 2009 IPPS final 
rule, we finalized the ``Participation in a Systematic Database 
Registry for Cardiac Surgery'' measure (73 FR 48609) for the FY 2010 
payment determination. This measure does not require the hospital to 
actually participate in a cardiac surgery registry, instead, it only 
requires the hospital to report whether or not it participates in a 
cardiac surgery registry. In the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule (74 FR 43871 and 43872), we adopted two more structural measures: 
Participation in a Systematic Clinical Database Registry for Stroke 
Care; and Participation in a Systematic Clinical Database Registry for 
Nursing Sensitive Care under the Hospital IQR Program for the FY 2011 
payment determination. Based on public comments, we collect these 
structural measures once annually.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25897 through 
25898), we proposed to include a new structural measure, Participation 
in a Systematic Clinical Database Registry for General Surgery, in the 
Hospital IQR Program beginning with the FY 2014 payment determination. 
The Participation in a Systematic Clinical Database Registry for 
General Surgery measure would require each hospital that participates 
in Hospital IQR Program to indicate whether it is participating in a 
Systematic Clinical Database Registry for General Surgery and, if so, 
to identify the registry. This measure, like two of the previously 
adopted structural measures on registry participation (Participation in 
a Systematic Clinical Database Registry for Stroke Care; and 
Participation in a Systematic Clinical Database Registry for Nursing 
Sensitive Care), is an application of an NQF-endorsed measure (NQF 
 0493) ``Participation by a physician or other clinician in a 
systematic clinical database registry that includes consensus endorsed 
quality measures'' to the inpatient facility.
    We recognize that the NQF has endorsed this measure for the 
physician/clinician setting, but believe that this measure is highly 
relevant to the hospital setting, in that participation in a systematic 
clinical database registry for various topics is quite common in 
hospitals. Therefore, we previously adopted the Stroke and Nursing 
Sensitive Care registry participation measures as applications of the 
measure appropriate to the hospital inpatient setting. We reviewed the 
NQF's consensus endorsed measures, as well as measures endorsed or 
adopted by other organizations, and were unable to identify any other 
measures specifically for participation in a systematic clinical 
database registry for general surgery that have been endorsed for the 
hospital inpatient setting. Having given due consideration to other 
measures that have been endorsed or adopted by a consensus entity, we 
proposed to adopt an application of this non-NQF endorsed measure under 
the Secretary's authority to select non-NQF endorsed measures where 
such measures do not exist for a specified topic or medical topic. We 
proposed to adopt the measure under the exception authority provided in 
section 1886(b)(3)(B)(IX)(bb) of the Act. Additionally, we believe 
that, for the same reasons, the previously adopted structural measures 
for Stroke and Nursing Sensitive Care registries also meet the 
requirements under this authority and proposed to continue collecting 
them on that basis.
    We proposed that annual data submission for this proposed 
structural measure via a Web-based collection tool would occur between 
April 1, 2013 and May 15, 2013 with respect to the time period January 
1, 2012, through December 31, 2012. This collection period and time 
period were included in a correction notice to the FY 2012 IPPS/LTCH 
proposed rule published at (76 FR 34633).
    We believe that participation in a registry provides hospitals with 
valuable ongoing quality improvement information and demonstrates a 
commitment to improve. Many registries also collect outcome data and 
provide feedback to hospitals about their performance. We invited 
public comment on this proposal to include this structural measure for 
the FY 2014 payment determination.
    Comment: Some commenters did not support the adoption of the 
proposed structural measure because they believed that the measure is 
neither tightly linked to improving the quality of patient care, nor is 
it NQF-endorsed or adopted by the HQA.
    Response: This measure is an application of an NQF-endorsed measure 
for the hospital inpatient setting. We believe that structural measures 
are backbones to quality care as they assess whether infrastructure or 
conditions conducive to providing high quality care are present.
    Comment: Some commenters did not support the adoption of this 
structural measure because they believed that registry participation 
might create a false assumption among beneficiaries that the quality of 
a hospital can be judged by its participation or non-participation in 
the registry. The commenters also objected because they felt they would 
be required to participate in a registry and incur fees, and believed 
that registry participation should be voluntary. Furthermore, the

[[Page 51628]]

commenters stated that the addition of another registry measure is not 
meaningful given CMS' goal of establishing an EHR-based quality data 
reporting program by 2015.
    Response: We understand the commenters' concerns. We want to 
clarify that the structural registry measure that we are finalizing 
does not require participation in any registry. To meet the reporting 
requirements for the structural measure, hospitals only have to answer 
yes or no to a question about whether they participate in a systematic 
clinical database registry for general surgery, and if so to indicate 
the registry. We do not believe adoption of a structural measure is 
incompatible with our goal to switch to EHR-based reporting by 2015, 
because many registries accept data from EHRs. After consideration of 
the public comments received, we are finalizing the proposed structural 
measure for FY 2014 payment determination.
    In summary, after consideration of the public comments received, we 
are finalizing the retirement of 4 measures from the FY 2014 measure 
set that was finalized in the FY 2011 IPPS/LTCH PPS final rule, 
suspending collection for 4 measures beginning with January 1, 2012 
discharges, and adding 3 new measures to the measure set for the FY 
2014 payment determination: 1 HAI measure (CAUTI) collected through the 
NHSN, 1 claims-based measure (Medicare Spending Per Beneficiary), and 1 
structural measure (Participation in a Systematic Clinical Database 
Registry for General Surgery). As a result, there will be a total of 59 
measures in the FY 2014 Hospital IQR measure set, but we will only be 
collecting data on 55 of those measures for purposes of the FY 2014 
payment determination. The 59 measures are listed below, and the 4 
measures for which we will not be collecting data are designated with 
the word ``SUSPENDED.''

------------------------------------------------------------------------
                                    Hospital IQR program measures for FY
                                         2014 payment determination
                                    reflecting retirement of 4 measures,
               Topic                 suspension of data collection for 4
                                       measures and adoption of 3 new
                                                  measures
------------------------------------------------------------------------
Acute Myocardial Infarction (AMI).   AMI-1 Aspirin at arrival
                                     [SUSPENDED].
                                     AMI-2 Aspirin prescribed at
                                     discharge.
                                     AMI-3 ACEI/ARB for left
                                     ventricular systolic dysfunction
                                     [SUSPENDED].
                                     AMI-5 Beta-blocker
                                     prescribed at discharge
                                     [SUSPENDED].
                                     AMI-7a Fibrinolytic
                                     (thrombolytic) agent received
                                     within 30 minutes of hospital
                                     arrival.
                                     AMI-8a Timing of Receipt of
                                     Primary Percutaneous Coronary
                                     Intervention (PCI).
                                     AMI-10 Statin Prescribed at
                                     Discharge.
Heart Failure (HF)................   HF-1 Discharge
                                     instructions.
                                     HF-2 Evaluation of left
                                     ventricular systolic function.
                                     HF-3 Angiotensin Converting
                                     Enzyme Inhibitor (ACE-I) or
                                     Angiotensin II Receptor Blocker
                                     (ARB) for left ventricular systolic
                                     dysfunction.
Pneumonia (PN)....................   PN-3b Blood culture
                                     performed in the emergency
                                     department prior to first
                                     antibiotic received in hospital.
                                     PN-6 Appropriate initial
                                     antibiotic selection.
Surgical Care Improvement Project    SCIP INF-1 Prophylactic
 (SCIP).                             antibiotic received within 1 hour
                                     prior to surgical incision.
                                     SCIP INF-2: Prophylactic
                                     antibiotic selection for surgical
                                     patients.
                                     SCIP INF-3 Prophylactic
                                     antibiotics discontinued within 24
                                     hours after surgery end time (48
                                     hours for cardiac surgery).
                                     SCIP INF-4: Cardiac surgery
                                     patients with controlled 6AM
                                     postoperative serum glucose.
                                     SCIP INF-6 Appropriate Hair
                                     Removal [SUSPENDED].
                                     SCIP INF-9: Postoperative
                                     urinary catheter removal on post
                                     operative day 1 or 2 with day of
                                     surgery being day zero.
                                     SCIP INF-10: Surgery
                                     patients with perioperative
                                     temperature management.
                                     SCIP Cardiovascular-2:
                                     Surgery Patients on a Beta Blocker
                                     prior to arrival who received a
                                     Beta Blocker during the
                                     perioperative period.
                                     SCIP INF--VTE[dash]1:
                                     Surgery patients with recommended
                                     Venous Thromboembolism (VTE)
                                     prophylaxis ordered.
                                     SCIP-VTE[dash]2: Surgery
                                     patients who received appropriate
                                     VTE prophylaxis within 24 hours pre/
                                     post surgery.
Mortality Measures (Medicare         Acute Myocardial Infarction
 Patients).                          (AMI) 30-day mortality rate.
                                     Heart Failure (HF) 30-day
                                     mortality rate.
                                     Pneumonia (PN) 30-day
                                     mortality rate.
Patients' Experience of Care......   HCAHPS survey.
Readmission Measure (Medicare        Acute Myocardial Infarction
 Patients).                          30-day Risk Standardized
                                     Readmission Measure.
                                     Heart Failure 30-day Risk
                                     Standardized Readmission Measure.
                                     Pneumonia 30-day Risk
                                     Standardized Readmission Measure.
AHRQ Patient Safety Indicators       PSI 06: Iatrogenic
 (PSIs), Inpatient Quality           pneumothorax, adult.
 Indicators (IQIs) and Composite     PSI 11: Post Operative
 Measures.                           Respiratory Failure.
                                     PSI 12: Post Operative PE
                                     or DVT.
                                     PSI 14: Postoperative wound
                                     dehiscence.
                                     PSI 15: Accidental puncture
                                     or laceration.
                                     IQI 11: Abdominal aortic
                                     aneurysm (AAA) mortality rate (with
                                     or without volume).
                                     IQI 19: Hip fracture
                                     mortality rate.
                                     Complication/patient safety
                                     for selected indicators
                                     (composite).
                                     Mortality for selected
                                     medical conditions (composite).
AHRQ PSI and Nursing Sensitive       PSI 04 Death among surgical
 Care.                               in patients with serious treatable
                                     complications.
Structural measures...............   Participation in a
                                     Systematic Database for Cardiac
                                     Surgery.
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for Stroke Care.
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for Nursing Sensitive
                                     Care.
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for General Surgery**.
Healthcare-Associated Infections..   Central Line Associated
                                     Bloodstream Infection.
                                     Surgical Site Infection.*
                                     Catheter-Associated Urinary
                                     Tract Infection.**

[[Page 51629]]

 
Hospital Acquired Condition          Foreign Object Retained
 Measures.                           After Surgery.
                                     Air Embolism.
                                     Blood Incompatibility.
                                     Pressure Ulcer Stages III &
                                     IV.
                                     Falls and Trauma:
                                     (Includes: Fracture Dislocation
                                     Intracranial Injury Crushing Injury
                                     Burn Electric Shock).
                                     Vascular Catheter-
                                     Associated Infection.
                                     Catheter-Associated Urinary
                                     Tract Infection (UTI).
                                     Manifestations of Poor
                                     Glycemic Control.
Emergency Department Throughput...   ED-1 Median time from
                                     emergency department arrival to
                                     time of departure from the
                                     emergency room for patients
                                     admitted to the hospital.*
                                     ED-2 Median time from admit
                                     decision to time of departure from
                                     the emergency department for
                                     emergency department patients
                                     admitted to the inpatient status.*
Prevention: Global Immunization      Immunization for
 Measures.                           Influenza.*
                                     Immunization for
                                     Pneumonia.*
Cost Efficiency...................   Medicare Spending per
                                     Beneficiary.**
------------------------------------------------------------------------
* Measures finalized in the FY 2011 IPPS/LTCH PPS final rule for the FY
  2014 payment determination.
** Additional measures adopted in this final rule for FY 2014 payment
  determination.

c. Hospital IQR Program Quality Measures for the FY 2015 Payment 
Determination
(1) Retention of FY 2014 Payment Determination Measures for the FY 2015 
Payment Determination
    We generally retain the Hospital IQR Program measures from one year 
to the next. Consistent with this approach, in the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25901), we proposed to retain all of the 
proposed measures for the FY 2014 payment determination, if finalized, 
for the FY 2015 payment determination.
    We did not receive any comments related to this proposal and are, 
therefore, finalizing it.
(2) New Hospital IQR Program Measures for the FY 2015 Payment 
Determination
(A) New CDC/NHSN-Based Healthcare-Associated Infection (HAI) Measures 
for the 2015 Payment Determination
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25901 through 
25903), for the FY 2015 payment determination, we proposed to adopt 
three additional HAI measures that are currently collected by CDC via 
the NHSN. These measures are: (1) Methicillin-resistant Staphylococcus 
Aureus (MRSA) Bacteremia measure; (2) Clostridium difficile (C. 
difficile) standardized infection ratio (SIR); and (3) Healthcare 
Personnel (HCP) Influenza Vaccination and the specifications for these 
measures are available at http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. Like the CLIP and the CAUTI measures that we proposed for 
the FY 2014 payment determination, all three proposed HAI measures are 
high priority HAI measures listed in the HHS Action Plan to Prevent 
HAIs and were listed in previous rulemaking as possible quality 
measures for future payment determinations.
    Our review indicated that there are no measures for MRSA or C. 
difficile SIR that have been endorsed by the NQF or another consensus 
entity for the hospital inpatient setting. Therefore, we proposed to 
adopt these non-NQF-endorsed measures under the Secretary's authority 
to select non-NQF endorsed measures where such measures do not exist 
for a specified topic or medical topic. We proposed to adopt these two 
CDC-developed measures (MRSA and C. difficile SIR) under the exception 
authority provided in section 1886 (b)(3)(B)(IX)(bb) of the Act.
    The HCP Influenza Vaccination measure is NQF-endorsed (NQF 
0431) for the hospital setting. Therefore, this measure meets 
the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act.
    The proposed reporting mechanism for these proposed HAI measures is 
discussed in greater detail in section IV.A.5.i. of the FY 2012 IPPS/
LTCH PPS proposed rule. We invited public comment on these proposed HAI 
measures.
    Comment: One commenter applauded CMS's proposed use of the measure 
exception authority under section 1886(b)(3)(B)(IX)(bb) of the Act to 
adopt the CDC-developed, non-NQF-endorsed MRSA and C. difficile SIR 
measures in the interest of public safety. The commenter believed that 
CMS's proposal has met Congressional intent and takes into account the 
statutory requirements that govern the Hospital VBP Program, which 
mandate that measures be selected for that program on HAIs, as measured 
by the prevention metrics and targets established in the HHS Action 
Plan to Prevent HAIs.
    Response: We appreciate the commenter's recognition of our efforts 
to adopt measures for the Hospital IQR Program to protect patient 
safety while fulfilling statutory mandates and promoting HHS 
initiatives.
    Comment: A commenter believed that the three proposed HAI measures 
for the FY 2015 payment determination need further refinement before 
they can be included in the Hospital IQR Program.
    Response: We thank the commenter for the comment. We will continue 
to collaborate with CDC to assure the specifications for the three 
proposed HAI measures are complete before the data collection period 
begins.
    Comment: Some commenters did not support the proposed MRSA and C. 
difficile SIR HAI measures because they are not NQF-endorsed.
    Response: Given the high priority of the MRSA and C. difficile SIR 
measures in the HHS Action Plan to Prevent HAIs, we proposed to 
implement these two measures to advance the goals of this initiative, 
despite of the lack of endorsement for the measures. As stated 
previously, we were unable to identify any other measures specifically 
for MRSA and C. Difficile SIR that have been NQF-endorsed for the 
hospital inpatient setting. We found no other measures that have been 
endorsed or adopted by a consensus entity. Therefore, we proposed to 
adopt these two non NQF-endorsed measures under the Secretary's 
exception authority set out in section 1886(b)(3)(B)(IX)(bb) of the Act 
to select non-NQF endorsed

[[Page 51630]]

measures where such measures do not exist for a specified area or 
medical topic. We have chosen to leverage the existing NHSN reporting 
system to collect HAI measures because we have already established a 
mechanism for reporting to the NHSN and it reduces potential hospital 
burden since many hospitals currently use the system.
(1) Methicillin-Resistant Staphylococcus Aureus (MRSA) Bacteremia 
Measure
    There are different types of staphylococcus aureus bacteria, 
commonly called ``staph.'' Staph bacteria are normally found on the 
skin or in the nose. The bacteria are generally harmless unless they 
enter the body through a cut or other wound, and even then they usually 
cause only minor skin problems in healthy people. MRSA infection is 
caused by a strain of staph bacteria that has become resistant to the 
antibiotics commonly used to treat ordinary staph infections. Older 
adults with weakened immune systems and patients in hospital or nursing 
home settings are most vulnerable to MRSA infections. Health care-
associated MRSA infections typically are associated with invasive 
procedures or devices, such as surgeries, intravenous tubing, urinary 
catheters, or artificial joints. MRSA infections account for about 60 
percent of skin infections seen in United States emergency departments 
and invasive MRSA infections may cause about 18,000 deaths during a 
hospital stay a year.\13\ Currently, there are 6 States that require 
facilities to report MRSA information to NHSN. As stated above, we were 
unable to identify any other measures specifically for MRSA that have 
been endorsed by the NQF for the hospital inpatient setting. We found 
no other measures that have been endorsed or adopted by a consensus 
entity. Therefore, we proposed to adopt this non-NQF-endorsed and CDC-
developed measure under the Secretary's authority to select non-NQF-
endorsed measures where such measures do not exist for a specified area 
or medical topic, under the exception authority provided in section 
1886(b)(3)(B)(IX)(bb) of the Act. The proposed reporting mechanism for 
the MRSA measure is discussed in greater detail in section IV.A.5.i. of 
the FY 2012 IPPS/LTCH PPS proposed rule. We invited public comment on 
this proposed HAI measure.
---------------------------------------------------------------------------

    \13\ Catherine Liu, Arnold Bayer, et al., Clinical practice 
Guidelines by the for the treatment of Methicillin-Resistant 
Staphylococcus Aureus Infections in Adult and Children. Infectious 
Disease Society of America 2011; 52:e18
---------------------------------------------------------------------------

    Comment: A commenter pointed out that the MRSA measure poses 
particular issues because it requires linkages between laboratory data 
with admission-discharge-transfer systems. The commenter indicated that 
hospitals using this measure must manually enter the data. Therefore, 
the commenter recommended delaying the adoption of this measure until 
there is adequate vendor support for hospitals to manage the demands of 
reporting NHSN measures.
    Response: Like C. difficile laboratory identified events, MRSA 
bacteremia event data are a combination of laboratory results and 
admission/discharge/transfer data. As with C. difficile laboratory 
event reporting, these two data types are often available 
electronically, and CDC expects that hospitals will increasingly use 
electronic data sources to report MRSA event data.
    According to CDC, users can enter the required LabID Event data 
either manually or electronically. Capacity to electronically link 
admission/discharge/transfer and laboratory results data is not a 
prerequisite for reporting LabID event data to NHSN, but that capacity 
is a way to significantly improve efficiency and economy of reporting. 
CDC is already working with a number of vendors who are submitting 
LabID data via the CDC Clinical Document Architecture (CDA) import 
function and that number continues to grow. In addition, the monthly 
patient day and admission counts for an entire facility are often 
regularly tabulated for the facility for other administrative uses and 
so is more likely to be readily available compared to location specific 
monthly counts, which often require separate efforts to be tabulated 
within the facility's data system.
    The denominator and laboratory data demands that are required for 
C. Difficile and MRSA Bacteremia have proven to be manageable among 
facilities who are already reporting at the facility-wide inpatient 
level in the States who have mandated such reporting. Facilities that 
do not use vendor CDA reporting, may still receive helpful lab 
printouts and reports to assist with identification of results that 
meet criteria for LabID Event reporting. The LabID form is short and 
requires only a limited number of variables, and the number of C. 
difficile and MRSA blood tests identified using the 14-day rule has 
shown to be within reasonable and manageable limits for currently 
participating facilities. If such numbers are very high for an entire 
facility, this may indicate the need for this important monitoring and 
surveillance to help guide appropriate facility infection control 
response.
    Comment: A commenter recommended that CMS allow hospitals to select 
two most applicable patient care units for purposes of reporting data 
on this proposed measure. The selected units should initially report a 
year of baseline data, followed by reporting data to CDC for no more 
than 6 months each year.
    Response: The MRSA bacteremia measure that we proposed and are 
finalizing in this final rule applies to patients hospital-wide, which 
is consistent with how the measure is presented in the HHS Action Plan 
to Prevent HAIs. We thank the commenter for the recommendation to allow 
hospitals to select two most applicable patient care units to report 
data on. However, allowing hospitals to choose two units could possibly 
skew the data and make it impossible to compare performance among 
hospitals. We found that monitoring at the location level and allowing 
facilities to choose their specific locations has not provided enough 
substantial data for meaningful nationwide comparative rates. This type 
of reporting was attempted in the CMS 9th SOW and showed that 
facilities tended to not choose locations with the highest rates and in 
need of further prevention efforts and also did not provide enough 
numbers by location type for reliable benchmarked, risk-adjusted rates.
    After consideration of the public comments we received, we are 
finalizing the MRSA measure for the FY 2015 payment determination.
(2) C. difficile SIR Measure
    Clostridium difficile (C. difficile) is a bacterium that can cause 
symptoms ranging from diarrhea, pseudo-membranous colitis, and toxic 
megacolon to life-threatening sepsis and even death. Illness from C. 
difficile most commonly affects older adults in hospitals or in long 
term care facilities where germs spread easily, antibiotic use is 
common and people are especially vulnerable to infection. Illness from 
C. difficile typically occurs after use of antibiotic medications. C. 
difficile spreads mainly on hands from person to person, but also on 
commonly touched services such as cart handles, bedrails, bedside 
tables, toilets, sinks, stethoscopes, thermometers, and telephones.
    In recent years, C. difficile infections have become more frequent, 
more severe and more difficult to treat. Each year, tens of thousands 
of people in the United States get sick from C. difficile, including 
some otherwise healthy people who are not hospitalized or taking 
antibiotics. Healthcare providers

[[Page 51631]]

have become more aware of the C. difficile infection and therefore, 
more testing is being done for symptomatic patients. The C. difficile 
pathogens may require specialized monitoring to evaluate if intensified 
infection control efforts are required to reduce the occurrence of 
these organisms and related infections. Currently, there are 3 States 
that require facilities to report C. difficile data to NHSN. Our goal 
for this proposed C. difficile SIR measure is to provide a common 
mechanism (CDC/NHSN) for all hospitals including hospitals 
participating in the Hospital IQR Program to report and analyze these 
data in order to inform infection control staff of the impact of 
targeted prevention efforts. The NHSN is listed in the HHS Action Plan 
to Prevent HAIs as the data source for HAI measures.
    Comment: Some commenters believed that the calculation of C. 
difficile SIRs will be challenging because hospitals use testing 
mechanisms with differing sensitivity to identify the presence of C. 
difficile. These commenters were concerned that the resulted difference 
in C. difficile SIR measurement may unfairly portray hospitals that use 
the more sensitive testing technology as having more C. difficile 
cases. A commenter pointed out that the C. difficile SIR measure poses 
particular issues because it requires linkages between laboratory data 
with admission-discharge-transfer systems. The commenter noted that 
currently, hospitals using this measure must manually enter the data. 
Therefore, the commenter recommended delaying the proposed adoption of 
this measure until there is adequate vendor support for hospitals to 
electronically interface with the NHSN for reporting.
    Response: CDC acknowledged that differences in the sensitivity of 
C. difficile laboratory testing methods could make a difference in the 
C. difficile event data that hospitals report. CDC is currently 
evaluating the impact and possible implications for C. difficile 
reporting through NHSN. C. difficile laboratory event data is a 
combination of laboratory results and admission/discharge/transfer 
data. These two data types are often available electronically, and CDC 
expects that hospitals will increasingly use electronic data sources to 
report C. difficile event data. However, EHRs are not the only means of 
capturing such information. The same data can be abstracted from 
hospital reports and entered manually into NHSN. Therefore, there is 
not a dependence on electronic data capture, but there is an important 
opportunity to use electronic means to report, and waiting until 
widespread EHR adoption would delay progress that could be made on 
these HAIs. Like MRSA Bacteremia, C. difficile facility-wide Lab-ID 
event reporting will be risk-adjusted by hospital type, teaching and 
med affiliation, and bed size. In addition, NHSN has added a question 
on the required annual facility survey beginning with 2010 data that 
asks about the type of testing the lab conducts for C. difficile and 
this information will be used for additional risk-adjustment along with 
review of usability of admission on prevalence.
    Comment: One commenter requested clarification that the measure is 
only applicable to high-risk units and not hospital-wide.
    Response: The CDC measure of C. difficile listed in the HHS Action 
Plan to Prevent HAIs calls for hospital-wide measurement of C. 
difficile events. Because the risk of C. difficile extends throughout 
the hospital, the measure applies to all hospital C. difficile events, 
and this is part of the specifications for this measure.
    After consideration of the public comments we received, we are 
finalizing this measure for the FY 2015 payment determination. Data 
collection will begin with January 1, 2013 infection events.
(3) Healthcare Personnel (HCP) Influenza Vaccination (NQF  
0431)
    For the FY 2015 payment determination, in the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25902 through 25903), we proposed to adopt one 
additional HAI measure that is currently collected by CDC via the NHSN: 
Healthcare Personnel (HCP) Influenza Vaccination (NQF  0431). 
This measure assesses the percentage of HCP employed at the facility 
that received a prophylactic vaccination for influenza. This measure is 
NQF-endorsed, and therefore, the measure meets the selection criteria 
under section 1886(b)(3)(B)(viii)(IX)(aa) of the Act.
    Rates of serious illness and death resulting from influenza and its 
complications are increased in high-risk populations such as persons 
over 50 years or under four years of age, and persons of any age who 
have underlying conditions that put them at an increased risk. HCP can 
acquire influenza from patients and can transmit influenza to patients 
and other HCP. Many HCP provide care for, or are in frequent contact 
with, patients with influenza or patients at high risk for 
complications of influenza. The involvement of HCP in influenza 
transmission has been a long-standing concern.14 15 16
---------------------------------------------------------------------------

    \14\ Maltezou HC, Drancourt M., Nosocomial influenza in 
children. Journal of Hospital Infection 2003; 55:83-91.
    \15\ Hurley JC, Flockhart S., An influenza outbreak in a 
regional residential facility. Journal of Infection Prevention 2010; 
11:58-61.
    \16\ Salgado CD, Farr BM, Hall KK, Hayden FG., Influenza in the 
acute hospital setting. The Lancet Infectious Diseases 2002; 2:145-
155.
---------------------------------------------------------------------------

    Vaccination is an effective preventive measure against influenza, 
and can prevent many illnesses, deaths, and losses in productivity.\17\ 
HCP are considered a high priority for expanding influenza vaccine use. 
Achieving and sustaining high influenza vaccination coverage among HCP 
is intended to help protect HCP and their patients and reduce disease 
burden and healthcare costs. Results of several studies indicate that 
higher vaccination coverage among HCP is associated with lower 
incidence of nosocomial influenza.18 19 20 Such findings 
have led some to call for mandatory influenza vaccination of 
HCP.21 22 23 24 25
---------------------------------------------------------------------------

    \17\ Wilde JA, McMillan JA, Serwint J, Butta J, O'Riordan MA, 
Steinhoff MC., Effectiveness of influenza vaccine in health care 
professionals: a randomized trial. The Journal of the American 
Medical Association 1999; 281:908-913.
    \18\ Salgado CD, Giannetta ET, Hayden FG, Farr BM., Preventing 
influenza by improving the vaccine acceptance rate of clinicians. 
Infection Control and Hospital Epidemiology 2004; 25: 923-928.
    \19\ Potter J, Stott DJ, Roberts MA, et al., Influenza 
vaccination of health-care workers in long-term-care hospitals 
reduces the mortality of elderly patients. Journal of Infectious 
Diseases 1997; 175:1-6.
    \20\ Hayward AC, Harling R, Wetten S, et al., Effectiveness of 
an influenza vaccine programme for care home staff to prevent death, 
morbidity, and health service use among residents: cluster 
randomised controlled trial. British Medical Journal 2006; 333:1241-
1246.
    \21\ Talbot TR, Bradley SF, Cosgrove SE, et al., SHEA position 
paper: Influenza vaccination of healthcare workers and vaccine 
allocation for healthcare workers during vaccine shortages. 
Infection Control and Hospital Epidemiology 2005; 26:882-890
    \22\ American College of Physicians (ACP), ACP policy on 
influenza vaccination of health care workers. http://www.acponline.org/running_practice/quality_improvement/projects/adult_immunization/flu_hcw.pdf
    \23\ Greene LR, Cain TA, Dolan SA et al., APIC position paper: 
influenza immunization of healthcare personnel. Association of 
Professionals in Infection Control (APIC). November 2008. http://www.apic.org/Content/NavigationMenu/PracticeGuidance/Topics/Influenza/APIC_Position_Paper_Influenza_11_7_08final_revised.pdf
    \24\ National Patient Safety Foundation (NPSF), Mandatory flu 
vaccinations for healthcare workers. Press Release, November 18, 
2009. http://www.npsf.org/pr/pressrel/2009-11-18.php
    \25\ Infectious Diseases Society of America (IDSA), IDSA policy 
on mandatory immunization of health care workers against seasonal 
and 2009 H1N1 influenza. Infectious Diseases Society of America 
(IDSA). September 30, 2009. http://www.idsociety.org/HCWimmunization/
---------------------------------------------------------------------------

    Until recently, vaccination coverage among HCP has been well below 
the national Healthy People 2010 target of

[[Page 51632]]

60 percent,\26\ but preliminary data suggest 62 percent of HCP reported 
receiving seasonal influenza vaccine in 2009-2010.\27\ Only 37 percent 
reported receiving the 2009 pandemic A/H1N1 vaccine.\28\
---------------------------------------------------------------------------

    \26\ Walker FJ, Singleton JA, Lu P, Wooten KG, Strikas RA., 
Influenza vaccination of healthcare workers in the United States, 
1989-2002. Infection Control and Hospital Epidemiology 2006; 27:257-
265.
    \27\ http://www.cdc.gov/mmwr/preview/mmwrhtml/rr55e209a1.htm 
Influenza Vaccination of Health-Care Personnel.
    Recommendations of the Healthcare Infection Control Practices 
Advisory Committee (HICPAC) and the Advisory Committee on 
Immunization Practices.
    \28\ Centers for Disease Control and Prevention., Interim 
results: Influenza A (H1N1) 2009 and Monovalent Seasonal Influenza 
Vaccination Coverage Among Health-Care Personnel--United States 
August 2009- January 2010. Morbidity and Mortality Weekly Report 
(MMWR); 59:357-362. Available at: http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5912a1.htm.
---------------------------------------------------------------------------

    HCP refers to all personnel working in healthcare settings who have 
the potential for exposure to patients and/or to infectious materials, 
including body substances, contaminated medical supplies and equipment, 
contaminated environmental surfaces, or contaminated air.\29\ HCP may 
include (but are not limited to) physicians, nurses, nursing 
assistants, therapists, technicians, emergency medical service 
personnel, dental personnel, pharmacists, laboratory personnel, autopsy 
personnel, students and trainees, contractual staff not employed by the 
healthcare facility, and persons (for example, clerical, dietary, 
house-keeping, laundry, security, maintenance, billing, and volunteers) 
not directly involved in patient care but potentially exposed to 
infectious agents that can be transmitted to and from HCP and patients. 
Settings in which HCP may work include, but are not limited to, acute 
care hospitals, long-term care facilities, skilled nursing facilities, 
rehabilitation centers, physicians' offices, urgent care centers, 
outpatient clinics, home health agencies, and emergency medical 
services.
---------------------------------------------------------------------------

    \29\ Adapted from: Pearson ML., Bridges CB., Harper SA.,: 
Influenza vaccination of health-care personnel: Recommendations of 
the Healthcare Infection Control Practices Advisory Committee 
(HICPAC) and the Advisory Committee on Immunization Practices 
(ACIP). Morbidity and Mortality Weekly Report (MMWR) 2006; 55:1-16. 
Available at: http://www.cdc.gov/mmwr/preview/mmwrhtml/rr5502a1.htm.
---------------------------------------------------------------------------

    Currently, four States have ``offer'' laws for influenza 
vaccination of HCP, meaning that vaccine must be offered to HCP by 
healthcare facilities; and three States (Alabama, California, and New 
Hampshire) have ``ensure'' laws for influenza vaccination of HCP, 
meaning that vaccination of non-immune HCP is mandatory in the absence 
of a specified exemption or refusal; and, additionally, numerous 
hospitals and other healthcare facilities have established policies 
requiring mandatory influenza vaccination of their HCP.\30\
---------------------------------------------------------------------------

    \30\ For additional information regarding healthcare facilities' 
influenza vaccine policies, please see: http://www.immunize.org/honor%2Droll/.
---------------------------------------------------------------------------

    Currently, no State requires that hospitals report this measure to 
NHSN. However, approximately 13 hospitals (including long term acute 
care and rehabilitation), outpatient hemodialysis centers, long term 
care facilities, and ambulatory surgical centers are currently 
reporting HCP immunization data to NHSN. In September 2009, CDC 
released the Healthcare Personnel Safety (HPS) Component of NHSN, which 
complements Patient Safety and Biovigilance components available in 
NHSN. The HPS Component replaced CDC's National Surveillance System for 
Health Care Workers (NaSH) and is comprised of two modules: the Blood/
Body Fluid Exposure Module and the Influenza Vaccination and Management 
and Exposure Module.\31\ Currently, participation in either module is 
voluntary. The current Influenza Vaccination and Management and 
Exposure Module may soon offer options for healthcare facilities to 
submit vaccination summary data. NHSN plans to partner with vendor-
based surveillance systems to permit periodic data extractions into 
NHSN.
---------------------------------------------------------------------------

    \31\ Available at: http://www.cdc.gov/nhsn/hps.html.
---------------------------------------------------------------------------

    The modules feature basic, custom, and advanced analysis 
capabilities available in real-time, which allow individual healthcare 
facilities to compile and analyze their own data, as well as benchmark 
these results to aggregate NHSN estimates. The HPS Component can assist 
participating facilities in developing surveillance and analysis 
capabilities to permit the timely recognition of HCP safety problems 
and prompt interventions with appropriate measures. Influenza 
vaccination data submitted to CDC will ultimately capture regional 
trends on the yearly uptake of the vaccine, prophylaxis and treatment 
for healthcare personnel, as well as the elements within yearly 
influenza campaigns that succeed or require improvement. At the State 
and national levels, the HPS Component will aid in monitoring rates and 
trends.
    We proposed to adopt the Healthcare Provider Influenza Vaccination 
measure that is currently collected by the CDC via the NHSN because of 
its importance in preventing influenza not only among healthcare 
workers but also among the patients that they attend. As stated 
earlier, this measure assesses the percent of Healthcare Personnel 
employed at the facility that received a prophylactic vaccination for 
influenza. Detailed specifications for the proposed measure are 
available at: http://www.cdc.gov/nhsn/PDFs/HSPmanual/HPS_Manual.pdf. 
As we also stated above, this measure is NQF-endorsed for the hospital 
setting. The proposed reporting mechanism for this proposed HAI measure 
is discussed in greater detail in section IV.A.5.i. of the FY 2012 
IPPS/LTCH PPS proposed rule. We invited public comment on this proposed 
HAI measure.
    Comment: Many commenters fully supported the proposed measure and 
stated that the measure will promote efforts in improving hospitals 
influenza vaccination rates and patient safety. Some commenters urged 
CMS to adopt this measure for the FY 2014 payment determination. 
Commenters recommended additional measures for other vaccines that 
prevent highly communicable diseases, such as pertussis, and diseases 
such as hepatitis B. A commenter strongly supported the adoption of 
this measure for the Hospital VBP Program. Finally, a commenter 
recommended that CMS adopt an adult immunization composite measure that 
is endorsed by NQF.
    Response: We thank the commenters for their recognition of the 
significance of this measure and for their strong support of the 
measure. Because the measure is scheduled to undergo NQF maintenance, 
we proposed to begin collection of the measure for the Hospital IQR 
Program in 2013 (FY 2015 payment determination) rather than 2012 (FY 
2014 payment determination) as suggested by the commenter in order to 
ensure that necessary revisions to the specifications are in place 
before the start of collection. We will consider the commenters' 
suggestions for additional measure topics as we select future measures.
    Comment: Many commenters supported the public reporting of this 
proposed measure. However, a commenter was concerned that the 
collection of data via NHSN is redundant and labor intensive because 
the current specifications of the NHSN system require hospitals to 
submit detailed data on every employee, rather than aggregated data on 
vaccination rates. Some commenters believed that most hospitals already 
have a database to track employee vaccination status. The commenters 
recommended that CMS either identify an alternative NQF-endorsed 
measure or postpone the

[[Page 51633]]

adoption of the measure in the Hospital IQR Program until the CDC has 
completed and fully tested the summary data collection tool. A few 
commenters suggested delaying the proposed measure until data can be 
collected via EHRs. A few commenters believed that current NQF-endorsed 
measures specifying the reporting of the vaccination status of all 
healthcare personnel are too labor-intensive. Commenters recommended 
that CMS either adopt a simplified definition of the measure that 
focuses solely on hospital employees and excludes contracted staff, or 
allow hospitals to submit summary data on HCP rates, ideally from 
existing databases, to reduce burden. Commenters also suggested that 
CMS allow for external factors outside of the facilities control (for 
example, vaccination shortage).
    Response: The measure is currently being respecified by the CDC to 
eliminate unnecessary burden on hospitals. CDC will be adding aggregate 
reporting of healthcare personnel influenza vaccination coverage to 
NHSN and has submitted a proposed measure to NQF that uses aggregate 
reporting in the measure proposal. The scope of the proposed 
respecified measure is hospital employees and credentialed non-
employees. These steps will enable hospitals--and other healthcare 
facilities--to take advantage of aggregate reporting capacity that is 
built into occupational health information systems. We are confident 
that such revisions to the measure specifications will be fully 
implementable by the proposed FY 2015 payment determination. This is a 
change to how the measure is reported to NHSN (reporting on the 
influenza vaccination coverage of at the facility level, rather than 
for individual personnel at the facility, and is not a change in the 
substance of the measure itself).
    After consideration of the public comments received, we are 
finalizing the HCP Influenza Vaccination measure for the FY 2015 
payment determination. Required data collection for the FY 2015 payment 
determination will cover the period from January 1, 2013 through March 
31, 2013. For future payment determinations, data collection will cover 
the period from October 1 through March 31st to coincide with the flu 
season.
(B) New Chart-Abstracted Measures for the FY 2015 Payment Determination
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25903 through 
25907), we proposed to adopt two sets of chart-abstracted measures for 
the FY 2015 payment determination: the Stroke and Venous 
Thromboembolism (VTE) measure sets. All of these proposed measures have 
either previously been proposed for the Hospital IQR Program, or have 
been listed as being under consideration for future adoption into the 
program. In addition, with one exception (STK-1: VTE Prophylaxis), all 
of the measures in these two measure sets have been electronically 
specified and are among the measures adopted for the EHR Incentive 
Program for eligible hospitals. While we proposed to adopt these for 
chart-abstracted submission in 2013 for the FY 2015 payment 
determination, we believe that by a future date, such as 2015, 
hospitals will be able to switch to EHR-based submission of these and 
all other chart-abstracted measures submitted for the Hospital IQR 
Program, and, as we discuss in greater detail below, we intend to work 
toward this goal over the next few years.
    The Stroke measure set we proposed to adopt consists of 8 measures; 
and the VTE measure set consists of 6 measures. Both measure sets are 
NQF-endorsed and their specifications are currently available in the 
Specifications Manual, which can be found on QualityNet. We believe 
that both of the proposed measure sets compliment the data elements in 
our current SCIP VTE and AMI measure sets.
    Comment: Many commenters supported the adoption of the Stroke 
measure set and the VTE measure set into the Hospital IQR Program 
because the measures in the sets are NQF-endorsed and HQA-adopted, and 
they are used by The Joint Commission as core measure sets. Commenters 
believed that the measures will provide meaningful information 
regarding how well Stroke care and VTE care are being managed in a 
hospital setting. The commenters further noted that the measure sets 
are already e-specified for the meaningful use criteria under the EHR 
Incentive Program. The commenters recommended delaying the adoption of 
the measure sets until there is harmonization of the measure sets for 
both the EHR Incentive Program and the Hospital IQR Program, so that 
the reporting burden would be significantly reduced for hospitals. Some 
commenters disagreed with CMS' assertion that the addition of measures 
will align the Hospital IQR Program with the EHR Incentive Program 
because the Stroke measure set and the VTE measure set calculations 
derived from chart-based measure specifications are not the same as 
those derived from e-measure specifications. The commenters believed 
that any discrepancy in calculation of performance rates may lead to 
confusion when they are publicly reported. Commenters recommended 
comparison of data collected through manual abstraction and EHR-based 
reporting to resolve discrepancies in calculations prior to display on 
Hospital Compare.
    Response: We thank the commenters for their support of the Stroke 
measure set and the VTE measure set. Providing hospitals with one set 
of harmonized specifications is a key goal for CMS for the future. We 
are aware of the differences in the chart-abstracted and EHR e-measure 
specifications, and have been working with relevant stakeholders to 
remedy the situation. We also recognize that many hospitals 
participating in the Hospital IQR Program have not adopted EHR 
technology at this time. Therefore, we are finalizing our proposal to 
include the chart-abstracted Stroke and VTE measure sets for data 
collection beginning with January 1, 2013 discharges.
    We also thank the commenters for their recommendations. We plan to 
update the Specifications Manual's chart-abstracted specifications for 
the stroke clinical quality measure set in order to align with the 
electronic specifications for these measures. As we move towards 
alignment and harmonization of clinical quality measures reporting 
among federal reporting initiatives, we plan to compare, test, and 
align these reporting specifications using different data sources.
(i) Stroke Measure Set
    Stroke is a topic of great relevance to the Medicare population due 
to its impact on morbidity and mortality, and it is an area with great 
potential for quality improvement for hospitals caring for stroke 
patients. Stroke is the third most common cause of death in the United 
States and is one of the top 20 conditions contributing to Medicare 
costs. Approximately 8 to 12 percent of ischemic strokes are fatal,\32\ 
and mortality following stroke is influenced by the quality of care 
provided to patients during their initial hospitalization.\33\ In the 
FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we listed 8 
Stroke measures as being under consideration for adoption for the FY 
2012 Hospital IQR payment determination. Numerous commenters encouraged 
us to adopt the listed stroke

[[Page 51634]]

measures which they see as evidence-based measures that accurately 
measure the care of the stroke patient (74 FR 43875 through 43876). 
Commenters believed that the measures are widely recognized for their 
roles in minimizing secondary strokes and other complications.
---------------------------------------------------------------------------

    \32\ American Heart Association, Heart Disease and Stroke 
Statistics--2009 Update. American Heart Association, 2009: p. 1-36.
    \33\ Weir, N.U., et al., Variations between countries in outcome 
after stroke in the International Stroke Trial (IST). Stroke, 2001. 
32(6): p. 1370-7.
---------------------------------------------------------------------------

    We proposed to adopt a stroke measure set with 8 NQF-endorsed 
process of care measures for the FY 2015 payment determination. The 
table below lists and describes each of these eight proposed measures.

                       8 Proposed Stroke Measures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
STK-1: Venous Thromboembolism (VTE)    Percent of patients with an
 Prophylaxis for patients with          ischemic stroke or a hemorrhagic
 ischemic or hemorrhagic stroke. (NQF   stroke and who are non-
 0434).                        ambulatory should start
                                        receiving DVT prophylaxis by end
                                        of hospital day two.
STK-2: Ischemic stroke patients        Percent of patients with an
 discharged on antithrombotic           ischemic stroke prescribed
 therapy. (NQF 0435).          antithrombotic therapy at
                                        discharge.
STK-3: Anticoagulation therapy for     Percent of patients with an
 atrial fibrillation/flutter. (NQF      ischemic stroke with atrial
 0436).                        fibrillation discharged on
                                        anticoagulation therapy.
STK-4: Thrombolytic Therapy for Acute  Percent of acute ischemic stroke
 ischemic stroke patients. (NQF         patients who arrive at the
 0437).                        hospital within 120 minutes (2
                                        hours) of time last known well
                                        and for whom IV t-PA was
                                        initiated at this hospital
                                        within 180 minutes (3 hours) of
                                        time last known well.
STK-5: Antithrombotic therapy by the   Percent of patients with ischemic
 end of hospital day two. (NQF 0438).                               antithrombotic therapy by the
                                        end of hospital day two.
STK-6: Discharged on statin            Percent of ischemic stroke
 medication. (NQF 0439).       patients with LDL >/= 100 mg/dL,
                                        or LDL not measured, or, who
                                        were on cholesterol reducing
                                        therapy prior to hospitalization
                                        are discharged on a statin
                                        medication.
STK-8: Stroke education. (NQF 0440).                               or hemorrhagic stroke or their
                                        caregivers who were given
                                        education or educational
                                        materials during the hospital
                                        stay addressing all of the
                                        following: personal risk factors
                                        for stroke, warning signs for
                                        stroke, activation of emergency.
STK-10: Assessed for rehabilitation    Percent of patients with an
 services. (NQF 0441).         ischemic stroke or hemorrhagic
                                        stroke who were assessed for
                                        rehabilitation services.
------------------------------------------------------------------------

    Because the NQF is the entity that holds a contract with the 
Secretary under section 1890(a) of the Act, measures that are endorsed 
by the NQF meet the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of 
NQF endorsement, we believe that the inclusion of the proposed stroke 
measure set in the Hospital IQR Program would provide a comprehensive 
view of how well stroke care is being managed in a hospital setting. As 
stated earlier, detailed measure specifications for these 8 proposed 
measures are available in the Specifications Manual located in 
QualityNet. We invited public comment on the proposed stroke measure 
set.
    Comment: A commenter stated that there are errors in the e-
specifications of the Stroke measure set and requested corrections of 
the errors to avoid variability of rates caused by discrepancy in 
measure specifications.
    Response: We have received public comments identifying a number of 
issues and questions about the electronic specifications for the Stroke 
related HITSP measure specifications listed in TN906/v1.0. We are 
working with the measure steward to make updates to these electronic 
specifications and will notify the public when the updates are 
published. In the future, we anticipate that electronic specification 
review will be part of the NQF measure endorsement process.
    After consideration of the public comments we received, we are 
finalizing the Stroke measure set for the FY 2015 payment 
determination.
(ii) VTE Measure Set
    It is widely agreed that VTE is the number one preventable cause of 
hospital death in the United States and the cost of VTE when it occurs 
is very high. A recent study from AHRQ in Health Affairs highlighted 
that when an acute VTE event occurs, it increases the costs of care by 
25 percent. In 2008, the Surgeon General issued a Call to Action to 
Prevent Deep Vein Thrombosis and Pulmonary Embolism. (This document can 
be found at: http://www.surgeongeneral.gov/topics/deepvein/calltoaction/call-to-action-on-dvt-2008.pdf.) VTE prevention with 
pharmacologic agents can impact the cost effectiveness of care. 
Specifically, patients who received anti-coagulant medication during 
hospitalization have less likelihood of recurrence of VTEs upon 
discharge to home. Parenteral anticoagulation is the first line of 
therapy because of its rapid onset of action. Because the oral 
anticoagulant medication has a very slow onset of action, it cannot be 
used as mono-therapy for acute VTE. A minimum of 5 days of parenteral 
anticoagulation is recommended as ``overlap therapy'' while oral 
anticoagulant medication is being initiated. More thrombotic 
complications and higher costs are associated with treatment in 
patients demonstrating a subtherapeutic aPTT. Unfractionated Heparin 
(UFH) Dosages/Platelet Count Monitoring by Protocol (or Nomogram) has 
significantly advanced the use of UFH with the demonstrated ability to 
achieve therapeutic aPTTs more rapidly than with standard UFH dosing. 
When this occurs, patients can be discharged sooner. However, 
anticoagulation therapy poses risks to patients and often leads to 
adverse drug events due to complex dosing, requisite follow-up 
monitoring and inconsistent patient compliance. The use of standardized 
practices for anticoagulation therapy that includes patient/caregiver 
involvement may reduce the risk of adverse drug events.
    The Hospital IQR Program currently has 2 measures of VTE 
prophylaxis for surgical patients (SCIP-VTE-1: Venous thromboembolism 
(VTE) prophylaxis ordered for surgery patients; and SCIP-VTE-2: VTE 
prophylaxis within 24 hours pre/post surgery) in the SCIP measure set. 
In the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43873), we 
listed 5 VTE measures (VTE-1: Venous thromboembolism prophylaxis; VTE-
3: Venous thromboembolism patients with anticoagulation overlap 
therapy; VTE-4: Venous thromboembolism patients receiving 
unfractionated heparin with dosages/platelet count monitoring by 
protocol; VTE-5: Venous thromboembolism discharge instructions; and 
VTE-6: Incidence of

[[Page 51635]]

potentially-preventable venous Thromboembolism) as possible new 
measures for the FY 2012 payment determination. In the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50213 through 50218), we listed 6 VTE 
measures (VTE-1: Venous thromboembolism prophylaxis; VTE-2: Intensive 
care unit venous thromboembolism prophylaxis; VTE-3: Venous 
thromboembolism patients with anticoagulation overlap therapy; VTE-4: 
Venous thromboembolism patients receiving unfractionated heparin with 
dosages/platelet count monitoring by protocol; VTE-5: Venous 
thromboembolism discharge instructions; and VTE-6: Incidence of 
potentially-preventable venous thromboembolism) as measures we were 
considering for possible future adoption into the program.
    We proposed to adopt for the FY 2015 Hospital IQR measure set 6 VTE 
measures which are aimed at preventing the incidence of potentially 
preventable VTE. These 6 measures are listed and described below.

            6 Proposed Venous Thromboembolism (VTE) Measures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
VTE-1: Venous thromboembolism       Percent of patients who received VTE
 prophylaxis (NQF 0371).    prophylaxis or have documentation
                                     why no VTE prophylaxis was given
                                     the day of or the day after
                                     hospital admission or surgery end
                                     date for surgeries that start the
                                     day of or the day after hospital
                                     admission.
VTE-2: Intensive care unit venous   Percent of patients who received VTE
 thromboembolism prophylaxis (NQF    prophylaxis or have documentation
 0372).                     why no VTE prophylaxis was given
                                     the day of or the day after the
                                     initial admission (or transfer) to
                                     the Intensive Care Unit (ICU) or
                                     surgery end date for surgeries that
                                     start the day of or the day after
                                     ICU admission (or transfer).
VTE-3: Venous thromboembolism       Percent of patients diagnosed with
 patients with anticoagulation       confirmed VTE who received an
 overlap therapy (NQF 0373).                            [IV] or subcutaneous [subcu])
                                     anticoagulation and warfarin
                                     therapy. For patients who received
                                     less than 5 days of overlap
                                     therapy, they must be discharged on
                                     both medications. Overlap therapy
                                     must be administered for at least 5
                                     days with an international
                                     normalized ratio (INR) = 2 prior to
                                     discontinuation of the parenteral
                                     anticoagulation therapy or the
                                     patient must be discharged on both
                                     medications.
VTE-4: Venous thromboembolism       Percent of patients diagnosed with
 patients receiving unfractionated   confirmed VTE who received
 heparin with dosages/platelet       intravenous (IV) UFH therapy
 count monitoring by protocol (NQF   dosages AND had their platelet
 0374).                     counts monitored using defined
                                     parameters such as a nomogram or
                                     protocol.
VTE-5: Venous thromboembolism       Percent of patients diagnosed with
 discharge instructions (NQF         confirmed VTE that are discharged
 0375).                     to home, to home with home health
                                     or home hospice on warfarin with
                                     written discharge instructions that
                                     address all four criteria:
                                     Compliance issues, dietary advice,
                                     follow-up monitoring, and
                                     information about the potential for
                                     adverse drug reactions/
                                     interactions.
VTE-6: Incidence of potentially-    Percent of patients diagnosed with
 preventable venous                  confirmed VTE during
 Thromboembolism (NQF 0376).                            arrival) who did not receive VTE
                                     prophylaxis between hospital
                                     admission and the day before the
                                     VTE diagnostic testing order date.
------------------------------------------------------------------------

    These 6 measures were endorsed in a 2008 NQF project titled: 
National Voluntary Consensus Standards for Prevention and Care of 
Venous Thromboembolism: Additional Performance Measures. Because the 
NQF is the entity that holds a contract with the Secretary under 
section 1890(a) of the Act, measures that are endorsed by the NQF meet 
the requirement for measure selection under section 
1886(b)(3)(B)(viii)(IX)(aa) of the Act. Aside from the consideration of 
NQF-endorsement, we believe that the inclusion of the VTE measure set 
in the Hospital IQR Program would provide a comprehensive view of how 
well VTE care is being managed in a hospital setting. Detailed measure 
specifications for these 6 proposed measures are available in the 
Specifications Manual located on QualityNet. We invited public comment 
on the proposed VTE measure set.
    Comment: One commenter supported the adoption of VTE 1, VTE 2, and 
VTE 3 but noted that the excluded populations in the denominator of the 
measures need to be expanded so that the compliance rates can be better 
portrayed. One commenter opposed the adoption of VTE 4 and VTE 5 
because the commenter believed that the level of detail being reported 
does not meet the objectives of the Hospital IQR Program. Further, the 
commenter recommended that VTE 6 not be adopted because the commenter 
believed that the definition is not consistent with epidemiological 
principles.
    Response: VTE is a condition that can be reasonably prevented by 
following evidence based guidelines, which are the basis for the VTE 
measure set. We believe including this VTE measure set will encourage 
broad use of VTE prophylaxis in both medical and surgical patients. VTE 
1, VTE 2, and VTE 3 address appropriate preventive treatment for 
surgical patients, patients in the ICU, and patients on anticoagulants. 
VTE 4 and VTE 5 assess important factors in VTE prophylaxis. VTE 4 
seeks to encourage hospitals to use a standardized tool for the 
titration of VTE prophylactic agents to achieve appropriate levels of 
effectiveness. The use of a nomogram or standardized protocol may 
reduce the incidence of adverse events related to non-therapeutic blood 
levels. VTE 5 is a measure of patient education related to VTE and 
prophylaxis including follow up care, dietary restrictions, and adverse 
interactions. VTE 6 is an important measure of the incidence of VTE in 
the hospitalized patient. Therefore, we are finalizing the adoption of 
the VTE measure set for discharges beginning on or after January 1, 
2013.
    Comment: One commenter urged CMS to separately report on Hospital 
Compare measure rates calculated using e-specifications and measure 
rates calculated using chart-abstracted data.
    Response: We thank the commenter for the suggestion. Currently the 
e-specifications are not used for Hospital IQR, but are used for 
Medicare EHR Incentive Programs. We currently do not post measure rates 
for Medicare EHR Incentive Programs on the Hospital Compare Web site. 
We will continue to post measure data collected as part of the Hospital 
IQR and Hospital VBP Programs on the Hospital Compare Web site.
    Comment: One commenter stated that the reporting of 76 measures by 
FY 2015 is a resource and data burden for hospitals.
    Response: We anticipate that once hospitals have acquired the 
capability to submit data on measures electronically in a future date 
such as 2015, the burden will be reduced significantly.

[[Page 51636]]

    After consideration of the public comments we received, we are 
finalizing the proposed VTE measure set for the FY 2015 payment 
determination. Data collection will begin with discharges on or after 
January 1, 2013.
    In summary, after consideration of the public comments received, we 
are finalizing the retention of 59 measures for the FY 2014 measure 
set, and adding 17 new measures to the measure set for the FY 2014 
payment determination: 3 HAI measures collected through the NHSN, (MRSA 
Bacteremia, C. difficile SIR, and the Healthcare Personnel Influenza 
Vaccination), the Stroke measure set (8 measures) and the VTE measure 
set (6 measures). As a result, there will be a total of 76 measures in 
the FY 2015 Hospital IQR measure set, but we will only be collecting 
data on 72 of those measures for purposes of the FY 2015 payment 
determination. The 76 measures are listed below, and the 4 measures for 
which we will not be collecting data are designated with the word 
``SUSPENDED.''

------------------------------------------------------------------------
                                    Hospital IQR program measures for FY
               Topic                     2015 payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction (AMI)    AMI-1 Aspirin at arrival
 Measures.                           [SUSPENDED].
                                     AMI-2 Aspirin prescribed at
                                     discharge.
                                     AMI-3 ACEI/ARB for left
                                     ventricular systolic dysfunction
                                     [SUSPENDED].
                                     AMI-5 Beta-blocker
                                     prescribed at discharge
                                     [SUSPENDED].
                                     AMI-7a Fibrinolytic
                                     (thrombolytic) agent received
                                     within 30 minutes of hospital
                                     arrival.
                                     AMI-8a Timing of Receipt of
                                     Primary Percutaneous Coronary
                                     Intervention (PCI).
                                     AMI-10 Statin Prescribed at
                                     Discharge.
Heart Failure (HF) Measures.......   HF-1 Discharge
                                     instructions.
                                     HF-2 Evaluation of left
                                     ventricular systolic function.
                                     HF-3 Angiotensin Converting
                                     Enzyme Inhibitor (ACE-I) or
                                     Angiotensin II Receptor Blocker
                                     (ARB) for left ventricular systolic
                                     dysfunction.
Stroke Measure Set................   STK-1 VTE prophylaxis.**
                                     STK-2 Antithrombotic
                                     therapy for ischemic stroke.**
                                     STK-3 Anticoagulation
                                     therapy for Afib/flutter.**
                                     STK-4 Thrombolytic therapy
                                     for acute ischemic stroke.**
                                     STK-5 Antithrombotic
                                     therapy by the end of hospital
                                     day.**
                                     STK-6 Discharged on
                                     Statin.**
                                     STK-8 Stroke education.**
                                     STK-10 Assessed for
                                     rehab.**
VTE Measure Set...................   VTE-1 VTE prophylaxis.**
                                     VTE-2 ICU VTE
                                     prophylaxis.**
                                     VTE-3 VTE patients with
                                     anticoagulation overlap therapy.**
                                     VTE-4 Patients receiving un-
                                     fractionated Heparin with doses/
                                     labs monitored by protocol.**
                                     VTE-5 VTE discharge
                                     instructions.**
                                     VTE-6 Incidence of
                                     potentially preventable VTE.**
Pneumonia (PN) Measures...........   PN-3b Blood culture
                                     performed in the emergency
                                     department prior to first
                                     antibiotic received in hospital.
                                     PN-6 Appropriate initial
                                     antibiotic selection.
Surgical Care Improvement Project    SCIP INF-1: Prophylactic
 (SCIP) Measures.                    antibiotic received within 1 hour
                                     prior to surgical incision.
                                     SCIP INF-2: Prophylactic
                                     antibiotic selection for surgical
                                     patients.
                                     SCIP INF-3: Prophylactic
                                     antibiotics discontinued within 24
                                     hours after surgery end time (48
                                     hours for cardiac surgery).
                                     SCIP INF-4: Cardiac surgery
                                     patients with controlled 6AM
                                     postoperative serum glucose.
                                     SCIP INF-6: Appropriate
                                     Hair Removal [SUSPENDED].
                                     SCIP INF-9: Postoperative
                                     urinary catheter removal on post
                                     operative day 1 or 2 with day of
                                     surgery being day zero.
                                     SCIP INF-10: Surgery
                                     patients with perioperative
                                     temperature management.
                                     SCIP Cardiovascular-2:
                                     Surgery Patients on a Beta Blocker
                                     prior to arrival who received a
                                     Beta Blocker during the
                                     perioperative period.
                                     SCIP INF-VTE[dash]1:
                                     Surgery patients with recommended
                                     Venous Thromboembolism (VTE)
                                     prophylaxis ordered.
                                     SCIP-VTE[dash]2: Surgery
                                     patients who received appropriate
                                     VTE prophylaxis within 24 hours pre/
                                     post surgery.
Mortality Measures (Medicare         Acute Myocardial Infarction
 Patients).                          (AMI) 30-day mortality rate.
                                     Heart Failure (HF) 30-day
                                     mortality rate.
                                     Pneumonia (PN) 30-day
                                     mortality rate.
Patients' Experience of Care         HCAHPS survey.
 Measure.
Readmission Measures (Medicare       Acute Myocardial Infarction
 Patients).                          30-day Risk Standardized
                                     Readmission Measure.
                                     Heart Failure 30-day Risk
                                     Standardized Readmission Measure.
                                     Pneumonia 30-day Risk
                                     Standardized Readmission Measure.
AHRQ Patient Safety Indicators       PSI 06: Iatrogenic
 (PSIs), Inpatient Quality           pneumothorax, adult.
 Indicators (IQIs) and Composite     PSI 11: Post Operative
 Measures.                           Respiratory Failure.
                                     PSI 12: Post Operative PE
                                     or DVT.
                                     PSI 14: Postoperative wound
                                     dehiscence.
                                     PSI 15: Accidental puncture
                                     or laceration.
                                     IQI 11: Abdominal aortic
                                     aneurysm (AAA) mortality rate (with
                                     or without volume).
                                     IQI 19: Hip fracture
                                     mortality rate.
                                     Complication/patient safety
                                     for selected indicators
                                     (composite).
                                     Mortality for selected
                                     medical conditions (composite).
AHRQ PSI and Nursing Sensitive       PSI-4 Death among surgical
 Care.                               inpatients with serious treatable
                                     complications.
Structural Measures...............   Participation in a
                                     Systematic Database for Cardiac
                                     Surgery.
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for Stroke Care.

[[Page 51637]]

 
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for Nursing Sensitive
                                     Care.
                                     Participation in a
                                     Systematic Clinical Database
                                     Registry for General Surgery.*
Healthcare-Associated Infections     Central Line Associated
 Measures.                           Bloodstream Infection.
                                     Surgical Site Infection.
                                     Catheter-Associated Urinary
                                     Tract Infection.*
                                     MRSA Bacteremia.**
                                     Clostridium difficile (C.
                                     difficile).**
                                     Healthcare Provider
                                     Influenza Vaccination.**
Hospital Acquired Condition          Foreign Object Retained
 Measures.                           After Surgery.
                                     Air Embolism.
                                     Blood Incompatibility.
                                     Pressure Ulcer Stages III &
                                     IV.
                                     Falls and Trauma:
                                     (Includes: Fracture Dislocation
                                     Intracranial Injury Crushing Injury
                                     Burn Electric Shock).
                                     Vascular Catheter-
                                     Associated Infection.
                                     Catheter-Associated Urinary
                                     Tract Infection (UTI).
                                     Manifestations of Poor
                                     Glycemic Control.
Emergency Department Throughput      ED-1 Median time from
 Measures.                           emergency department arrival to
                                     time of departure from the
                                     emergency room for patients
                                     admitted to the hospital.
                                     ED-2 Median time from admit
                                     decision to time of departure from
                                     the emergency department for
                                     emergency department patients
                                     admitted to the inpatient status.
Prevention: Global Immunization      Immunization for Influenza.
 Measures.                           Immunization for Pneumonia.
Cost Efficiency...................   Medicare Spending per
                                     Beneficiary.*
------------------------------------------------------------------------
* New quality measures for the FY 2014 payment determination.
** New quality measures for FY 2015 payment determination.

4. Possible New Quality Measures and Measure Topics for Future Years
    We anticipate that as EHR technology evolves, and more 
infrastructure is put in place, we will have the capacity to accept 
electronic reporting of all of the clinical chart-abstracted measures 
that are currently part of the Hospital IQR Program or have been 
proposed for adoption into the program. We intend for this future 
progress to significantly reduce the administrative burden on hospitals 
under the Hospital IQR Program. We recognize that considerable work 
needs to be done by measure owners and developers to make this possible 
with respect to the clinical quality measures that we proposed. This 
includes completing electronic specifications for measures, pilot 
testing, reliability, and validity testing, and implementing such 
specifications into EHR technology to capture and calculate the 
results, and implementing the systems. We believe that at a future 
date, such as 2015, CMS and hospitals will be able to switch to 
complete EHR-based reporting of all chart-abstracted measures to CMS 
for the Hospital IQR Program, and we intend to work diligently toward 
this goal. We believe this will simplify measure collection and 
submission for the Hospital IQR Program, and will reduce the burden on 
hospitals. We invited public comment and suggestions on this topic.
    In future rules, it is our intention to propose to adopt outcome 
measures for stroke and joint replacement surgery which we have 
developed and anticipate submitting for NQF review. In addition, we 
intend to propose additional HAI measures as they gain NQF endorsement. 
We also invited public comment on the following quality measures and 
topics set out below that we are considering for the future. We seek to 
limit the number of chart-abstracted measures and topics in the near 
future, in order to facilitate the transition to EHR-based reporting.

        Possible Hospital IQR Program Future Measures and Topics
------------------------------------------------------------------------
          Measurement topic            Measure title/description/concept
------------------------------------------------------------------------
Mortality/Complications..............   Acute stroke 30-day
                                        mortality rate.
                                        Total Hip and Total Knee
                                        arthroplasty 30-day
                                        complications.
Readmissions.........................   Stroke 30-Day Risk
                                        Standardized Readmission
                                        Measure.
                                        Total Hip and Total Knee
                                        Arthroplasty 30-Day Risk
                                        Standardized Readmission
                                        Measure.
Patient Safety.......................   Surgical checklist use
                                        for surgical procedures.
                                        NQF approved Serious
                                        Reportable Events.
Medication Safety....................   Universal Documentation
                                        and Verification of Current
                                        Medications in the Medical
                                        Record.
                                        Drug-Drug interaction.
                                        Medication
                                        Reconciliation.
Surgical Outcome Measures............   Lower Extremity Bypass
                                        Complications.
                                        ICD Complications.
                                        Risk Adjusted Case Mix
                                        Adjusted Elderly surgery
                                        outcomes.
                                        Risk Adjusted Case Mix
                                        Adjusted Colorectal surgery
                                        outcomes.
Healthcare-Associated Infections.....   Ventilator Associated
                                        Pneumonia.
                                        Post Procedure
                                        Pneumonias.
                                        Multi Drug Resistant
                                        Organisms--VRE, Klebsiella,
                                        Acinetobacter.
Readmissions.........................   COPD 30-day Risk
                                        Standardized Readmission Rate.
                                        CABG 30-day Risk
                                        Standardized Readmission Rate.
                                        Other Vascular Condition
                                        30-day Risk Standardized
                                        Readmission.
                                        Percutaneous Coronary
                                        Intervention (PCI) 30-day Risk
                                        Standardized Readmission Rate.

[[Page 51638]]

 
                                        All-Patient Condition-
                                        Specific Readmission Rates for
                                        AMI, Heart Failure, Pneumonia,
                                        CABG, COPD, PCI, other vascular
                                        conditions.
                                        All-condition 30-day
                                        readmission rate.
Average Length of Stay...............   Overall inpatient
                                        hospital average length of stay
                                        (ALOS) and ALOS by medical
                                        service category.
Mortality............................   30-day Risk Standardized
                                        Mortality Rate following PCI for
                                        STEMI/shock patients.
                                        30-day risk-standardized
                                        mortality rate following PCI for
                                        non-STEMI/non-shock patients.
SCIP.................................   Short Half-Life
                                        prophylactic administered
                                        preoperatively redosed within 4
                                        hours after preoperative dose.
Care Coordination....................   Cardiac Rehabilitation
                                        Referral for AMI, HF, Cardiac
                                        Surgery.
Heart Failure........................   Symptom and Activity
                                        Assessment.
                                        Symptom Management.
                                        Patient Education.
                                        Combination Medical
                                        Therapy for LVSD.
                                        Beta Blocker Therapy for
                                        LVSD.
                                        Counseling Regarding ICD
                                        for Patients with LVSD.
Tobacco & Alcohol Cessation..........   TAM-1: Tobacco Use
                                        Screening.
                                        TAM-2: Tobacco Use
                                        Treatment.
                                        TAM-3: Tobacco Use
                                        Treatment Management at
                                        Discharge.
                                        TAM-4: Assessing Status
                                        after Discharge.
                                        TAM-5: Alcohol Use
                                        Screening.
                                        TAM-6: Alcohol Use Brief
                                        Intervention.
                                        TAM-7: Alcohol and other
                                        Drug dependence--Treatment
                                        Management at Discharge.
                                        TAM-8: Substance Use--
                                        Assessing Status after
                                        Discharge.
Nursing Sensitive (remainder of         NSC-2: Patients surveyed
 measures).                             on an eligible reporting unit
                                        that have at least one stage II
                                        or greater [National Ulcer
                                        Advisory Panel (NPUAP)]
                                        nosocomial pressure ulcer on the
                                        day of the prevalence study.
                                        NSC-3: Number of patient
                                        falls, with or without injury to
                                        the patient, by type of Unit
                                        during the calendar month x
                                        1000.
                                        NSC-4: Number of patient
                                        falls with an injury level of
                                        minor or greater by Type of Unit
                                        during the calendar month x
                                        1,000.
                                        NSC-5: Patients surveyed
                                        on the eligible reporting unit
                                        that have a vest restraint and/
                                        or limb restraint (upper or
                                        lower or both) on the day of the
                                        prevalence study.
                                        NSC-12: Number of
                                        productive hours worked as
                                        specified in the Set Measure
                                        Identifier.
                                        NSC-13: Total number of
                                        productive hours worked by
                                        nursing staff (stratified by
                                        type of certification RN, LPN/
                                        LVN, UAP) with direct patient
                                        care responsibilities by Type of
                                        Unit during the calendar month.
                                        NSC-14: Nursing
                                        satisfaction survey.
                                        NSC 15: The total number
                                        of voluntary separations (as
                                        specified under the Performance
                                        Measure Identifier and
                                        Description above) during the
                                        calendar month.
Cardiac Surgery measures.............   Post-operative Renal
                                        Failure.
                                        Surgical Re-exploration.
                                        Anti-Platelet Medication
                                        at Discharge.
                                        Beta Blockade at
                                        Discharge.
                                        Anti-Lipid Treatment
                                        Discharge (Statin at Discharge).
                                        Risk-Adjusted Operative
                                        Mortality for CABG.
                                        Risk-Adjusted Operative
                                        Mortality for Aortic Valve
                                        Replacement (AVR).
                                        Risk-Adjusted Operative
                                        Mortality for Mitral Valve
                                        Replacement/Repair (MVR).
                                        Risk-Adjusted Operative
                                        Mortality MVR+CABG Surgery.
                                        Risk-Adjusted Operative
                                        Mortality for AVR+CABG.
                                        Surgical Volume--a.
                                        Isolated Coronary Artery Bypass
                                        Graft (CABG) Surgery, b. Valve
                                        Surgery, c. CABG+Valve Surgery.
                                        Timing of Antibiotic
                                        Prophylaxis for Cardiac Surgery
                                        Patients.
                                        Selection of Antibiotic
                                        Prophylaxis for Cardiac Surgery
                                        Patients.
                                        Pre-Operative Beta
                                        Blockade.
                                        Duration of Prophylaxis
                                        for Cardiac Surgery Patients.
                                        Prolonged Intubation
                                        (ventilation).
                                        Deep Sternal Wound
                                        Infection Rate.
                                        Stroke/Cerebrovascular
                                        Accident.
                                        CABG Composite Score.
------------------------------------------------------------------------

    Comment: Commenters generally supported CMS adopting more outcome 
measures in the future. The commenters further stated that CMS should 
not dismiss process of care measures that have a direct link to outcome 
measures.
    Response: We thank the commenters for their suggestions which we 
will take into consideration for future measures.
    Comment: Many commenters were supportive of our proposed list of 
future measures and measure topics.
    Response: We thank the commenters for their support of our future 
measure topics and will take their comments into consideration in our 
selection of future measures.
    Comment: Many commenters supported the inclusion of The Joint 
Commission Smoking Cessation and Tobacco measure sets for the Hospital 
IQR Program and recommended EHR-

[[Page 51639]]

based reporting for these measures. For future cardiac readmission 
measures, one commenter recommended that CMS take into account the FDA-
approved new classes of medications for prevention of cardiac 
readmissions and improvement of patient outcomes. One commenter 
suggested that any 30-day ischemic stroke mortality or readmission 
measure must include stroke severity as a risk-adjustment factor.
    Response: We thank the commenters for their specific suggestions 
and will consider them as we decide which measures to propose to adopt 
in the future for the Hospital IQR Program.
    Comment: Some commenters were opposed to some measures and measure 
topics on our list of future measure and measure topics: One commenter 
opposed the Nursing Sensitive Care measures and Readmission measures 
for AMI, HF, PN, and PCI. One commenter opposed the adoption of the 
ventilator associated pneumonia (VAP) measure because the commenter 
believed that the definitions and diagnosis are problematic, and 
opposed the adoption of the SCIP, and MDRO measures because they are 
not NQF-endorsed. Two commenters were opposed to the care coordination 
measure. A commenter opposed the adoption of the SCIP (process) measure 
(short Half-Life prophylactic administered preoperatively redosed 
within 4 hours after preoperative dose) because the related Surgical 
Site Infection (SSI) outcome measure is already part of the Hospital 
IQR Program.
    Response: We thank the commenters for their recommendations and 
will take them into consideration as we decide which measures to 
propose to adopt in the future for the Hospital IQR Program.
    Comment: Some commenters recommended measures that are not on our 
list of future measures and measure topics. One commenter proposed a 
new measure for hyponatremia. One commenter proposed a measure for AMI 
and HF such as the NQF-endorsed Heart Failure (HF): Beta-blocker 
therapy (NQF 0083). One commenter supported a surgical 
checklist measure for Hospital IQR Program. One commenter recommended 
NQF-endorsed wound care measures and malnutrition evaluation measures 
if they are available. One commenter recommended adopting measures that 
would indicate share-decision making in hospitals. One commenter 
suggested a measure for Surgical Site Infection following 
implementation of a CIED. One commenter recommended PTCA Readmission 
measures. One commenter strongly urged CMS to adopt measures based on 
registry data (for example, CABG), CTM-3, PAC measures, efficiency 
measures, CAD and CHD measures, patient-reported outcomes, and cross-
cutting measures of care for patients with multiple chronic conditions.
    Response: We appreciate all the suggestions for additional measures 
and measure topics and will take them into consideration as we decide 
which measures to propose to adopt in the future for the Hospital IQR 
Program.
    Comment: One commenter recommended that, in addition to current 
reporting efforts, future reporting should strike a balance between 
driving quality and system improvement as well as attempt to capture 
the entire episode of care so that the quality of care and care 
continuum can be better portrayed.
    Response: We thank the commenter for the recommendation and will 
take it into consideration as we decide which measures to propose to 
adopt in the future for the Hospital IQR Program.
    We thank the commenters for their comments and suggestions 
regarding future Hospital IQR measure adoption.
5. Form, Manner, and Timing of Quality Data Submission
a. Background
    Sections 1886(b)(3)(B)(viii)(I) and (II) of the Act state that the 
applicable percentage increase, for FY 2007 and each subsequent fiscal 
year, shall be reduced by 2.0 percentage points (or, beginning with FY 
2015, by one-quarter of such applicable percentage increase (determined 
without regard to sections 1886(b)(3)(B)(ix), (xi), or (xii) of the 
Act) for any subsection (d) hospital that does not submit quality data 
in a form and manner, and at a time, specified by the Secretary. The 
data submission requirements, Specifications Manual, and submission 
deadlines are posted on the QualityNet Web site at: http://www.QualityNet.org/. CMS requires that hospitals submit data in 
accordance with the specifications for the appropriate discharge 
periods. Hospitals submit quality data through the secure portion of 
the QualityNet Web site (formerly known as QualityNet Exchange) 
(https://www.QualityNet.org). This Web site meets or exceeds all 
current Health Insurance Portability and Accountability Act 
requirements for security of protected health information.
    In order to participate in the Hospital IQR Program, hospitals must 
meet specific procedural requirements. Hospitals choosing to 
participate in the Hospital IQR Program must also meet specific data 
collection, submission, and validation requirements.
b. Procedural Requirements for FY 2012 Payment Determinations and 
Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25914 through 
25920), we proposed Hospital IQR Program procedural requirements that 
are, for the most part, the same as the procedures adopted in the FY 
2011 IPPS/LTCH PPS final rule for the Hospital IQR Program. Hospitals 
must comply with the following procedural requirements to participate--
     Register with QualityNet, before participating hospitals 
initially begin reporting data, regardless of the method used for 
submitting data.
     Identify a QualityNet Administrator who follows the 
registration process located on the QualityNet Web site (http://www.QualityNet.org).
     Complete a Notice of Participation. New subsection (d) 
hospitals and existing hospitals that wish to participate in the 
Hospital IQR Program for the first time must complete an online Notice 
of Participation (formerly known as ``Reporting Hospital Quality Data 
for Annual Payment Update Notice of Participation,'' also referred to 
as IPledge) that includes the name and address of each hospital campus 
that shares the same CMS Certification Number (CCN). We revise the 
Notice of Participation periodically as needed and provide appropriate 
notification of any revisions to hospitals and QIOs through the routine 
Hospital IQR Program communication channels, which include memo and e-
mail notification and QualityNet Web site articles and postings.
     Any hospital that receives a new CCN on or after October 
15, 2009 (including new subsection (d) hospitals and hospitals that 
have merged) that wishes to participate in the Hospital IQR Program and 
has not otherwise submitted a Notice of Participation using the new CCN 
must submit a completed Notice of Participation no later than 180 days 
from the date identified as the open date (that is, the Medicare 
acceptance date) on the approved CMS Quality Improvement Evaluation 
System (QIES) (which we referred to in the proposed rule as the CMS 
Online System Certification and Reporting (OSCAR) system) to 
participate in the Hospital IQR Program. We proposed regulation text to 
codify this requirement.
     We will accept Hospital IQR Program withdrawal forms for 
the FY 2013 payment determination from hospitals any time from October 
1, 2011 until August 15, 2012. The August 15, 2012 deadline will give 
us sufficient

[[Page 51640]]

time to update the FY 2013 payment to hospitals starting on October 1, 
2012. If a hospital withdraws from the program for the FY 2013 payment 
determination, it will receive a reduction of 2.0 percentage points to 
the FY 2013 applicable percentage increase. Once a hospital has 
submitted a Notice of Participation, it is considered to be an active 
Hospital IQR Program participant until such time as the hospital 
submits a withdrawal form to CMS.
     We will determine if a hospital has complied with our data 
submission requirements by looking at whether the hospital has properly 
submitted data to the appropriate data warehouses for HCAHPS, CDC/NHSN, 
chart-abstracted measures, and structural measure quality measure data 
during the four calendar year quarters of FY 2012.
    The Hospital IQR Program procedural requirements have remained 
relatively unchanged for the past several years and we proposed to 
codify them at 42 CFR 412.140. We invited public comment on this 
proposal.
    We received no comments on our proposal to codify the Hospital IQR 
Program procedural requirements. Therefore, for the reasons described 
above, we are codifying the Hospital IQR Program procedural 
requirements at 42 CFR 412.140.
c. Procedural Requirements for FY 2013 and Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25915), we 
proposed that hospitals that have an open date (as noted on the 
approved CMS OSCAR system/QIES) before March 31, 2009 that did not 
participate in the Hospital IQR Program in FY 2011 or FY 2012 but that 
wish to participate in the Hospital IQR Program for the FY 2013 payment 
determination must submit a completed Notice of Participation to CMS on 
or before December 31, 2011. These hospitals, unlike hospitals that 
receive a new CCN, do not need to get their operations up and running. 
Therefore, we believe this is a reasonable deadline that will enable 
these hospitals to decide whether they want to participate in the 
Hospital IQR Program while also enabling us to collect enough data from 
them to make an accurate FY 2013 payment determination. We proposed 
regulation text that provides that hospitals that would like to 
participate in the Hospital IQR Program for the first time, or that 
previously withdrew from the program and would like to participate 
again, must submit to CMS a completed Notice of Participation Form by 
December 31 of the fiscal year preceding the fiscal year in which they 
would like to participate.
    We received no comments regarding the proposal to require hospitals 
to submit a completed Notice of Participation Form by December 31 of 
the fiscal year preceding the fiscal year in which they would like to 
participate. Therefore, for the reasons described above, we will 
require a completed Notice of Participation Form by December 31 of the 
fiscal year preceding the fiscal year in which they would like to 
participate.
d. Data Submission Requirements for Chart-Abstracted Measures
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 2525915), we 
proposed to reduce the quarterly submission deadline for chart-
abstracted quality measures from 4\1/2\ months to 104 days. In other 
words, for FY 2014 payment determinations, the quarterly deadline for 
the quality measures under the topic that require chart abstraction 
(AMI, HF, PN, SCIP, Emergency Department Throughput (EDT), and Global 
Immunization (GIM)) will be 104 days following the last discharge date 
in the calendar quarter. We proposed to reduce the data submission 
deadline in order to allow for a correction period, which we will 
propose in future rulemaking. We also believe that this proposed change 
will encourage hospitals to utilize quality measure information in a 
more rapid manner to facilitate quality improvement. We also want to 
provide hospitals sufficient notice of any proposed changes to our 
submission deadline, since we recognize the advance time needed by 
hospitals to modify their recordkeeping and abstraction practices to 
comply with this proposed requirement. We also proposed to change the 
aggregate population and sampling deadline from 4 months to 3 months to 
align with the corresponding proposal to change the data submission 
deadline from 135 to 104 days.
    We will continue to require hospitals to submit aggregate 
population and sample size counts to CMS on a quarterly basis for 
Medicare and non-Medicare discharges for the topic areas for which 
chart-abstracted data must be submitted (currently AMI, HF, PN, and 
SCIP) (75 FR 50221). Starting with the FY 2014 payment determination, 
we proposed to change the submission deadline for hospitals to submit 
aggregate population and sample size count data for the measures 
requiring chart abstraction from 4 months to 3 months following the 
last discharge date in the calendar quarter. We proposed this 3-month 
deadline for submission of the aggregate population and sample size 
counts data to provide CMS with information necessary to notify 
hospitals about their data completeness status. Specifically, we 
currently provide a Provider Participation Report the day after the 
submitted file is processed, which includes a calculation of the number 
of hospital submitted cases by topic, hospital self-reported aggregate 
population and sample size count, and Medicare FFS claims by clinical 
topic and SCIP surgical category. We expect that hospitals will use 
this report after submission to assess their patient-level data 
completeness and will submit additional patient-level cases before the 
proposed quarterly patient-level deadline. We proposed to provide 
hospitals with the same 14-day period after the proposed aggregate 
population and sample size count deadline to submit the required 
patient-level records.
    Comment: Several commenters opposed the shorter timeframes due to 
the increased administrative burden that this would create for 
hospitals.
    Response: We appreciate the comment and are sensitive to the burden 
faced by hospitals to meet the requirements under the Hospital IQR 
Program. In the CY 2012 OPPS/ASC proposed rule (76 FR 42363 through 
42365), we proposed to implement a review and corrections process for 
the Hospital VBP Program that would give hospitals an opportunity to 
review and correct data submitted on all Hospital IQR Program chart-
abstracted measures, whether or not those measures are adopted as 
Hospital VBP Program measures. We noted that under the Hospital IQR 
Program, hospitals currently have an opportunity to submit, review, and 
correct any of the chart-abstracted information submitted to the QIO 
Clinical Warehouse for the full 4\1/2\ months following the last 
discharge date in a calendar quarter, although we also noted that we 
had proposed to shorten this period. In response to the comments 
stating that the shortened timeframe would increase the burden to 
hospitals under the Hospital IQR Program, we re-examined the timing 
issues that had prompted us to propose to shorten the period and 
concluded that the existing 4\1/2\ month submission period would give 
hospitals a sufficient amount of time to review and correct their 
chart-abstracted data, and would also give us a sufficient amount of 
time to perform our administrative functions. For this reason, we will 
not finalize our proposal to shorten the chart-abstracted data 
submission period to 104 days, and hospitals will continue to have 4\1/
2\ months following the last discharge date in a calendar quarter to 
submit their

[[Page 51641]]

chart-abstracted data for that quarter. To be consistent with our 
decision to retain the 4\1/2\ month data submission period, we will 
also not finalize our proposal to shorten the aggregate population and 
sampling deadline from 4 months to 3 months, and hospitals will 
continue to have 4 months to submit this data.
    Comment: One commenter expressed concern that the reduced 
submission deadline would reduce the amount of time vendors have to 
analyze, report and resubmit the various data files.
    Response: We thank the commenter for their input and appreciate the 
commenter's concern regarding the proposed reduced timeframes. For the 
reasons stated above, we will not finalize our proposals to shorten the 
chart-abstracted data submission deadline or the aggregate population 
and sampling deadline.
    Comment: A few commenters suggested that efforts be made to 
synchronize reporting timeframes with other standard reporting 
requirements, such as The Joint Commission's requirements and 
timeframes.
    Response: We believe that the reporting deadlines we have developed 
for the Hospital IQR Program take into consideration both the burden to 
hospitals and our administrative and operational needs. However, we 
appreciate the commenters' suggestion to align our reporting deadlines 
with the reporting deadlines imposed by other organizations and will 
take it into consideration in developing future rulemaking.
    Comment: Many commenters suggested that CMS shorten the data 
submission timeline from 135 days to 122 days, not the proposed 104 
days. These commenters asserted that this would build in time for a 
data correction period while ensuring that hospitals are not 
overwhelmed by a drastically shortened data collection period.
    Response: We thank the commenters for their input. As noted above, 
we are not finalizing our proposals to shorten the chart-abstracted 
data submission deadline or the aggregate population and sampling 
deadline. However, we will take the commenters' suggestions into 
consideration in developing future rulemaking.
    Comment: One commenter supported the reduction in submission days 
because it would increase efficiency in the program. A few commenters 
supported the opportunity to review and correct data and suggested the 
reduced submission deadline was not a burden in exchange for the review 
opportunity.
    Response: We thank the commenters for supporting our proposals to 
shorten the chart-abstracted data submission deadline and the aggregate 
population and sampling deadline, however for the reasons noted above, 
we will not be finalizing these proposals.
    After consideration of the public comments we received, we will not 
finalize our proposal to shorten the chart-abstracted data submission 
period to 104 days, and hospitals will continue to have 4\1/2\ months 
following the last discharge date in a calendar quarter to submit their 
chart-abstracted data for that quarter. To be consistent with our 
decision to retain the 4\1/2\ month data submission period, we will 
also not finalize our proposal to shorten the aggregate population and 
sampling deadline from 4 months to 3 months, and hospitals will 
continue to have 4 months to submit this data.
    We did not receive any comments on our proposal to continue 
providing hospitals with 14 days after the aggregate population and 
sample size count deadline to submit the required patient-level 
records, and we are finalizing that proposal.
e. Sampling and Case Thresholds Beginning with the FY 2015 Payment 
Determination
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25915 through 
25916), we proposed to continue the requirement for hospital submission 
of population and sampling data for the FY 2015 payment determination 
and future years. Hospitals must submit to CMS quarterly aggregate 
population and sample size counts for Medicare and non-Medicare 
discharges for the topic areas for which chart-abstracted data must be 
submitted (AMI, HF, PN, SCIP, EDT and GIM). Hospitals are required to 
submit their aggregate population and sample size count for each topic 
area.
    In accordance with the policy we adopted in the FY 2011 IPPS/LTCH 
PPS final rule, hospitals that have not treated patients in a specific 
topic area must still submit quarterly population and sample size 
counts for all Hospital IQR chart-abstracted data topics. For example, 
if a hospital has not treated AMI patients, the hospital is still 
required to submit a zero for its quarterly aggregate population and 
sample count for that topic in order to meet the requirement. We view 
it as vital for hospitals to determine accurately their aggregate 
population and appropriate sampling size data in order for CMS to 
assess hospitals' data reporting completeness for their total 
population of cases, Medicare and non-Medicare.
    In order to reduce the burden on hospitals that treat a low number 
of patients in a Hospital IQR Program topic area, a hospital that has 
five or fewer discharges (Medicare and non-Medicare combined) in a 
topic area during a quarter in which data must be submitted would not 
be required to submit patient-level data for that topic area for the 
quarter. The hospital must still submit its aggregate population and 
sample size counts for Medicare and non-Medicare discharges for the 
topic areas each quarter. Hospitals meeting the five or fewer patient 
discharge exception may voluntarily submit these data.
    We strongly recommend that hospitals review the QIO Clinical 
Warehouse Feedback Reports and the Hospital IQR Program Provider 
Participation Reports that are available after patient-level data are 
submitted to the QIO Clinical Warehouse. We generally update these 
reports on a daily basis to provide accurate information to hospitals 
about their submissions. These reports enable hospitals to ensure that 
their data were submitted on time and accepted into the QIO Clinical 
Warehouse.
    We did not receive any public comments related to this proposal. 
Therefore, we are finalizing our proposal regarding hospital submission 
of population and sampling data for the FY 2015 payment determination 
and future years as proposed.
f. HCAHPS Requirements for the FY 2013, FY 2014, and FY 2015 Payment 
Determinations
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25916 through 
25917), beginning with discharges occurring in third quarter CY 2011, 
we proposed to move the HCAHPS data submission deadline forward by one 
week in order to allow for a review and correction period, which we 
will propose in future rulemaking. Currently, hospitals have about 14 
weeks after the end of a calendar quarter to submit HCAHPS data for 
that quarter to the QIO Clinical Warehouse. If this proposal is 
adopted, hospitals will have about 13 weeks after the end of a calendar 
quarter to submit HCAHPS data for that quarter to the QIO Clinical 
Warehouse.
    Other than this proposed change, we did not propose any other 
changes to the HCAHPS requirements for the FY 2013 and FY 2014 Hospital 
IQR Program payment determinations, which were adopted in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50220). For FY 2015 Hospital IQR 
payment determinations, we proposed to continue the HCAHPS requirements 
as follows. Under these requirements, a hospital must

[[Page 51642]]

continuously collect and submit HCAHPS data in accordance with the 
current HCAHPS Quality Assurance Guidelines and the quarterly data 
submission deadlines, both of which are posted at http://www.hcahpsonline.org. In order for a hospital to participate in the 
collection of HCAHPS data, a hospital must either: (1) Contract with an 
approved HCAHPS survey vendor that will conduct the survey and submit 
data on the hospital's behalf to the QIO Clinical Warehouse; or (2) 
self-administer the survey without using a survey vendor provided that 
the hospital attends HCAHPS training and meets Minimum Survey 
Requirements as specified on the HCAHPS Web site at: http://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors 
can be found on the HCAHPS Web site. For the FY 2015 Hospital IQR 
Program, we proposed that the HCAHPS data will be based on discharges 
from January 1, 2013 through December 31, 2013.
    Every hospital choosing to contract with a survey vendor must 
provide the sample frame of HCAHPS-eligible discharges to its survey 
vendor with sufficient time to allow the survey vendor to begin 
contacting each sampled patient within 6 weeks of discharge from the 
hospital. (We refer readers to the Quality Assurance Guidelines located 
at http://www.hcahpsonline.org for details about HCAHPS survey 
administration.) Hospitals are strongly encouraged to submit their 
entire patient discharge list, excluding patients who had requested 
``no publicity'' status or who are excluded because of State 
regulations, in a timely manner to their survey vendor to allow 
adequate time for sample creation, sampling, and survey administration. 
We wish to emphasize that hospitals must also provide the 
administrative data that is required for HCAHPS in a timely manner to 
their survey vendor. This includes the patient MS-DRG at discharge, or 
alternative information that can be used to determine the patient's 
service line, in accordance with the survey protocols in the most 
recent HCAHPS Quality Assurance Guidelines.
    We note that the HCAHPS Quality Assurance Guidelines require that 
hospitals maintain complete discharge lists that indicate which 
patients were eligible for the HCAHPS survey, which patients were not 
eligible, which patients were excluded, and the reason(s) for 
ineligibility and exclusion. (We refer readers to the Quality Assurance 
Guidelines located at http://www.hcahpsonline.org for details about 
HCAHPS eligibility and sample frame creation.) In addition, the 
hospital must authorize the survey vendor to submit data via My 
QualityNet, the secure part of the QualityNet Web site, on the 
hospital's behalf.
    Hospitals must submit at least 300 completed HCAHPS surveys in a 
rolling four-quarter period unless the hospital is too small to obtain 
300 completed surveys. We wish to emphasize that the absence of a 
sufficient number of HCAHPS eligible discharges is the only acceptable 
reason for submitting fewer than 300 completed HCAHPS surveys in a 
rolling four quarter period. If a hospital obtains fewer than 100 
completed surveys, the hospital's HCAHPS scores will be accompanied by 
a footnote on the Hospital Compare Web site alerting the Web site users 
that the scores should be reviewed with caution, as the number of 
surveys may be too low to reliably assess hospital performance.
    After the survey vendor submits the data to the QIO Clinical 
Warehouse, we strongly recommend that hospitals employing a survey 
vendor promptly review the two HCAHPS Feedback Reports (the Provider 
Survey Status Summary Report and the Data Submission Detail Report) 
that are available. These reports enable a hospital to ensure that its 
survey vendor has submitted the data on time and the data has been 
accepted into the QIO Clinical Warehouse.
    In order to ensure compliance with HCAHPS survey and administration 
protocols, hospitals and survey vendors must participate in all 
oversight activities. As part of the oversight process, during the 
onsite visits or conference calls, the HCAHPS Project Team will review 
the hospital's or survey vendor's survey systems and assess protocols 
based upon the most recent HCAHPS Quality Assurance Guidelines. All 
materials relevant to survey administration will be subject to review. 
The systems and program review includes, but is not limited to: (a) 
Survey management and data systems; (b) printing and mailing materials 
and facilities; (c) telephone and Interactive Voice Response (IVR) 
materials and facilities; (d) data receipt, entry and storage 
facilities; and, (e) written documentation of survey processes. As 
needed, hospitals and survey vendors will be subject to follow-up site 
visits or conference calls. We wish to point out that the HCAHPS 
Quality Assurance Guidelines state that hospitals should refrain from 
activities that explicitly influence how patients respond on the HCAHPS 
survey. If we determine that a hospital is not compliant with HCAHPS 
program requirements, we may determine that the hospital is not 
submitting HCAHPS data that meet the requirements of the Hospital IQR 
Program.
    We continue to strongly recommend that each new hospital 
participate in an HCAHPS dry run, if feasible, prior to beginning to 
collect HCAHPS data on an ongoing basis to meet Hospital IQR Program 
requirements. New hospitals can conduct a dry run in the last month of 
a calendar quarter. The dry run will give newly participating hospitals 
the opportunity to gain first-hand experience collecting and 
transmitting HCAHPS data without the public reporting of results. Using 
the official survey instrument and the approved modes of administration 
and data collection protocols, hospitals/survey vendors will collect 
HCAHPS dry-run data and submit the data to My QualityNet, the secure 
portion of QualityNet.
    We again are encouraging hospitals to regularly check the HCAHPS 
Web site at http://www.hcahpsonline.org for program updates and 
information.
    Comment: One commenter asked about the purpose of the proposed 
HCAHPS review and correction period. Another commenter recommended that 
CMS change its HCHAPS data submission timeline to match the current 
Joint Commission data submission schedule, which is two weeks earlier 
than the CMS deadline.
    Response: The proposed one-week HCAHPS review and correction period 
would allow a formal opportunity for hospitals (or their HCAHPS survey 
vendors) to resubmit data for patients in order to correct errors in 
the data submitted for those patients prior to the review and 
correction period.
    Given the amount of time necessary for participating hospitals or 
their survey vendors to fully administer the HCAHPS survey, receive 
survey responses, and create the necessary data files, we do not 
believe it is appropriate to further shorten the data submission period 
either by beginning the period sooner, or ending it sooner.
    After consideration of the public comments we received, we are 
finalizing the HCAHPS requirements discussed above, as proposed.
    In the Hospital Inpatient VBP Program proposed rule, we proposed 
that HCAHPS scores become part of the FY 2013 Hospital VBP Program (76 
FR 2462). We adopted that proposal in the Hospital Inpatient VBP 
Program final rule (76 FR 26510). As HCAHPS scores become incorporated 
in hospital payment, we believe that a neutral third-party should 
administer the

[[Page 51643]]

survey for hospitals whose annual payment updates will be affected by 
their HCAHPS scores. It is our belief that an experienced survey vendor 
will be best able to ensure reliable results. Therefore, we are 
considering whether to require that-subsection (d) hospitals engage an 
HCAHPS-approved survey vendor to administer the HCAHPS survey. We 
invited public comment that will inform our future policy on this issue
    Comment: One commenter expressed support for requiring the use of 
an approved survey vendor to administer the HCAHPS survey when the 
survey will be used for hospital payment purposes.
    Response: We thank the commenter for this suggestion. We are 
considering this policy change for the future and we will take this 
suggestion into consideration as we develop future proposals.
g. Procedures for Claims-Based Measures
    In the FY 2012 IPPS/LTCH PPS proposed rule, we proposed to adopt a 
new claims-based measure for FY 2014, the Medicare Spending per 
Beneficiary Measure, which is included in the chart below.

------------------------------------------------------------------------
                                         FY 2014 Payment determination:
                                       adopted and proposed claims-based
                Topic                   quality measures (no additional
                                            hospital data submission
                                                   required)
------------------------------------------------------------------------
Mortality Measures (Medicare            Acute Myocardial
 Patients).                             Infarction (AMI) 30-day
                                        mortality rate.
                                        Heart Failure (HF) 30-
                                        day mortality rate.
                                        Pneumonia (PN) 30-day
                                        mortality rate.
Readmission Measure (Medicare           Acute Myocardial
 Patients).                             Infarction 30-day Risk
                                        Standardized Readmission
                                        Measure.
                                        Heart Failure 30-day
                                        Risk Standardized Readmission
                                        Measure.
                                        Pneumonia 30-day Risk
                                        Standardized Readmission
                                        Measure.
AHRQ Patient Safety Indicators          PSI 06: Iatrogenic
 (PSIs), Inpatient Quality Indicators   pneumothorax, adult.
 (IQIs) and Composite Measures.         PSI 11: Post Operative
                                        Respiratory Failure.
                                        PSI 12: Post Operative
                                        PE or DVT.
                                        PSI 14: Postoperative
                                        wound dehiscence.
                                        PSI 15: Accidental
                                        puncture or laceration.
                                        IQI 11: Abdominal aortic
                                        aneurysm (AAA) mortality rate
                                        (with or without volume).
                                        IQI 19: Hip fracture
                                        mortality rate.
                                        Complication/patient
                                        safety for selected indicators
                                        (composite).
                                        Mortality for selected
                                        medical conditions (composite).
AHRQ PSI and Nursing Sensitive Care..   PSI 04 Death among
                                        surgical inpatients with serious
                                        treatable complications.
Hospital Acquired Condition Measures.   Foreign Object Retained
                                        After Surgery.
                                        Air Embolism.
                                        Blood Incompatibility.
                                        Pressure Ulcer Stages
                                        III & IV.
                                        Falls and Trauma:
                                        (Includes: Fracture Dislocation
                                        Intracranial Injury Crushing
                                        Injury Burn Electric Shock).
                                        Vascular Catheter-
                                        Associated Infection.
                                        Catheter-Associated
                                        Urinary Tract Infection (UTI).
                                        Manifestations of Poor
                                        Glycemic Control.
Cost Efficiency......................   Medicare Spending per
                                        Beneficiary.*
------------------------------------------------------------------------
* New proposed measure for FY 2014.

    We did not propose to change the procedures and time periods we 
adopted in the FY 2011 IPPS/LTCH PPS final rule for the FY 2012, FY 
2013 and FY 2014 payment determinations. For the FY 2014 payment 
determination, we proposed to use up to 3 years of Medicare FFS claims 
data to calculate the measures, as appropriate for the measures.
    Hospitals are encouraged to regularly check the QualityNet Web 
site, http://www.QualityNet.org, for program updates and information.
    We received no comments on these procedures and are finalizing them 
with the clarification that we will use 3 years of Medicare FFS claims 
data to calculate the measures.
h. Data Submission Requirements for Structural Measures
    Structural measures assess the characteristics and capacity of the 
provider to deliver quality healthcare. In the FY 2012 IPPS/LTCH PPS 
proposed rule, we proposed to add one additional structural measure for 
the FY 2014 payment determination, Participation in a Systematic 
Clinical Database Registry for General Surgery. Beginning with FY 2013, 
we proposed to align the submission deadline for all structural 
measures with the submission deadline for the fourth calendar quarter 
of the chart-abstracted measures.\34\ We proposed to update the period 
of data collection that hospitals will submit the required registry 
participation information once annually for the structural measures via 
a Web-based collection tool between April 1, 2012 and May 15, 2012 with 
respect to the time period of January 1, 2011 through December 31, 
2011. This proposal will give CMS a more complete picture of registry 
participation as well as synchronize data submissions for structural 
and chart-abstracted measures. These measures do not require the 
hospital to participate in a registry.
---------------------------------------------------------------------------

    \34\ We corrected this language in the proposed rule in a 
correction notice published at 76 FR 34633 to remove an incorrect 
reference to these measures aligning in FY 2014, when in fact they 
will be aligned starting in FY 2013.
---------------------------------------------------------------------------

    Below is the list of structural measures we have adopted for the FY 
2014 payment determination:

------------------------------------------------------------------------
                                         FY 2014 Payment determination:
                Topic                         Structural measures
------------------------------------------------------------------------
Cardiac Surgery......................   Participation in a
                                        Systematic Database for Cardiac
                                        Surgery.
Stroke Care..........................   Participation in a
                                        Systematic Clinical Database
                                        Registry for Stroke Care.

[[Page 51644]]

 
Nursing Sensitive Care...............   Participation in a
                                        Systematic Clinical Database
                                        Registry for Nursing Sensitive
                                        Care.
General Surgery......................   Participation in a
                                        Systematic Clinical Database
                                        Registry for General Surgery.*
------------------------------------------------------------------------
* New measure for FY 2014 proposed in the FY 2012 IPPS/LTCH PPS proposed
  rule and adopted in this final rule.

    Comment: Several commenters noted an error in the proposed rule 
regarding the date of collection and the period of collection for the 
proposed structural measure as well as the existing structural 
measures.
    Response: We issued a correction notice on this issue on June 14, 
2011 (76 FR 34633 through 34634). The correction notice corrected both 
the period of time for which the data will be corrected as well as the 
timeframe during which we will actually collect the data. We 
erroneously stated in the proposed rule at (76 FR 25898) that 
collection would begin in July 2012 with respect to the time period 
January 1, 2012 to June 30, 2012, instead of collection to begin in 
April 2013 with respect to the time period January 1, 2012 through 
December 31, 2012.
    Comment: A few commenters supported the alignment of the data 
collection for structural measures with the data submission deadline 
for the fourth quarter of the chart-abstracted measures.
    Response: We appreciate the commenters' support for this proposed 
alignment.
    After consideration of the public comments we received, we are 
finalizing our proposal that, beginning with FY 2013, we are aligning 
the submission deadlines for all structural measures with the 
submission deadline for the fourth calendar quarter of the chart-
abstracted measures. For FY 2013, hospitals will be required to submit 
the required registry participation information once annually for the 
structural measures via a Web-based collection tool between April 1, 
2012 and May 15, 2012 with respect to the time period of January 1, 
2011 through December 31, 2011. For FY 2014, hospitals will be required 
to submit the required registry participation information once annually 
for the structural measures via a Web-based collection tool will be 
between April 1, 2013 and May 15, 2013 with respect to the time period 
of January 1, 2012 through December 31, 2012.
i. Data Submission and Reporting Requirements for Healthcare-Associated 
Infection (HAI) Measures Reported via NHSN
    As discussed above, in the FY 2012 IPPS/LTCH PPS proposed rule we 
proposed to adopt 2 new HAI measures for the FY 2014 payment 
determination and 3 HAI measures for FY 2015 payment determination. For 
FY 2014, only the Catheter Associated Urinary Tract Infection will be 
adopted. For FY 2015, we are adopting all of the three HAI measures 
that we proposed: Healthcare Provider Influenza Vaccination, MRSA 
Bacterimia and C. Difficile. Below is the list of HAI measures we are 
finalizing for the FY 2014 and FY 2015 payment determinations:

------------------------------------------------------------------------
                                            FY 2014 and 2015 Payment
                                       determination: Adopted healthcare-
                Topic                    associated infection measures
                                                   (CDC/NHSN)
------------------------------------------------------------------------
                                        Surgical Site
                                        Infection.*
                                        Catheter Associated
                                        Urinary Tract Infection.**
                                        Clostridium
                                        Difficile.***
                                        Healthcare Provider
                                        Influenza Vaccination.***
                                        MRSA Bacteremia.***
------------------------------------------------------------------------
* Measures adopted for FY 2014 payment determination in the FY 2011 IPPS/
  LTCH PPS final rule.
** Measure adopted for FY 2014 payment determination in this final rule.
*** Measures adopted for FY 2015 payment determination in this final
  rule.

    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 259219 through 
25920), we proposed to update the current data submission and reporting 
requirements for these proposed measures. Specifically, we proposed to 
utilize the data submission and reporting standard procedures that have 
been set forth by CDC for NHSN participation in general and for 
submission of these measures to NHSN. We refer readers to the CDC's 
NHSN Web site (http://www.cdc.gov/nhsn) for detailed data submission 
and reporting procedures. We believe that these procedures are feasible 
because they are already widely used by over 4,000 hospitals reporting 
HAI data using the NHSN. Our proposal seeks to reduce hospital burden 
by aligning CMS data submission and reporting procedures with NHSN 
procedures currently used by hospitals, including hospitals complying 
with 28 State HAI reporting requirements. The existing data collection 
and submission timeframes for the HAI measures for the FY 2014 payment 
determination, which we proposed to use for the HAI measures we have 
proposed above, are shown below. Hospitals must submit their quarterly 
data to NHSN for Hospital IQR Program purposes on or around the dates 
shown in the table below (updates to this will be posted on the 
QualityNet Web site).

     Submission Timeframes for HAI Measures for the FY 2014 Payment
                              Determination
------------------------------------------------------------------------
                                                       Final submission
                                       CDC-NHSN          deadline for
                                    Collection and       hospital IQR
    CY 2012 Infection Events       quarterly report     program FY 2014
                                      generation            payment
                                       timeframe         determination
------------------------------------------------------------------------
Q1 (Jan-Mar 2012)...............  January 31st--      August 15, 2012.
                                   August 15th.
Q2 (Apr-Jun 2012)...............  April 30th--        November 15, 2012.
                                   November 15th.
Q3 (Jul-Sep 2012)...............  July 31st--Feb-     February 15, 2013.
                                   15th.
Q4 (Oct-Dec 2012)...............  October 31st--May   May 15, 2013.
                                   15th.
------------------------------------------------------------------------

[[Page 51645]]

    Hospitals would have until the Hospital IQR Program final 
submission deadline to submit their quarterly data to NHSN. After the 
final Hospital IQR Program submission deadline has occurred for each CY 
2012 quarter, CMS will obtain the hospital-specific calculations that 
have been generated by the NHSN for the Hospital IQR Program.
    We invited public comment on this proposal.
    Comment: A few commenters requested clarification of the data 
collection dates for the MRSA and C. Difficile SIR measures for FY 2015 
payment determination.
    Response: For the FY 2015 payment determination, data collection 
will begin with January 1, 2013 events.
    After consideration of the public comments we received, we will 
adopt the data submission and reporting standard procedures that have 
been set forth by CDC for NHSN participation in general and for 
submission of these measures to NHSN as listed above.
6. Chart Validation Requirements for Chart-Abstracted Measures
a. Changes to the Chart Validation Requirements and Methods for the FY 
2012 Payment Determination and Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25920 through 
25922), we proposed several changes to the chart validation 
requirements and methods we adopted in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50225 through 50229) for the FY 2012 payment determination 
and subsequent years. In previous years, charts were requested by the 
CMS CDAC contractor and hospitals were given 45 days from the date of 
the request to submit the requested records. If any record(s) were not 
received by the 45-day requirement, the CMS CDAC contractor assigned a 
``zero'' validation score to each measure in a missing record. We 
proposed to change the time period given to hospitals to submit medical 
records to the CDAC contractor to 30 calendar days, and we proposed to 
codify this proposal at 42 CFR 412.140(d)(1). This proposed change in 
submission timeframe will align the current process with the 
requirements in 42 CFR 476.78(b)(2), which currently allow only 30 days 
for chart submission in the context of reviews by QIOs. We proposed 
this deadline modification to reduce the time we need to complete 
validation, and provide hospitals with feedback on their abstraction 
accuracy. We believe that this linkage between Hospital IQR Program 
validation discharge quarters and the same fiscal year's Hospital VBP 
Program proposed performance period would improve the reliability and 
accuracy of the Hospital VBP Program's chart-abstracted measures. 
Hospitals that are subject to Hospital IQR payment reduction due to not 
passing our validation requirement would be excluded from receiving a 
Hospital VBP performance score and corresponding incentive payment 
under section 1886(o)(1)(C)(ii)(I) of the Act. Thus, CMS would ensure 
that the data submitted on chart-abstracted measures we adopt for the 
Hospital VBP Program is accurate by virtue of validating it under the 
validation procedures we have adopted for the Hospital IQR Program.
    Comment: A few commenters recommended that CMS consider options to 
receive electronic copies of records rather than paper records.
    Response: We appreciate the feedback and will consider the 
suggestion in developing future rulemaking to reduce the validation 
burden to hospitals using electronic health records. We recognize that 
many more hospitals will transition their recordkeeping to EHRs in the 
coming years, and we will strive to provide the public with accurate 
quality data while maintaining alignment with hospital recordkeeping 
practices.
    Comment: Most commenters supported the reduction in the time frame 
for hospitals to submit the requested records to the CDAC contractor 
from 45 calendar days to 30 calendar days if the reduction will improve 
the timeliness of feedback to the hospitals.
    Response: We appreciate the input and believe that the reduction 
will improve the timeliness of feedback to the hospitals.
    Comment: Some commenters oppose the reduction in the time frame as 
this decrease in the timeframe would negatively impact hospitals' 
capability to respond in a timely manner and could negatively affect 
hospitals' ability to perform quality checks.
    Response: We appreciate the comment, but believe that decreasing 
the time frame for chart submission will allow CMS to provide more 
timely feedback to hospitals on the validation results.
    Comment: One commenter believed that validating Hospital VBP data 
under the Hospital IQR Program data would efficiently use both CMS and 
hospital resources.
    Response: We appreciate the commenter's support for this proposal.
    After consideration of the public comments we received, we are 
adopting as final our proposal to change the time period given to 
hospitals to submit medical records to the CDAC contractor from 45 to 
30 calendar days, and are codifying this policy at 42 CFR 
412.140(d)(1).
b. Supplements to the Chart Validation Process for the FY 2014 Payment 
Determination and Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25920 through 
25922), we proposed to continue to use the supplements to the chart 
validation requirements and methods we adopted in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50227 through 50229) for FY 2014 payment 
determinations and future years with several proposed modifications.
    We proposed to add hospitals to our validation sample if they were 
open under their current CCNs in FY 2012 but not selected for 
validation in the three previous annual Hospital IQR Program validation 
samples. We proposed this addition to supplement our validation 
approach to ensure that all eligible Hospital IQR Program hospitals are 
selected for validation at least once every 4 years. We proposed this 
addition starting in FY 2015 because FY 2015 would be the fourth year 
that CMS would have used the random validation approach (which begins 
in FY 2012 as adopted in the FY 2011 IPPS/LTCH PPS final rule). We 
invited public comment on this proposal.
    Comment: One commenter disagreed with the policy we adopted in the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50229) to conduct random 
sampling of hospitals, and believes that CMS should utilize the charts 
provided to the QIOs to identify hospitals potentially submitting poor 
quality data.
    Response: Section 1886(b)(3)(B)(viii)(XI) of the Act states that 
``the Secretary shall establish a process to validate measures 
specified under this clause as appropriate. Such process shall include 
the auditing of a number of randomly selected hospitals sufficient to 
ensure validity of the reporting program under this clause as a whole 
and shall provide a hospital with an opportunity to appeal the 
validation of measures reported by such hospital.'' We believe that our 
FY 2012 Hospital IQR Program validation process meets the requirement 
regarding randomly selected hospitals in section 
1886(b)(3)(B)(viii)(XI) of the Act. While we appreciate the commenter's 
concern, we believe that by ensuring all hospitals are validated at 
least once every four years, we will ensure that hospitals with poor 
data are identified. In addition, we note that, under the policy that 
we adopted in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50227 through 
50229),

[[Page 51646]]

hospitals that fail validation for the FY 2012 payment determination 
and subsequent years will be selected for validation the following year 
to ensure deficiencies are corrected.
    Comment: Most commenters supported a requirement that eligible 
hospitals be selected at least once every four years for validation. 
Most commenters also stated that because CMS intends to use the results 
of Hospital IQR chart validation for the Hospital VBP Program, all 
eligible hospitals should be regularly included in the chart validation 
process.
    Response: We appreciate the commenters' support for this proposal 
to ensure that all hospitals are validated at least once every 4 years.
    After considering the public comments we received, we are adopting 
as final the proposal to supplement our validation approach to ensure 
that all eligible Hospital IQR Program hospitals are selected for 
validation at least once every 4 years.
    Starting with the FY 2012 payment determination and continuing in 
subsequent fiscal years, the chart validation process audits 800 
randomly selected hospitals for the discharge quarters. This sample 
size is sufficient to validate more than 22 percent of subsection (d) 
hospitals in an applicable fiscal year and ensure accuracy of the 
Hospital IQR Program quality data.
    For the FY 2014 payment determination, we proposed to validate 24 
chart-abstracted measures including 19 currently validated measures, 
and 5 proposed additional measures. The FY 2014 proposed validation 
reflects the 5 measures we proposed to add (2 EDT measures, Central 
Line Associated Blood Stream Infection, Global Influenza Immunization, 
and Global Pneumonia Immunization measures) and the 8 measures we 
proposed to retire (AMI-1, AMI-3, AMI-4, AMI-5, HF-4, PN-4, PN-5c, and 
SCIP Infection 6).
    Validation of the HCAHPS measure is conducted through our oversight 
activities. We provide oversight of all HCAHPS survey vendors and 
hospitals self-administering the survey in order to ensure that the 
data collection protocols are followed. We also provide oversight and 
validation through our review of Quality Assurance Plans, site visits, 
conference calls and detailed data analyses each quarter to ensure 
there are no anomalies found in the data. In particular, we use site 
visits to review all data collection activities, including data reviews 
to track a discharged patient from sampling to survey administration to 
data submission.
    We proposed, starting with FY 2014 payment determinations, a modest 
increase to the current Hospital IQR Program validation sample of SCIP, 
AMI, HF, and PN cases. Specifically, we proposed to add three charts 
per selected hospital per quarter to the validation sample. This 
additional quarterly sample would enable us to validate the CLABSI 
measure that we added to the Hospital IQR Program measure set beginning 
with the FY 2014 payment determination. CLABSI is a relatively rare 
event compared to SCIP, AMI, HF, and PN cases. In 2009, about 18,000 
CLABSIs occurred in ICU patients in the United States, and these 
infections were a major contributor to prolonged hospital stays and 
inpatient mortality. We proposed a process to validate the CLABSI 
measure that takes into account the relative infrequency of this event 
and the case-finding methodology for it, specifically the requirements 
for a positive blood culture result and the presence of a central 
venous catheter in the patient at the time of, or within 48 hours 
before, onset of the infection.
    We recognize that the current validation process and sample size 
for AMI, HF, PN, and SCIP measures is not likely to be sufficiently 
reliable to detect systematic underreporting of CLABSI. Unlike the 
current AMI, HF, PN, and SCIP chart-abstracted process of care 
measures, CLABSI is a rarely occurring infection among acute care 
inpatient discharges. We estimate that about 0.1 percent to 0.2 percent 
of all acute care inpatient patient discharges nationwide involve 
patients who are infected with a CLABSI. We believe that our current 
Hospital IQR Program AMI, HF, PN, and SCIP sample sizes and sample 
methods would not reliably validate CLABSI measure rates at the 
hospital level because of the relatively rare occurrence of these 
events. We also seek to target validation of the CLABSI measure to 
minimize hospital burden in complying with our sample size proposals, 
for which hospitals must find, photocopy, and return requested medical 
records to CMS. If CMS did not utilize this targeted validation 
approach for the CLABSI measure, hospitals would have to submit 200 to 
300 additional randomly selected cases in order to effectively validate 
this measure, given its rare occurrence. We believe that our proposed 
CLABSI validation process addresses these limitations through the use 
of a targeted incremental validation sample comprised of three charts 
of possible CLABSI events, and will reliably validate the Hospital IQR 
Program CLABSI measure while not overly burdening hospitals with 
medical record requests.
    Specifically, we proposed to identify sampled hospitals' three 
quarterly potential CLABSI charts using a two-step selection process 
that would target intensive care unit patients with bloodstream 
infection (positive blood culture results) and a Central Venous 
Catheter (CVC) provided by sampled hospitals to CMS. In the first step 
of this process, a CMS contractor would require the 800 randomly 
sampled hospitals to provide a quarterly list of all blood cultures 
positive for infection status taken from intensive care units 
conducting CLABSI surveillance during the discharge quarter. We are 
aware that this list will include both reported CLABSI events and many 
non-CLABSI events, including patients with and without CVCs. In 
clinical terms, our intent in reviewing these positive blood culture 
lists is to identify the information needed to determine whether the 
blood culture isolate is a likely pathogen found at least once, or a 
common skin commensal (CSC) found in two or more positive blood 
cultures drawn on separate occasions. CSC's are microorganisms that are 
commonly found on the skin and often indicate contamination of the 
blood culture media rather than infection by the microorganism when it 
is identified in a single blood culture test. Two sets of blood 
cultures are needed to differentiate true infection from contamination. 
The list of CSCs is comprised of the following organisms: diphtheroids 
(Corynebacterium spp.); Bacillus spp. (not B. anthracis); 
Priopionibacterium spp.; coagulase negative staphylococci including S. 
epidermidis; viridans group streptococci; Aerococcus spp.; and 
Micrococcus spp. This list of CSCs is also found at the NHSN Web site, 
http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf. We would 
also require hospitals to self-identify intensive care unit patients 
with a CVC that are on this blood culture list. Using all of this 
information, we would be able to identify intensive care unit patients 
with a bloodstream infection and with a CVC (that is, candidate CLABSI 
events) for subsequent sampling.
    In the second step of this process, we would randomly sample these 
candidate CLABSI events (ICU patients with a CVC and where a pathogen 
was recovered at least once or the same CSC was cultured from 2 or more 
blood cultures drawn on separate occasions). Specifically, the CMS CDAC 
would require hospitals to submit up to 3 medical records each quarter 
meeting these criteria, randomly selected by

[[Page 51647]]

CMS from among eligible charts. This number of medical records is 
sufficient to detect unreported CLABSI events based on our sample size 
analysis and experience from State health department validation 
efforts. This proposed process utilizes the validation experience from 
at least ten current State health department validation initiatives. In 
addition, we proposed to randomly validate CLABSI data by abstracting 
all necessary quality data from the 12 quarterly medical records in our 
AMI, HF, PN, and SCIP targets already collected for Hospital IQR 
Program validation as well as the 3 additional records we later propose 
to collect for ED throughput/Immunization. Our intent in validating all 
currently requested quarterly medical records for CLABSI is to assess 
reliability of CLABSI measure rates from a random sample of patients 
independent from the proposed 3 record sample selected using blood 
culture lists and CVC presence to target underreporting of CLABSI 
events to the CDC's NHSN. In our proposed 12 record random sample of 
CLABSI events, we will not use blood culture list and CVC presence in 
our sampling, since this sample is already drawn from the AMI, HF, PN, 
and SCIP hospital reported data reported to CMS. By combining a random 
and targeted sampling approach using two independent sources to 
validate CLABSI data, we believe that we are adequately assessing the 
accuracy and reliability of the CLABSI measure in accordance with 
section 1886(b)(3)(B)(viii)(XI) of the Act.
    We proposed to determine the CLABSI validation score using a 
process that begins with the CMS contractor validation coordinator 
comparing the CDAC's CLABSI infection status to the hospital's event 
data reported to NHSN for the applicable quarter. For each medical 
record reviewed, a hospital would receive a match only if the CMS 
contractor validation coordinator determines equivalency between the 
CMS contractor's determination of infection status and the infection 
status reported to NHSN. For example, if one of the CMS-requested 
validation medical records revealed CLABSI and the event was not 
reported to the NHSN, then the hospital would receive a zero score for 
the CLABSI measure for that validated record. If the CMS contractor 
discovered that a second record in the CMS validation sample indicated 
no CLABSI event, but a CLABSI was reported to the NHSN for the record, 
the hospital would also receive a zero score for the CLABSI measure for 
that validation record. Thus, hospitals would only receive a 100 
percent CLABSI validation score for individual records if their CMS 
validation records' CLABSI status was consistent with the information 
reported, or not reported, to NHSN. In the above example, if the CMS 
quarterly validation process identified that 13 out of 15 total sampled 
records accurately reported the presence of a CLABSI or did not report 
a CLABSI where none was present, then the hospital's CLABSI validation 
score would be 13/15, or about 87 percent.
    Comment: One commenter suggested that the CLABSI chart validation 
process, which uses CDC criteria for identification of CLABSI events, 
requires experienced interpretation and is more subjective than current 
validation measure criteria. The commenter believed that CMS should 
validate mismatches using a Certified Infection Control Practitioner. 
The commenter recommended excluding the validation results for CLABSI 
from the overall score for the initial year of validation and allowing 
hospitals to appeal CLABSI mismatches regardless of the overall score 
in order to educate hospitals on CLABSI mismatches.
    Response: We appreciate the comment, and plan to provide 
educational feedback on all validated CLABSI cases on match status and 
abstracted reasons for CLABSI event status to hospitals. Based on the 
relatively rare nature of CLABSI events, we anticipate a relatively 
high match rate among hospitals surpassing the current 75 percent 
passing threshold. Based on this information, we believe that the 
proposed approach to validate CLABSI data is the least burdensome and 
most statistically sound approach. We also believe that providing 
hospitals with the opportunity to appeal validated cases that do not 
affect the overall score would delay completion of the entire appeals 
process.
    Comment: Some commenters did not support what they believed to be a 
manual and time consuming record identification process and expressed 
concerned that CMS has not identified exactly what data elements should 
be on the quarterly list of blood cultures positive for infection or 
what format would be used for submitting the list to CMS.
    Response: We appreciate the input and are aware of the additional 
time required by this process. We included this burden in our Paperwork 
Reduction Act burden request for public review and OMB consideration. 
However, we believe the need to ensure that information reported to the 
public is accurate and validated outweighs the additional burden. We 
will provide additional information regarding the exact data elements 
and format for submission of the quarterly list of blood cultures 
positive for infection in future communications.
    Comment: One commenter expressed concern that the proposed CLABSI 
validation sample of three charts is not a sufficient sample.
    Response: We appreciate the commenter's concern about the sample 
size for validation. However, the number of charts to be validated for 
CLABSI is actually 18 charts, not 3 charts. As stated above, in 
addition to validating the 3 CLABSI charts submitted by hospitals as 
part of the targeted CLABSI sample, we will also validate CLABSI data 
elements on the other 15 quarterly charts that are submitted for the 
AMI, HF, PN, SCIP and ED throughput/Immunization measures. Our intent 
in including three additional quarterly charts in the CLABSI validation 
sample is to target CLABSI events unreported to NHSN by using blood 
culture lists and ICU status to increase targeting efficiency. In 
addition, we weighed the burden to hospitals, the reliability of 
hospital validation results in the sample size, and the program costs 
of validation expenses when proposing the sample size. We believe these 
considerations support our proposal to use a three-chart validation 
sample for CLABSI.
    Comment: One commenter expressed concern that the process of 
requiring hospitals to submit two additional lists and three charts has 
the potential to introduce new errors into the system and additional 
penalties for hospitals. The commenter recommended that the proposal be 
piloted and the burden assessed.
    Response: We appreciate the input and are aware of the additional 
time required by this process. However, we believe that this process 
will allow us to validate the CLABSI measure in the most efficient way 
possible. Although a pilot was not conducted, we collaborated with CDC 
and used the experience of State hospital health departments in 
validating CLABSI information in formulating this proposal.
    Comment: One commenter was concerned that CMS has not estimated the 
burden of work required for 800 hospitals to provide a quarterly list 
of blood cultures positive for infection status taken from ICUs 
conducting CLABSI surveillance during the discharge quarter. The 
commenter believed that additional consideration should be given to the 
time burdens on hospitals should they have to note on this list which 
samples came from

[[Page 51648]]

patients with CVCs in the ICUs under surveillance. The commenter 
believed that the practice of looking for unreported CLABSI cases among 
charts sent for AMI, HF, PN and SCIP measures may not be fruitful 
because only a small proportion of these patients will be in the ICU 
with CVCs. The commenter also questioned whether the proposed scoring 
model has been tested, if there has been any direct pilot experience 
with matching this data against NHSN data, and if there are reasons why 
cases omitted from NHSN would show up on the ICU blood culture list (or 
vice versa).
    Response: We appreciate the input and are aware of the additional 
time required by this process. We included this burden in our Paperwork 
Reduction Act burden request for public review and OMB consideration. 
However, we believe the need to ensure that information reported to the 
public is accurate and validated outweighs the additional burden. 
Although a pilot was not conducted, we collaborated with CDC and used 
the experience of State hospital health departments in validating 
CLABSI information in formulating this proposal. We believe that this 
process is less burdensome to hospitals than other options considered, 
including CMS onsite chart review and larger samples. We recognize that 
only a small proportion of cases for AMI, HF, PN, and SCIP patients 
will be in the ICU, however, we believe that validating the existence 
or absence of CLABSI and the associated match in NHSN for those limited 
cases will result in an appropriately validated quality measure.
    Comment: Several commenters urged CMS to evaluate whether or not 
the list can be procured from information that is stored in the NHSN.
    Response: The intent of the supplemental CLABSI sample of three 
quarterly charts is to target CLABSI events unreported to NHSN by using 
blood culture lists and ICU status to increase targeting efficiency. We 
believe that using reported NHSN events as the sole validation sample 
list would ignore the possibility of unreported CLABSI events. We 
intend to continue our collaboration with CDC in the future to assess 
and improve our validation process.
    After consideration of the public comments we received, we are 
adopting as final the proposal to identify sampled hospitals' three 
quarterly potential CLABSI charts using the two-step selection process 
outlined above as well as abstracting all necessary quality data from 
the 15 quarterly medical records in our AMI, HF, PN, SCIP and ED 
Throughput/Immunization charts already collected for Hospital IQR 
Program validation.
    Starting with the FY 2014 payment determination, we also proposed 
to add a sixth quarterly sample, which would enable us to validate the 
EDT measures and the Immunization for Influenza and Immunization for 
Pneumonia global measures that we added to the Hospital IQR Program 
measure set. We proposed to modify the current process (75 FR 50225-75 
FR 50229) for these measures in two ways. First, we proposed to select 
3 additional records each quarter from the records submitted by the 800 
annually sampled hospitals. These records would only include principal 
diagnoses and surgical procedures not already included in the AMI, HF, 
PN, and SCIP populations eligible for validation sampling in these four 
topic areas. Second, we would abstract EDT and the Immunization for 
Influenza and Immunization for Pneumonia global measure data from the 
15 quarterly AMI, HF, PN, SCIP and CLABSI records already submitted by 
hospitals for Hospital IQR Program validation. We would validate 18 
records per quarter for these measures. With the addition of this 
sample of three records, we would ensure that all hospitals that 
reported chart-abstracted Hospital IQR data in all principal procedure 
and diagnosis codes would be eligible for sample selection for these 
global measures, thus, starting in FY 2014, we would be validating a 
total of 18 records per quarter per validated hospital in 6 strata (1) 
SCIP, (2) AMI, (3) HF, (4) PN, (5) CLABSI, and (6) EDT/immunization 
measures.
    Comment: Several commenters supported the increased number of 
charts for validation in the Hospital IQR Program and believe the 
additional charts will enhance the validation process.
    Response: We appreciate the commenters' support for this proposal.
    After consideration of the public comments we received, starting 
with FY 2014, we are adding a sixth quarterly sample to validate the 
EDT measures and the Immunization for Influenza and Immunization for 
Pneumonia global measures and to modify the current process as 
described above.
7. QIO Regulation Changes for Provider Medical Record Deadlines 
Possibly Including Serious Reportable Events
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25922 through 
25923), we proposed changes to the QIO regulation text to require 
submission of medical records within 21 days of serious reportable 
events. Our State QIOs use information collected under the provision we 
proposed to change, 42 CFR 476.78, to educate hospitals on medical 
record abstraction accuracy, and to identify potential opportunities 
for quality improvement through medical record review. It is our goal 
to improve QIO work, such as quality improvement assistance, 
beneficiary (or beneficiary representative) requested QIO quality of 
care reviews, and QIO medical necessity reviews to achieve the 
following three aims: (1) Improve individual care; (2) improve health 
for populations; and (3) lower cost through improvement. QIOs serve a 
critical role in advancing these three aims through their work with 
Medicare providers and beneficiaries to advance quality care and 
health.
    To assist us in achieving these aims, we proposed changes to 42 CFR 
476.78(b), along with minor editorial revisions. Specifically, we 
proposed to add a new Sec.  476.78(b)(2)(ii) that would require the 
submission of medical information within 21 days in those situations in 
which a ``serious reportable event'' or other circumstance has been 
identified during the course of a QIO review. For purposes of this 
subsection, we proposed to define the term ``serious reportable event'' 
to be consistent with the NQF's definition of a serious reportable 
event in its report ``Serious Reportable Events in Healthcare 2006 
Update.'' These events include the following:
Surgical Events
     Surgery performed on the wrong body part.
     Surgery performed on the wrong patient.
     Wrong surgical procedure performed on a patient.
     Unintended retention of a foreign object in a patient 
after surgery or other procedure.
     Intraoperative or immediately postoperative death in an 
ASA Class I patient.
Product or Device Events
     Patient death or serious disability associated with the 
use of contaminated drugs, devices or biologics provided by the 
healthcare facility.
     Patient death or serious disability associated with the 
use or function of a device in patient care in which the device is used 
or functions other than as intended.
     Patient death or serious disability associated with 
intravascular air embolism that occurs while being cared for in a 
healthcare facility.
Patient Protection Events
     Infant discharged to the wrong person.

[[Page 51649]]

     Patient death or serious disability associated with 
patient leaving the facility without permission.
     Patient suicide, or attempted suicide, resulting in 
serious disability while being cared for in a healthcare facility.
Care Management Events
     Patient death or serious disability associated with a 
medication error (for example, errors involving the wrong drug, wrong 
dose, wrong patient, wrong time, wrong rate, wrong preparation or wrong 
route of administration).
     Patient death or serious disability associated with a 
hemolytic reaction (abnormal breakdown of red blood cells) due to the 
administration of ABO/HLA--incompatible blood or blood products.
     Maternal death or serious disability associated with labor 
or delivery in a low-risk pregnancy while being cared for in a 
healthcare facility.
     Patient death or serious disability associated with 
hypoglycemia, the onset of which occurs while the patient is being 
cared for in a healthcare facility.
     Death or serious disability associated with failure to 
identify and treat hyperbilirubinemia (condition where there is a high 
amount of bilirubin in the blood) in newborns.
     Stage 3 or 4 pressure ulcers acquired after admission to a 
healthcare facility.
     Patient death or serious disability due to spinal 
manipulative therapy.
     Artificial insemination with the wrong donor sperm or 
wrong egg.
Environmental Events
     Patient death or serious disability associated with an 
electric shock while being cared for in a healthcare facility.
     Any incident in which a line designated for oxygen or 
other gas to be delivered to a patient contains the wrong gas or is 
contaminated by toxic substances.
     Patient death or serious disability associated with a burn 
incurred from any source while being cared for in a healthcare 
facility.
     Patient death or serious disability associated with a fall 
while being cared for in a healthcare facility.
     Patient death or serious disability associated with the 
use of restraints or bedrails while being cared for in a healthcare 
facility.
Criminal Events
     Any instance of care ordered by or provided by someone 
impersonating a physician, nurse, pharmacist, or other licensed 
healthcare provider.
     Abduction of a patient of any age.
     Sexual assault on a patient within or on the grounds of a 
healthcare facility.
     Death or significant injury of a patient or staff member 
resulting from a physical assault (that is, battery) that occurs within 
or on the grounds of a healthcare facility.
    This proposed 21 day medical record deadline would be used when, 
for example, in the QIO's judgment, delays in receiving medical 
information could negatively undermine its efforts to evaluate the 
quality of care provided or the facility's adherence to payment 
policies. It also would enable QIOs to better utilize, and respond to, 
information about adverse events gained from the quality reporting 
program, in a timely fashion so that QIOs can have an improved and more 
immediate impact on the quality of health care.
    We also proposed a technical correction to 42 CFR 476.78(a) to 
correct a cross-reference.
    We invited public comment on our proposal to improve patient care 
through QIO access to more rapid provider information about ``serious 
reportable events'' and our proposed technical correction to 42 CFR 
476.78(a).
    Comment: One commenter supported the regulation changes to require 
submission of medical information within 21 days of serious reportable 
events and wanted the investigation of these most serious and NQF-
defined events to quickly evaluate the quality of care, to have a more 
immediate impact, and to prevent other such terrible events from 
occurring in a facility again.
    Response: We agree with the commenter and appreciate the support 
for this proposal.
    Comment: One commenter expressed concern that asking hospitals to 
report serious reportable events to both Patient Safety Organizations 
and to QIOs would create a duplication and undue burden on hospitals.
    Response: We appreciate the commenter's concern but wish to clarify 
that this proposal does not change any existing requirements for 
reporting serious reportable events. This proposal would simply reduce 
the current submission requirement from 30 days to 21 days.
    Comment: One commenter asked that CMS clarify the term ``medical 
information.'' The commenter asked whether this term refers to the 
complete medical record or to portions of the medical record. The 
commenter also asked what CMS requires if the medical record is not yet 
complete.
    Response: We thank the commenter for these questions and refer the 
commenter to 42 CFR 476.78(b) and 42 CFR 482.24. Hospitals, under these 
regulations in our conditions of participation, are required to provide 
patient care data and other pertinent information to the QIO at the 
time the QIO is collecting review information that is required for the 
QIO to make its determinations. This information includes, but is not 
limited to, the medical record.
    After consideration of the public comments we received, we are 
adopting the requirement that hospitals submit medical information 
within 21 days in those situations in which a ``serious reportable 
event'' or other circumstance has been identified during the course of 
a QIO review. We also are finalizing our proposed technical correction 
to 42 CFR 476.78(a) to correct a cross-reference.
8. Data Accuracy and Completeness Acknowledgement Requirements for the 
FY 2012 Payment Determination and Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25923), we 
proposed to require hospitals to continue to electronically acknowledge 
their data accuracy and completeness once annually. However, we 
proposed to change the submission deadline to be used for the FY 2013 
Hospital IQR Program payment determination and subsequent years.\35\ 
This proposal will allow us to align the submission deadline with the 
final quarter of the chart-abstracted measures. Hospitals will continue 
to submit the required electronic acknowledgment that the data provided 
to meet the FY 2013 Hospital IQR Program data submission requirements 
is accurate and complete to the best of the hospital's knowledge at the 
time of data submission.\36\ We proposed to make the submission 
deadline for the Data Accuracy and Completeness Acknowledgement May 15, 
2012 with respect to the time period of January 1, 2011 through 
December 31, 2011. We invited public comment on this proposal.
---------------------------------------------------------------------------

    \35\ In a correction notice published at (76 FR 34633), we 
corrected an erroneous reference in the proposed rule to the fiscal 
year for which it proposed to change the submission deadline for the 
Data Accuracy and Completeness Acknowledgement. The reference to 
this period in this sentence was changed from FY 2012 to FY 2013.
    \36\ In a correction notice published at (76 FR 34633), we 
corrected an erroneous reference in the proposed rule to the fiscal 
year for which it proposed to change the submission deadline for the 
Data Accuracy and Completeness Acknowledgement. The reference to 
this period in this sentence was changed from FY 2012 to FY 2013.
---------------------------------------------------------------------------

    Comment: A few commenters supported the alignment of the Data

[[Page 51650]]

Accuracy and Completeness Acknowledgement with the data submission 
deadline for the fourth quarter of the chart-abstracted measures.
    Response: We appreciate the commenters' support on this proposal.
    After consideration of the public comments we received, we are 
adopting the submission deadline for the Data Accuracy and Completeness 
Acknowledgement of May 15, 2012 with respect to the time period of 
January 1, 2011 through December 31, 2011.
9. Public Display Requirements for the FY 2014 Payment Determination 
and Subsequent Years
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25923), we 
proposed to continue, for the FY 2014 payment determination and 
subsequent years, the approach we adopted in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50230) for public display requirements for the FY 
2012 payment determination and subsequent years.
    The Hospital IQR Program quality measures are typically reported on 
the Hospital Compare Web site http://www.hospitalcompare.hhs.gov, but 
on occasion are reported on other CMS Web sites. We require that 
hospitals sign a Notice of Participation form when they first register 
to participate in the Hospital IQR Program. Once a hospital has 
submitted a form, the hospital is considered to be an active Hospital 
IQR Program participant until such time as the hospital submits a 
withdrawal form to CMS (72 FR 47360). Hospitals signing this form agree 
that they will allow us to publicly report the quality measures 
included in the Hospital IQR Program.
    We will continue to display quality information for public viewing 
as required by section 1886(b)(3)(B)(viii)(VII) of the Act. Before we 
display this information, hospitals will be permitted to review their 
information as recorded in the QIO Clinical Warehouse.
    We invited public comment on this proposal.
    We did not receive any comments related to this proposal and are, 
therefore, finalizing it.
10. Reconsideration and Appeal Procedures for the FY 2012 Payment 
Determination
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25923 through 
25925), we proposed to continue, for the FY 2012 payment determination 
and subsequent years, the general approach we adopted in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50230) for reconsideration and appeal 
procedures for the FY 2011 payment determination. We also proposed to 
codify the requirements under this process at 42 CFR 412.140(e). We 
discuss each of the regulatory provisions that we proposed, as well as 
specific changes, below.
    We proposed that the general deadline for submitting a request for 
reconsideration in connection with the FY 2012 payment determination 
will be 30 days from the date of receipt of the payment determination 
notification. Historically, most reconsideration requests are based on 
the failure to meet established data submission deadlines. While we 
want to ensure that hospitals have an opportunity to request 
reconsiderations when warranted, we also need to balance this goal with 
our need to complete the reconsideration process in a timely manner and 
with the hospitals' desire to obtain final decisions on their requests 
in a timely manner. Therefore, we proposed to reduce the 
reconsideration and appeal period from a deadline of November 1st 2012 
to 30 days after hospital receipt of the payment determination 
notification. Notifications will be sent via a trackable mail option 
such as certified U.S. mail or registered mail. We include this change 
in the proposed Sec.  412.140(e)(1).
    As discussed more fully below, we proposed that all hospitals 
submit a request for reconsideration and receive a decision on that 
request before they can file an appeal with the Provider Reimbursement 
Review Board (PRRB). For the FY 2012 payment determination, we proposed 
to continue utilizing many of the same procedures that we used for the 
FY 2011 requests for reconsideration. However, we clarified that a 
hospital must submit all documentation and evidence that supports its 
request for reconsideration at the time that it submits its request. 
This includes copies of any communications, such as e-mails that the 
hospital believes demonstrate its compliance with the program 
requirements, as well as all paper medical records that support the 
hospital's rationale for seeking reconsideration. The information that 
must be included when a hospital submits a reconsideration request has 
been listed in proposed Sec.  412.140(e)(2). Under these proposed 
procedures, the hospital must:

--Submit to CMS, via QualityNet, a Reconsideration Request form 
(available on the QualityNet Web site) containing the following 
information:
--Hospital CMS Certification number (CCN).
--Hospital Name.
--CMS-identified reason for failure (as provided in the CMS 
notification of failure letter to the hospital).
--Hospital basis for requesting reconsideration. This must identify the 
hospital's specific reason(s) for believing it met the Hospital IQR 
Program requirements and should receive the full update to the 
standardized amount.
--CEO contact information, including name, e-mail address, telephone 
number, and mailing address (must include the physical address, not 
just the post office box). We note that to the extent a hospital can 
submit a request for reconsideration on-line, the burden on our staff 
would be reduced and, as a result, we can more quickly review the 
request.
--QualityNet System Administrator contact information, including name, 
e-mail address, telephone number, and mailing address (must include the 
physical address, not just the post office box).
--Paper medical record requirement for reconsideration requests 
involving validation. We proposed that if a hospital asks us to 
reconsider an adverse Hospital IQR Program payment decision made 
because the hospital failed the validation requirement, the hospital 
must submit paper copies of all the medical records that it submitted 
to the CDAC contractor each quarter for purposes of the validation. 
Hospitals must submit this documentation to a CMS contractor. The 
contractor will be a QIO support contractor, which has authority to 
review patient level information under 42 CFR Part 480. We proposed to 
post the address where hospitals can ship the paper charts on the 
QualityNet Web site after we issue the FY 2012 IPPS/LTCH PPS final 
rule.

    Hospitals submitting a Hospital IQR Program validation 
reconsideration request will have all data elements to be reconsidered 
reviewed by CMS, and not their State QIO. (The State QIO is available 
to conduct a quarterly validation appeal if requested to do so by a 
hospital.)
    Hospitals must provide a written justification for each appealed 
data element classified during the validation process as a mismatch. We 
will review the data elements that were labeled as mismatched, as well 
as the written justifications provided by the hospitals, and make a 
decision on the reconsideration request.
    As we mentioned above, a hospital that submits a reconsideration 
request to CMS must receive a decision on that request prior to 
submitting a PRRB appeal. We believe that the reconsideration process 
is less costly for

[[Page 51651]]

both CMS and hospitals, and that it decreases the number of PRRB 
appeals by resolving issues earlier in the reconsideration and appeals 
process. We proposed language at Sec.  412.140(e)(3) stating that a 
hospital that receives an adverse decision on its reconsideration 
request may appeal that decision to the PRRB.
    Following receipt of a request for reconsideration, we will--
     Provide an e-mail acknowledgement, using the contact 
information provided in the reconsideration request, to the CEO and the 
QualityNet Administrator that the request has been received.
     Provide written notification to the hospital CEO, using 
the contact information provided in the reconsideration request, 
regarding our decision. We expect the process to take approximately 90 
days from the receipt of the reconsideration request.
    We proposed to continue for the FY 2012 Hospital IQR Program 
reconsideration and future years the scope of review when a hospital 
requests reconsideration because it failed our validation requirements, 
which we adopted in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 
43892). The scope of this review will be as follows:
    1. Hospital requests reconsideration for CDAC contractor-abstracted 
data elements classified as mismatches affecting validation scores. 
Hospitals must timely submit a copy of the entire requested medical 
record to the CDAC contractor during the quarterly validation process 
for the requested case to be eligible to be reconsidered on the basis 
of mismatched data elements. Only hospitals that fail to meet the 
passing threshold for the quarterly validation would receive an 
opportunity to appeal the validation results to their State QIO.
    2. Hospital requests reconsideration for medical record copies 
submitted during the quarterly validation process and classified as 
invalid record selections. Invalid record selections are defined as 
medical records submitted by hospitals during the quarterly validation 
process that do not match the patient's episode of care information as 
determined by the CDAC contractor (in other words, the contractor 
determines that the hospital returned a medical record that is 
different from that which was requested). If the CDAC contractor 
determines that the hospital has submitted an invalid record selection 
case, it awards a zero validation score for the case because the 
hospital did not submit the entire copy of the medical record for that 
requested case. During the reconsideration process, our review of 
invalid record selections will initially be limited to determining 
whether the record submitted to the CDAC contractor was actually an 
entire copy of the requested medical record. If we determine during 
reconsideration that the hospital did submit the entire copy of the 
requested medical record, then we would abstract data elements from the 
medical record submitted by the hospital.
    3. Hospital requests reconsideration for medical records not 
submitted to the CDAC contractor within the proposed 30 calendar day 
deadline. Our review will initially be limited to determining whether 
the CDAC contractor received the requested record within the proposed 
30 calendar days, and whether the hospital received the initial medical 
record request. If we determine during reconsideration that the CDAC 
contractor did receive a paper copy of the requested medical record 
within the proposed 30 calendar days, then we would abstract data 
elements from the medical record submitted by the hospital. If we 
determine that the hospital received a request for medical records and 
did not submit the requested records within the proposed 30 day period, 
CMS will not accept these records as part of the reconsideration. CMS 
will not abstract data from charts not received timely by the CMS 
contractor. Please note that this proposed language is also designed to 
address those instances where the hospital's request is based on 
``invalid record selections,'' which we have defined as medical records 
submitted during the quarterly validation process that do not match the 
patient's episode of care information as determined by the CMS 
contractor as described above in situation 2, above ``Hospital requests 
reconsideration for medical record copies submitted during the 
quarterly validation process and classified as invalid record 
selections.''
    In sum, we proposed to continue to initially limit the scope of our 
reconsideration reviews involving validation to information already 
submitted by the hospital during the quarterly validation process, and 
we will not abstract medical records that were not submitted to the CMS 
contractor during the quarterly validation process. We would expand the 
scope of our review only if we find during the initial review that the 
hospital correctly and timely submitted the requested medical records. 
In that case, we would abstract data elements from the medical record 
submitted by the hospital as part of our review of its reconsideration 
request.
    If a hospital is dissatisfied with the result of a Hospital IQR 
Program reconsideration decision, the hospital may file an appeal under 
42 CFR Part 405, Subpart R (a PRRB appeal). We invited public comment 
on the extent to which these proposed procedures will be less costly 
for hospitals, and whether they will lead to fewer PRRB appeals.
    Comment: Several commenters supported CMS' proposal to reduce the 
timeframe for appeals from November 1st to 30 days from the date of 
receipt of the payment determination notification because it would 
shorten the reconsideration and appeals process, thereby allowing 
hospitals who successfully appeal CMS' decision to receive their full 
annual payment update in a more expedited manner.
    Response: We agree and appreciate the commenters support for this 
proposal.
    Comment: One commenter opposed the proposal to shorten the 
timeframe and argued that because many hospitals may decide to retain 
an attorney for a reconsideration request, and because of the time it 
takes to coordinate an appeal with an attorney, the deadline should 
remain at November 1 annually.
    Response: We appreciate the commenter's input regarding the time 
necessary to coordinate a reconsideration request. However, we believe 
that hospitals will have adequate time to evaluate whether to request 
reconsideration under this proposal and that the benefits of a faster 
reconsideration process outweigh any potential inconvenience to 
hospitals.
    In summary, we thank the commenters for their input. We believe our 
reconsideration process, including the proposed shorter timeframe for 
requesting reconsideration, is minimally burdensome. The form for 
reconsiderations and a detailed description of the reconsideration 
process are available at http://qualitynet.org >Hospitals-Inpatient> 
APU Reconsideration.
    After consideration of the public comments we received, we are 
finalizing the reconsideration process we proposed, including the 
proposal that the general deadline for submitting a request for 
reconsideration in connection with the FY 2012 payment determination 
will be 30 days from the date of receipt of the payment determination 
notification.
11. Hospital IQR Program Disaster Waivers
    In our experience, there have been times when hospitals have been 
unable to submit required quality data due to extraordinary 
circumstances that are not

[[Page 51652]]

within their control. It is our goal to not penalize hospitals for such 
circumstances or unduly increase their burden during these times. 
Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25925) we 
proposed to continue, for the FY 2014 and subsequent years payment 
determinations, the process we adopted in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50225), for hospitals to request and for CMS to grant 
waivers with respect to the reporting of required quality data when 
there are extraordinary circumstances beyond the control of the 
hospital. Under the process, in the event of extraordinary 
circumstances, such as a natural disaster, not within the control of 
the hospital, for the hospital to receive consideration for an 
extension or waiver of the requirement to submit quality data for one 
or more quarters, a hospital would submit to CMS a request form that 
would be made available on the QualityNet Web site. The following 
information should be noted on the form:
     Hospital CCN;
     Hospital Name;
     CEO and any other designated personnel contact 
information, including name, e-mail address, telephone number, and 
mailing address (must include a physical address, a post office box 
address is not acceptable);
     Hospital's reason for requesting an extension or waiver;
     Evidence of the impact of the extraordinary circumstances, 
including but not limited to photographs, newspaper and other media 
articles; and
     A date when the hospital will again be able to submit 
Hospital IQR Program data, and a justification for the proposed date.
    The request form must be signed by the hospital's CEO. We proposed 
that a request form must be submitted within 30, rather than 45, days 
of the date that the extraordinary circumstance occurred. The QIO in 
the hospital's State will forward the request form to CMS. Following 
receipt of the request form, CMS will: (1) Provide a written 
acknowledgement using the contact information provided in the request, 
to the CEO and any additional designated hospital personnel, notifying 
them that the hospital's request has been received; and (2) provide a 
formal response to the CEO and any additional designated hospital 
personnel using the contact information provided in the request 
notifying them of our decision.
    This proposal does not preclude CMS from granting waivers or 
extensions to hospitals that have not requested them when we determine 
that an extraordinary circumstance, such as an act of nature (for 
example, hurricane), affects an entire region or locale. If CMS makes 
the determination to grant a waiver or extension to hospitals in a 
region or locale, CMS proposes to communicate this decision through 
routine communication channels to hospitals, vendors and QIOs, 
including but not limited to issuing memos, e-mails and notices on the 
QualityNet Web site. We proposed to include an overview of this process 
in proposed 42 CFR 412.140(c)(2). We invited public comment on this 
proposal.
    Comment: One commenter expressed concern with the proposed 
reduction in the timeframe for submission noting that during truly 
devastating events, it may take more than 30 days for complete 
restoration of electronic communication that CMS depends upon to post 
forms, post notices, and issue e-mails. The commenter recommended that 
the waiver process not only be permitted electronically, but also 
through use of U.S. Postal Service where electronic communications have 
not been established.
    Response: We appreciate the commenter's input and recognize that 
during truly devastating events complete restoration of electronic 
communication could take more than 30 days. However, the form can be 
completed and submitted using the U.S. Postal Service, fax or 
electronic submission. In addition, a hospital can request the 
assistance of their State QIO to complete and submit the form. We also 
note that we may grant an extension or waiver, to hospitals that have 
not requested them, of one or more submission deadlines in 
extraordinary circumstances that affect an entire region or locale.
    Comment: Many commenters stated they had no objections to reducing 
the timeframe for waiver submissions.
    Response: We appreciate the commenters' support for the proposal.
    After consideration of the public comments we received, we are 
adopting as final the process that requires that a request form must be 
submitted within 30, rather than 45, days of the date that the 
extraordinary circumstance occurred.
12. Electronic Health Records (EHRs)
a. Background
    Starting with the FY 2006 IPPS final rule, we have encouraged 
hospitals to take steps toward the adoption of EHRs (also referred to 
in previous rulemaking documents as electronic medical records) that 
will allow for reporting of clinical quality data from the EHRs 
directly to a CMS data repository (70 FR 47420 through 47421). We 
sought to prepare for future EHR submission of quality measures by 
sponsoring the creation of electronic specifications for quality 
measures under consideration for the Hospital IQR Program.
b. HITECH Act EHR Provisions
    The HITECH Act (Title IV of Division B of the ARRA, together with 
Title XIII of Division A of the ARRA) authorizes payment incentives 
under Medicare for the adoption and use of certified EHR technology 
beginning in FY 2011. Hospitals are eligible for these payment 
incentives if they meet requirements for meaningful use of certified 
EHR technology, which include reporting on quality measures using 
certified EHR technology. With respect to the selection of quality 
measures for this purpose, under section 1886(n)(3)(A)(iii) of the Act, 
as added by section 4102 of the HITECH Act, the Secretary shall select 
measures, including clinical quality measures, that hospitals must 
provide to CMS in order to be eligible for the EHR incentive payments. 
With respect to the clinical quality measures, section 1886(n)(3)(B)(i) 
of the Act requires the Secretary to give preference to those clinical 
quality measures that have been selected for the Hospital IQR Program 
under section 1886(b)(3)(B)(viii) of the Act or that have been endorsed 
by the entity with a contract with the Secretary under section 1890(a) 
of the Act. All measures must be proposed for public comment prior to 
their selection, except in the case of measures previously selected for 
the Hospital IQR Program under section 1886(b)(3)(B)(viii) of the Act. 
The final rule for the Medicare and Medicaid EHR Incentive Programs 
includes 15 clinical quality measures for eligible hospitals and 
critical access hospitals (75 FR 44418), 2 of which were previously 
selected for the Hospital IQR Program under section 1886(b)(3)(B)(viii) 
of the Act. The remaining 13 measures for these incentive programs are 
being proposed for the Hospital IQR Program for the FY 2015 payment 
determination.
    We continue to believe there are important synergies with respect 
to the two programs. We believe the financial incentives under the 
HITECH Act for the adoption and meaningful use of certified EHR 
technology by hospitals will encourage the adoption and use of 
certified EHRs for the reporting of clinical quality measures under the 
Hospital IQR Program. Through the EHR Incentive Programs we expect that 
the submission of quality data through EHRs will provide a foundation 
for establishing the capacity of hospitals to

[[Page 51653]]

send, and for CMS to receive, quality measures via hospital EHRs for 
Hospital IQR Program measures in the future.
    The HITECH Act requires that the Secretary seek to avoid redundant 
and duplicative reporting, with specific reference to the Hospital IQR 
Program for eligible hospitals. To the extent that quality measures are 
included in both the Hospital IQR Program and the EHR Incentive 
Programs, this would mean that Hospital IQR Program would need to 
transition to use of certified EHR technology rather than manual chart 
abstraction. We are considering what the most practical approach to 
effect such a transition might be. One option is to select a date after 
which chart-abstracted data would no longer be used in the Hospital IQR 
Program. This would require sufficient advance notice to hospitals for 
hospitals to report the data via certified EHR technology. At that 
point, we believe that it is likely that nearly all IPPS hospitals will 
have implemented certified EHR technology as incentivized by the HITECH 
Act. Another option would be to allow hospitals to submit the same 
measure for the Hospital IQR Program based on either chart-abstraction 
or EHR-based reporting. This would require extensive testing to ensure 
equivalence given that the data for the Hospital IQR Program supports 
both the public reporting of such information and the Hospital VBP 
Program. We are concerned that this option would not be feasible. We 
invited public comment on the approach of selecting calendar year 2015 
after which chart-abstracted data would no longer be accepted for the 
Hospital IQR Program.
    Comment: Many commenters overwhelmingly supported the alignment of 
Hospital IQR Program measures with the EHR Incentive Programs' 
meaningful use criteria for objective/measure. Some commenters 
recommended that CMS monitor the adoption rate of EHRs in the EHR 
Incentive Programs in order to gauge a target date for complete 
transition. A few commenters supported the FY 2015 target date for 
complete transition from chart-abstraction to EHR-based data collection 
while several commenters doubted the EHR-readiness of some hospitals 
and believed that 2020 is probably a more realistic date for a complete 
transition. A commenter recommended the maintaining chart-abstraction 
for small hospitals which may not be able to afford EHR technology.
    Response: We thank the commenters for supporting our goal to 
advance the Hospital IQR Program toward EHR-based reporting. As we 
state in section IV.A.3.a of this final rule, we anticipate that most 
hospitals will have the capability to report quality measures 
electronically by 2015 because of the upcoming payment adjustments for 
eligible hospitals that do not meet the criteria as meaningful users of 
certified EHR technology.
    Comment: Commenters also noted complete electronic measure testing, 
validation, and comparison of measure outcomes obtained from chart-
abstraction and electronic specifications are crucial in the transition 
process.
    Response: As we move towards alignment and harmonization of 
clinical quality measures reporting among federal reporting 
initiatives, we plan to test, compare, and align these reporting 
specifications to ensure consistency.
    We thank the commenters for the comments and suggestions and we 
will take them into account as we develop future proposals regarding 
the transfer to EHR technology for chart-abstracted records under the 
Hospital IQR Program.
    Ultimately, we anticipate that all of the Hospital IQR measures 
that are chart-abstracted will be e-specified and also included in the 
EHR Incentive Programs. We envision a single reporting infrastructure 
for electronic submission of these measures in the future, and will 
strive to align the hospital quality initiative programs to seek to 
avoid redundant and duplicative reporting of quality measures for 
hospitals. We note that some important Hospital IQR Program quality 
measures such as HCAHPS experience of care measures are based on survey 
data and do not lend themselves to EHR reporting. Similarly, certain 
outcome quality measures, such as the current Hospital IQR Program 
readmission measures, are based on claims data rather than clinical 
data. Thus, not all Hospital IQR quality measures will necessarily be 
capable of being submitted through EHRs. As a consequence, not all 
Hospital IQR Program measures would necessarily be appropriate for 
inclusion in the EHR Incentive Programs.
    We again note that the provisions in this FY 2012 IPPS/LTCH PPS 
proposed rule do not implicate or implement any HITECH statutory 
provisions. Those provisions are the subject of separate rulemaking and 
public comment.

B. Hospital Value-Based Purchasing (VBP) Program

1. Background
    Section 1886(o) of the Act requires the Secretary to establish a 
Hospital VBP Program under which value-based incentive payments are 
made in a fiscal year to hospitals meeting performance standards 
established for a performance period for such fiscal year. Both the 
performance standards and the performance period for a fiscal year are 
to be established by the Secretary.
    Section 1886(o)(1)(B) of the Act directs the Secretary to begin 
making value-based incentive payments under the Hospital VBP Program to 
hospitals for discharges occurring on or after October 1, 2012. These 
incentive payments will be funded for FY 2013 through a reduction to 
the FY 2013 base operating MS-DRG payment for each discharge of 1 
percent, as required by section 1886(o)(7)(B)(i) of the Act.
    Section 1886(o)(1)(C) of the Act provides that the Hospital VBP 
Program applies to subsection (d) hospitals (as defined in section 
1886(d)(1)(B) of the Act), but excludes from the definition of the term 
``hospital,'' with respect to a fiscal year: (1) A hospital that is 
subject to the payment reduction under section 1886(b)(3)(B)(viii)(I) 
of the Act (the Hospital IQR Program) for such fiscal year; (2) a 
hospital for which, during the performance period for the fiscal year, 
the Secretary cited deficiencies that pose immediate jeopardy to the 
health or safety of patients; and (3) a hospital for which there are 
not a minimum number (as determined by the Secretary) of measures for 
the performance period for the fiscal year involved, or for which there 
are not a minimum number (as determined by the Secretary) of cases for 
the measures that apply to the hospital for the performance period for 
such fiscal year.
2. Overview of the Hospital Inpatient VBP Program
    On April 29, 2011, we issued the Hospital Inpatient VBP Program 
final rule to implement section 1886(o) of the Act (76 FR 26490, May 6, 
2011). As described more fully in the Hospital Inpatient VBP Program 
final rule, we adopted for the FY 2013 Hospital VBP Program 13 measures 
that we have already adopted for the Hospital IQR Program, categorized 
into two domains (76 FR 26495 through 26511). We grouped 12 clinical 
process of care measures into a clinical process of care domain, and 
placed the HCAHPS survey measure into a patient experience of care 
domain. We adopted a 3-quarter performance period from July 1, 2011 
through March 31, 2012 for these measures (76 FR 26494 through 26495). 
To determine whether a hospital meets the proposed performance 
standards for these measures, we will compare each hospital's 
performance during this performance period to its performance

[[Page 51654]]

during a 3-quarter baseline period from July 1, 2009 through March 31, 
2010 (76 FR 26493 through 26495).
    We also finalized a methodology for assessing the total performance 
of each hospital based on performance standards under which we will 
score each hospital based on achievement and improvement ranges for 
each applicable measure. We will calculate a Total Performance Score 
for each hospital by combining the greater of the hospital's 
achievement or improvement points for each measure to determine a score 
for each domain, weighting each domain score (for the FY 2013 Hospital 
VBP Program, the weights will be clinical process of care = 70 percent, 
patient experience of care = 30 percent), and adding together the 
weighted domain scores. We will convert each hospital's Total 
Performance Score into a value-based incentive payment using a linear 
exchange function. We refer readers to the Hospital Inpatient VBP 
Program final rule for further explanation of the details of the FY 
2013 Hospital VBP Program (76 FR 26490 through 26547).
    For FY 2014, we also adopted in the Hospital Inpatient VBP Program 
final rule 13 outcome measures comprised of 3 mortality measures, 2 
AHRQ composite measures, and 8 hospital-acquired condition (HAC) 
measures (76 FR 26511). These measures are set forth below.

     Finalized Outcome Measures for the FY 2014 Hospital VBP Program
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Mortality Measures (Medicare            Acute Myocardial
 Patients).                             Infarction (AMI) 30-day
                                        mortality rate.
                                        Heart Failure (HF) 30-
                                        day mortality rate.
                                        Pneumonia (PN) 30-day
                                        mortality rate.
AHRQ Patient Safety Indicators          Complication/patient
 (PSIs), Inpatient Quality Indicators   safety for selected indicators
 (IQIs) Composite Measures.             (composite).
                                        Mortality for selected
                                        medical conditions (composite).
Hospital Acquired Condition Measures.   Foreign Object Retained
                                        After Surgery.
                                        Air Embolism.
                                        Blood Incompatibility.
                                        Pressure Ulcer Stages
                                        III & IV.
                                        Falls and Trauma:
                                        (Includes: Fracture,
                                        Dislocation, Intracranial
                                        Injury, Crushing Injury, Burn,
                                        Electric Shock).
                                        Vascular Catheter-
                                        Associated Infection.
                                        Catheter-Associated
                                        Urinary Tract Infection (UTI).
                                        Manifestations of Poor
                                        Glycemic Control.
------------------------------------------------------------------------

3. Additional FY 2014 Hospital VBP Program Measure
a. Background
    Section 1886(o)(2)(A) of the Act requires the Secretary to select 
for the Hospital VBP Program measures, other than readmission measures, 
from the measures specified under section 1886(b)(3)(B)(viii) of the 
Act for the Hospital IQR Program. Section 1886(o)(2)(B)(i) of the Act 
requires the Secretary, with respect to value-based incentive payments 
made for discharges occurring during FY 2013, to ensure that the 
selected measures cover at least the following specified conditions or 
topics: Acute Myocardial Infarction (AMI); Heart Failure (HF); 
Pneumonia (PN); Surgeries, as measured by the Surgical Care Improvement 
Project (SCIP); Healthcare-Associated Infections (HAIs), as measured by 
the prevention metrics and targets established in the HHS Action Plan 
to Prevent HAIs (available at: http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html) (or any successor plan); and HCAHPS. Section 
1886(o)(2)(B)(ii) of the Act requires the Secretary, with respect to 
value-based incentive payments made for discharges occurring during FY 
2014 or a subsequent year, to ensure that Hospital VBP Program measures 
include efficiency measures, including measures of Medicare spending 
per beneficiary.
    Section 1886(o)(2)(C)(i) of the Act provides that the Secretary may 
not select a measure with respect to a performance period for a fiscal 
year unless the measure has been specified under the Hospital IQR 
Program and included on the Hospital Compare Web site for at least one 
year prior to the beginning of the performance period. Section 
1886(o)(2)(C)(ii) of the Act provides that a measure selected under 
section 1886(o)(2)(A) of the Act shall not apply to a hospital if the 
hospital does not furnish services appropriate to the measure.
b. Efficiency Measure--Medicare Spending Per Beneficiary Measure--for 
the FY 2014 Hospital VBP Program
(1) Introduction
    Section 1886(o)(2)(B)(ii) of the Act requires the Secretary to 
ensure that, for Hospital VBP discharges occurring during FY 2014 or a 
subsequent year, the measures selected ``include efficiency measures, 
including measures of `Medicare spending per beneficiary' * * *.'' 
Therefore, for the FY 2014 Hospital VBP Program, in the FY 2012 IPPS/
LTCH PPS proposed rule (76 FR 25927 through 25928), we proposed to 
adopt a Medicare spending per beneficiary measure. We also proposed 
this measure for inclusion in the Hospital IQR Program in the proposed 
rule and we described it in detail in section IV.A.3.b.(2)(B) of the 
proposed rule (76 FR 25896 through 25897). Our proposed and final 
approaches to scoring this measure and including it in the Hospital VBP 
Program are discussed below.
(2) Scoring the Medicare Spending per Beneficiary Measure
    Section 1886(o)(5)(B)(ii) of the Act requires that the hospital 
performance score be determined using the higher of its achievement or 
improvement score for each measure. Therefore, in the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25927 through 25928), we proposed to calculate 
each hospital's achievement score and improvement score on the proposed 
Medicare spending per beneficiary measure, in order to determine which 
score will be used to calculate the Total Performance Score for the 
hospital.
    We proposed this scoring methodology because it is generally 
similar to the methodology proposed for scoring the clinical process of 
care and outcome measures in the Hospital Inpatient VBP Program 
proposed rule (76 FR 2465 through 2471).
(A) Scoring Based on Achievement
    We proposed to calculate a Medicare per beneficiary spending ratio 
of the Medicare spending per beneficiary amount for each hospital to 
the median Medicare spending per beneficiary amount across all 
hospitals during the performance period. We proposed that a hospital 
would earn between 1 and 10 achievement points on the Medicare

[[Page 51655]]

spending per beneficiary measure if its individual Medicare spending 
per beneficiary ratio during the performance period falls at or between 
the achievement threshold and the achievement benchmark for the 
measure. We proposed to set the achievement threshold at the median 
Medicare spending per beneficiary ratio across all hospitals during the 
performance period. We proposed to set the benchmark at the mean of the 
lowest decile of Medicare spending per beneficiary ratios during the 
performance period. We proposed that a hospital whose individual 
Medicare spending per beneficiary ratio fell below the achievement 
threshold would score 0 achievement points on the measure, and that a 
hospital whose individual Medicare spending per beneficiary ratio falls 
at or above the achievement benchmark would score the maximum of 10 
achievement points on the measure. We have clarified the scoring 
language, as detailed below, to indicate that a hospital whose Medicare 
spending per beneficiary ratio falls above the achievement threshold 
would not score achievement points, because a lower ratio, within the 
achievement range, results in higher points on this measure. We also 
provided a narrative formula to illustrate the proposed calculation of 
achievement points, which we have clarified below.
(B) Scoring Based on Improvement
    In the FY 2012 IPPS/LTCH PPS proposed rule 76 FR 25927 through 
25928), we proposed that a hospital would earn between 1 and 9 
improvement points on the proposed Medicare spending per beneficiary 
measure if its individual Medicare spending per beneficiary ratio 
during the performance period falls within the improvement range. We 
proposed to set the threshold for improvement at the hospital's own 
Medicare spending per beneficiary ratio, as calculated during the 
baseline period. We proposed a baseline period of May 15, 2010 through 
February 14, 2011 for the Medicare spending per beneficiary measure and 
discussed this proposal in section IV.B.3.b.(4) of the preamble of the 
FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25928). We proposed that the 
improvement benchmark would be equal to the achievement benchmark for 
the performance period, which is the mean of the lowest decile of 
Medicare spending per beneficiary ratios across all hospitals. We 
proposed that a hospital whose Medicare spending per beneficiary ratio 
is equal to or lower than its baseline period Medicare spending per 
beneficiary ratio would score 0 improvement points on the measure We 
have clarified the scoring language, as detailed below, to indicate 
that a hospital whose Medicare spending per beneficiary ratio falls 
above the improvement threshold (the hospital's own Medicare spending 
per beneficiary during the baseline period) would not score improvement 
points, because a lower ratio, within the improvement range, results in 
higher points on this measure.
    Comment: Several commenters suggested that the narrative scoring 
examples included in the proposed rule were incorrect, because they 
were similar to those used for scoring other quality measures. The 
commenters believed the formulas did not apply to the spending per 
beneficiary measure. One commenter noted that the scoring process 
description should be clarified to indicate that a lower Medicare 
spending per beneficiary ratio would result in a higher score on the 
measure than would a higher Medicare spending per beneficiary ratio.
    Response: We disagree that the narrative scoring examples were 
incorrect. However, we agree that it would be beneficial to clarify the 
examples, for consistency with the numeric examples. The narrative 
examples in the proposed rule appeared in a different order than the 
numeric examples, resulting in a negative number being divided by a 
negative number and yielding a positive number. The numeric examples 
result in a positive number being divided by a positive number, which 
is again a positive number. In this final rule, we are clarifying the 
narrative examples. We are clarifying the description of the scoring 
process to indicate that a lower Medicare spending per beneficiary 
ratio would result in a higher score on the measure, if it falls within 
the achievement or improvement range, as suggested by a commenter.
    Comment: One commenter requested clarification of the purpose of 
calculating a ratio to the median spending amount rather than giving 
consideration to the distribution of scores, and suggested evaluating 
the distribution of scores by geographic region.
    Response: The purpose of using a ratio in the Medicare spending per 
beneficiary measure is to quantify a hospital's individual Medicare 
spending per beneficiary amount, as compared to spending nationally. 
The use of a ratio also facilitates our comparison of a hospital's 
baseline Medicare spending per beneficiary, relative to national 
Medicare spending per beneficiary, during the baseline period, to the 
hospital's performance period Medicare spending per beneficiary, 
relative to the national Medicare spending per beneficiary during the 
performance period. We believe that comparison of standardized Medicare 
spending per beneficiary ratios on a national level is the best way to 
help hospitals understand where opportunities for improved efficiencies 
lie.
    After considering all public comments on scoring of the Medicare 
spending per beneficiary measure, we are finalizing our proposal that a 
hospital will earn between 1 and 10 achievement points on the Medicare 
spending per beneficiary measure if its individual Medicare spending 
per beneficiary ratio during the performance period falls at or between 
the achievement threshold and the achievement benchmark for the 
measure. We are finalizing the achievement threshold at the median 
Medicare spending per beneficiary ratio across all hospitals during the 
performance period. We are finalizing the benchmark at the mean of the 
lowest decile of Medicare spending per beneficiary ratios during the 
performance period. A hospital whose individual Medicare spending per 
beneficiary ratio falls above the achievement threshold will score 0 
achievement points on the measure, and a hospital whose individual 
Medicare spending per beneficiary ratio falls at or below the 
achievement benchmark will score the maximum of 10 achievement points 
on the measure. A hospital whose individual Medicare spending per 
beneficiary ratio falls at or below the achievement threshold, but 
above the benchmark, will score between 1 and 9 points according to the 
following formula:

[9 * ((achievement threshold - Hospital's performance period Medicare 
spending per beneficiary ratio)/(achievement threshold - benchmark))] + 
.5

    We are finalizing our proposal that a hospital will earn between 1 
and 9 improvement points on the proposed Medicare spending per 
beneficiary measure if its individual Medicare spending per beneficiary 
ratio during the performance period falls within the improvement range. 
We are finalizing the threshold for improvement at the hospital's own 
Medicare spending per beneficiary ratio, as calculated during the 
baseline period. We are finalizing the baseline period of May 15, 2010 
through February 14, 2011 for the Medicare spending per beneficiary 
measure. We are finalizing that the improvement benchmark would be 
equal to the achievement benchmark for

[[Page 51656]]

the performance period, which is the mean of the lowest decile of 
Medicare spending per beneficiary ratios across all hospitals. A 
hospital whose Medicare spending per beneficiary ratio is equal to or 
higher than its baseline period Medicare spending per beneficiary ratio 
will score 0 improvement points on the measure. If a hospital's score 
on the measure during the performance period is less than its baseline 
period score but above the benchmark (within the improvement range), 
the hospital will receive a score of 0-9 according to the following 
formula:

[10 * ((Hospital baseline period Medicare spending per beneficiary 
ratio - Hospital performance period Medicare spending per beneficiary 
ratio)/(Hospital baseline period Medicare spending per beneficiary 
ratio - Benchmark)] - .5

(C) Example of Scoring the Medicare Spending per Beneficiary Measure
    In the proposed rule, we provided the following numeric example of 
scoring this measure:
    If Hospital A had the following spending per beneficiary amounts 
during the baseline and performance period:

Baseline = $10,105
Performance = $9,125;
and the median spending per beneficiary amounts across all hospitals 
for the baseline and performance periods were:
Median Baseline = $11,672
Median Performance = $12,467;
then the Medicare spending per beneficiary ratios for Hospital A in the 
baseline and performance periods would be:
Baseline Ratio = 0.866
Performance Ratio = 0.732.

    The achievement threshold is the median ratio across all hospitals, 
which would be 1.0. In this example, we assume a benchmark of 0.712. We 
would calculate achievement and improvement points for Hospital A as 
follows:

Achievement Points = 9 * (1.0 - 0.732) / (1.0 - 0.712) + 0.5 = 8.868
Improvement Points = 10 * (0.866 - 0.732) / (0.866 - 0.712) - 0.5 = 
8.185

    These points are rounded to yield 9 attainment points and 8 
improvement points.
    Because section 1886(o)(5)(B)(ii) of the Act, as added by section 
3001 of the Affordable Care Act, requires that the hospital performance 
score will be determined using the higher of attainment or improvement 
score for each measure, the hospital in this example would receive 9 
points on the Medicare spending per beneficiary measure.
    Comment: One commenter stated that the scoring example was correct.
    Response: We agree that this example is correct, and we have 
clarified the narrative formulas, for consistency with this example, as 
suggested by other commenters.
(D) Incorporation of Medicare Spending Per Beneficiary Measure Score 
into the Overall Hospital Total Performance Score
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25928), we 
proposed to incorporate the Medicare spending per beneficiary measure 
score into the FY 2014 Hospital VBP Program as part of a new domain: 
the ``Efficiency'' domain. The Medicare spending per beneficiary 
measure score would be the Efficiency domain score for purposes of the 
FY 2014 Hospital VBP Program. Consistent with the domain scoring method 
in the Hospital Inpatient VBP Program final rule (76 FR 26490 through 
26547), we proposed to determine the total earned points for the 
Efficiency domain in general by adding the points earned for each 
domain measure and dividing by the total possible points, then 
multiplying that number by 100 percent. However, because we proposed to 
adopt only one measure for the Efficiency domain for the FY 2014 
Hospital VBP Program, the total points earned for the domain would be 
the points earned on the Medicare spending per beneficiary measure. We 
proposed that the total possible points that a hospital could earn for 
the Efficiency domain for FY 2014 would be 10, which is equal to the 
total possible points that the hospital could earn for the Medicare 
spending per beneficiary measure. We proposed that the Efficiency 
domain percentage score would be calculated for FY 2014 as follows: 
Efficiency domain score = Total points earned on the Medicare spending 
per beneficiary measure divided by 10, then multiplied by 100 percent.
    Once the Efficiency domain score has been determined, we proposed 
to assign it a weight for use in the calculation of the Total 
Performance Score. We proposed FY 2014 domain weighting, additional FY 
2014 measures, and other proposals for the FY 2014 Hospital VBP Program 
in the CY 2012 OPPS/ASC proposed rule (76 FR 42354 through 42365).
    Comment: Two commenters requested clarification of the proposed 
weighting of the Efficiency domain.
    Response: We proposed to weight the Efficiency domain at 20 percent 
in the CY 2012 OPPS/ASC proposed rule (76 FR 42362 through 42363).
    After considering the public comments we received on the proposals 
for incorporation of Medicare spending per beneficiary measure score 
into the overall hospital Total Performance Score, we are finalizing 
our proposal to incorporate the Medicare spending per beneficiary 
measure score into the FY 2014 Hospital VBP Program as part of a new 
domain: The ``Efficiency'' domain. We are finalizing that the Medicare 
spending per beneficiary measure score will be the Efficiency domain 
score for purposes of the FY 2014 Hospital VBP Program. We are 
finalizing our proposal to determine the total earned points for the 
Efficiency domain by adding the points earned for each domain measure 
and dividing by the total possible points, then multiplying that number 
by 100 percent. For the FY 2014 payment adjustment, there is only 1 
measure in the Efficiency domain, the Medicare spending per beneficiary 
measure, and the total possible points are 10. We are finalizing that 
the Efficiency domain percentage score would be calculated for FY 2014 
as follows: Efficiency domain score = Total points earned on the 
Medicare spending per beneficiary measure divided by 10, then 
multiplied by 100 percent.
    We are finalizing our proposal to assign a weight to the Efficiency 
domain, for use in the calculation of the Total Performance Score. We 
note that we proposed FY 2014 domain weighting, additional FY 2014 
measures, and other proposals for the FY 2014 Hospital VBP Program in 
the CY 2012 OPPS/ASC proposed rule (76 FR 42354 through 42365).
4. Efficiency Domain (Medicare Spending per Beneficiary Measure) 
Performance Period and Baseline Period
    Section 1886(o)(2)(C)(i) of the Act prohibits the Secretary from 
selecting a measure for the Hospital VBP Program with respect to a 
performance period unless it has been specified under the Hospital IQR 
Program and included on the Hospital Compare Web site for at least 1 
year prior to the beginning of such performance period. Section 
1886(o)(8) of the Act requires that hospitals be notified of the 
calculation of their value-based incentive payment no later than 60 
days prior to the fiscal year involved. In order to comply with these 
statutory requirements for the FY 2014 Hospital VBP Program, in the FY

[[Page 51657]]

2012 IPPS/LTCH PPS proposed rule (76 FR 25928), we proposed to adopt a 
9-month period of performance from May 15, 2012 through February 14, 
2013 for the proposed Medicare spending per beneficiary measure. If the 
measure is adopted, this would allow for a 1-year display period on 
Hospital Compare, a 60-day notification period, and would allow the 
time needed for administrative processes. We noted that this would have 
meant that only IPPS discharges occurring from May 15, 2012 through 90 
days prior to February 14, 2013 would count as index stays for purposes 
of creating the Medicare spending per beneficiary episodes. This was 
because, as proposed, the Medicare spending per beneficiary measure 
would have included a Medicare spending per beneficiary episode 
spanning from 3 days prior to admission through 90-days post-discharge. 
However, we have finalized a shorter Medicare spending per beneficiary 
episode, which spans from 3 days prior to admission through 30 days 
post-discharge. Therefore, discharges occurring within 30 days of the 
end of the performance period will be counted as index admissions, as 
described in section IV.A.3.b.(2)(B) of this final rule. The Medicare 
spending per beneficiary episode is described in section 
IV.A.3.b.(2)(B) of the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25896 
through 25897), and in section IV.A.3.b.(2)(B) of this final rule.
    For the purposes of calculating improvement points on the proposed 
Medicare spending per beneficiary measure, it is necessary to establish 
the baseline period to which the performance period score will be 
compared. For purposes of the FY 2014 Hospital VBP Program, we proposed 
to adopt a baseline period of May 15, 2010 through 90 days prior to 
February 14, 2011 for this proposed measure. This proposal was intended 
to indicate that only discharges occurring 90 days prior to the end of 
the performance period would be counted as index admissions, because, 
as proposed, the Medicare spending per beneficiary measure would have 
included a Medicare spending per beneficiary episode spanning from 3 
days prior to admission through 90-days post-discharge. However, we 
have finalized a shorter Medicare spending per beneficiary episode, 
which spans from 3 days prior to admission through 30 days post-
discharge. Therefore, discharges occurring within 30 days of the end of 
the baseline period will be counted as index admissions, as described 
in section IV.A.3.b.(2)(B) of this final rule. The proposed baseline 
period is consistent with the baseline period that has been proposed 
for the FY 2013 clinical process of care and patient experience of care 
measures in the Hospital Inpatient VBP Program final rule (76 FR 26490 
through 26547) because it precedes the performance period by 2 years.
    We invited public comment on all of our proposals related to the 
Efficiency Domain and Medicare spending per beneficiary measure.
    Comment: A large number of commenters addressed the proposed period 
of performance for the Medicare spending per beneficiary measure. All 
but one of those commenters stated that implementation should be 
delayed. Most commenters stated that the Medicare spending per 
beneficiary measure was not posted on Hospital Compare in time to meet 
the requirement of the Affordable Care Act that it be displayed there 
for 1 year prior to the start of the performance period and that 
therefore, CMS must choose another performance period for the measure. 
A number of commenters specifically noted the language in section 3001 
of the Affordable Care Act requiring measures of Medicare spending per 
beneficiary be included in the calculation of value-based incentive 
payments made for discharges occurring during fiscal year 2014 or a 
subsequent fiscal year. Nine commenters stated that the measure should 
be delayed pending the outcome of NQF study or endorsement. A few 
commenters stated that the measure should be delayed until results of 
IOM work can be incorporated, and several commenters suggested that CMS 
wait for the outcome of its GROUPER study. A few commenters stated that 
implementation should be delayed so that further analysis and testing 
should be performed. One commenter stated that the performance period 
was inappropriate, because it precedes the payment year, making it 
impossible for hospitals to improve performance during the payment 
year. That commenter further questioned the association of a baseline 
year with the performance year. A few commenters suggested that the 
Medicare spending per beneficiary measure should utilize a 12-month 
performance period, similar to other VBP measures. One commenter stated 
that the proposed period of performance should be implemented without 
revision.
    Response: We disagree with comments that this measure was not 
included on Hospital Compare in a timely manner. The measure was 
included on April 21, 2011, which is more than 1 year before the 
proposed performance period start date of May 15, 2012. We disagree 
with comments that we should use the Affordable Care Act language 
regarding inclusion of a Medicare spending per beneficiary measure for 
discharges occurring in ``a subsequent fiscal year'' to delay the 
implementation of this measure. We believe that the Medicare spending 
per beneficiary measure is an important step in encouraging hospitals 
to redesign and coordinate care with other providers and suppliers of 
care, and that its timely implementation is critical to incentivizing 
hospitals to provide the highest-quality, most efficient care possible 
to Medicare beneficiaries. We acknowledge that movement toward 
consistency in performance periods across Hospital VBP Program 
measures, to the extent possible, is an important goal. However we note 
that some measures within the Hospital VBP Program, including the 
Medicare spending per beneficiary measure, cannot initially have 12-
month periods of performance, due to statutory constraints on display 
and notification timeframes.
    In order to implement this measure for FY 2014, and to display it 
on Hospital Compare for 1 year prior to the start of the performance 
period, as required by statute, a 9-month period of performance is the 
longest we are able to implement for the FY 2014 payment adjustment. We 
note that all hospitals will have the same 9-month performance period 
during which their Medicare spending per beneficiary ratios will be 
compared. Therefore, we do not believe that any hospital will be 
unfairly disadvantaged by this performance period. We will analyze and 
consider the possibility of moving to a 12-month period of performance 
for the Medicare spending per beneficiary measure in the future. In 
response to the comment which questions the use of a performance period 
which precedes the payment adjustment year, we note that the section 
1886(o)(4) of the Act, as added by section 3001 of the Affordable Care 
Act requires that the performance period for a fiscal year begin and 
end prior to the beginning of that fiscal year. Section 
1886(o)(5)(B)(ii) of the Act, as added by section 3001(a) of the 
Affordable Care Act, requires that the hospital performance score be 
determined using the higher of achievement or improvement points, and 
we believe that the use of a baseline period is the best means of 
comparison, in order to determine how much hospitals have improved on 
this measure and calculate improvement

[[Page 51658]]

points. We disagree with comments in favor of delaying the 
implementation of the Medicare spending per beneficiary measure for 
further refinement or endorsement. We believe that the measure provides 
an accurate comparison of hospital-specific Medicare spending per 
beneficiary. We intend to perform ongoing analysis of this measure, in 
order to continually improve it, but we believe that its prompt 
implementation is an important step in ensuring that Medicare 
beneficiaries receive high-quality, coordinated, and efficient care. We 
appreciate the commenter's support for the implementation of this 
measure as proposed.
    Comment: A few commenters stated that the measure could first be 
implemented for public reporting purposes, but not be attributed to 
specific hospitals. Another commenter suggested that CMS could 
implement the measure by first publishing spending on a per-region 
basis.
    Response: As stated above, we believe that the Medicare spending 
per beneficiary measure is an important step in encouraging hospitals 
to redesign and coordinate care with other providers and suppliers of 
care, and that its prompt implementation is critical to incentivizing 
hospitals to provide the highest-quality, most efficient care possible 
to Medicare beneficiaries. This measure would be incorporated as one 
component of the hospital's Total Performance Score for the Hospital 
VBP Program.
    In summary, after consideration of the public comments we received, 
we are finalizing the following proposals, with regard to inclusion of 
the Medicare spending per beneficiary measure in the FY 2014 Hospital 
VBP Program. We are finalizing our proposal to include of the Medicare 
spending per beneficiary measure in the FY 2014 Hospital VBP Program. 
We are finalizing our proposal that a hospital will earn between 1 and 
10 achievement points on the Medicare spending per beneficiary measure 
if its individual Medicare spending per beneficiary ratio during the 
performance period falls at or between the achievement threshold and 
the achievement benchmark for the measure. We are finalizing the 
achievement threshold at the median Medicare spending per beneficiary 
ratio across all hospitals during the performance period. We are 
finalizing the benchmark at the mean of the lowest decile of Medicare 
spending per beneficiary ratios during the performance period. A 
hospital whose individual Medicare spending per beneficiary ratio falls 
above the achievement threshold will score 0 achievement points on the 
measure, and a hospital whose individual Medicare spending per 
beneficiary ratio falls at or below the achievement benchmark will 
score the maximum of 10 achievement points on the measure. A hospital 
whose individual Medicare spending per beneficiary ratio falls at or 
below the achievement threshold, but above the benchmark, will score 
between 1-9 points according to the following formula: [9 * 
((achievement threshold- Hospital's performance period Medicare 
spending per beneficiary ratio)/(achievement threshold-benchmark))] + 
0.5.
    We are finalizing our proposal that a hospital will earn between 1 
and 9 improvement points on the proposed Medicare spending per 
beneficiary measure if its individual Medicare spending per beneficiary 
ratio during the performance period falls within the improvement range. 
We are finalizing the threshold for improvement at the hospital's own 
Medicare spending per beneficiary ratio, as calculated during the 
baseline period. We are finalizing the baseline period of May 15, 2010 
through February 14, 2011 for the Medicare spending per beneficiary 
measure. We are finalizing the improvement benchmark would be equal to 
the achievement benchmark for the performance period, which is the mean 
of the lowest decile of Medicare spending per beneficiary ratios across 
all hospitals. A hospital whose Medicare spending per beneficiary ratio 
is equal to or higher than its baseline period Medicare spending per 
beneficiary ratio will score 0 improvement points on the measure. If a 
hospital's score on the measure during the performance period is less 
than its baseline period score but above the benchmark (within the 
improvement range), the hospital will receive a score of 0-9 according 
to the following formula:

[10 * ((Hospital baseline period
Medicare spending per beneficiary ratio-Hospital performance period
Medicare spending per beneficiary ratio)/(Hospital baseline period
Medicare spending per beneficiary ratio-Benchmark)]-0.5.

    We are finalizing our proposal to incorporate the Medicare spending 
per beneficiary measure score into the FY 2014 Hospital VBP Program as 
part of a new domain: the ``Efficiency'' domain. We are finalizing that 
the Medicare spending per beneficiary measure score will be the 
Efficiency domain score for purposes of the FY 2014 Hospital VBP 
Program. We are finalizing our proposal to determine the total earned 
points for the Efficiency domain by adding the points earned for each 
domain measure and dividing by the total possible points, then 
multiplying that number by 100 percent. For the FY 2014 payment 
adjustment, there is only 1 measure in the Efficiency domain, the 
Medicare spending per beneficiary measure, and the total possible 
points are 10. We are finalizing that the Efficiency domain percentage 
score would be calculated for FY 2014 as follows: Efficiency domain 
score = Total points earned on the Medicare spending per beneficiary 
measure divided by 10, then multiplied by 100 percent.
    We are finalizing our proposal to assign a weight to the Efficiency 
domain, for use in the calculation of the Total Performance Score. We 
note that we proposed FY 2014 domain weighting, additional FY 2014 
measures, and other proposals for the FY 2014 Hospital VBP Program in 
the CY 2012 OPPS/ASC proposed rule (76 FR 42354 through 42365).
    We are finalizing a 9-month period of performance from May 15, 2012 
through February 14, 2013 for the Medicare spending per beneficiary 
measure. We are finalizing a 9-month baseline period of May 15, 2010 
through February 14, 2011. We are finalizing that only discharges 
occurring within 30 days of the end of the baseline period will be 
counted as index admissions for the purposes of establishing baseline 
period Medicare spending per beneficiary episodes.
5. Simultaneous Specification of Additional Measures for the Hospital 
VBP Program and the Hospital IQR Program
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25928), we 
proposed to simultaneously specify additional measures for the Hospital 
VBP Program and the Hospital IQR Program, as appropriate, for use in 
both programs. Our rationale is to improve patient safety and quality 
of care in an expedited manner that is compliant with applicable 
statutory guidance. We noted that we used this approach in the FY 2012 
IPPS/LTCH PPS proposed rule by proposing to add the Medicare spending 
per beneficiary measure to both the Hospital VBP and Hospital IQR 
Programs. We also stated that we would provide all associated 
regulatory impact and policy rationale in future proposals for both 
programs. We stated our belief that this proposal notifies stakeholders 
through rulemaking and welcomed comments on this proposal.
    Comment: Several commenters objected to the proposal to

[[Page 51659]]

simultaneously adopt measures for both the Hospital VBP Program and the 
Hospital IQR Program. The commenters believed that such an approach is 
inconsistent with section 1886(o)(2)(C)(i) of the Act, because they 
believed that CMS is statutorily required to add measures to the 
Hospital VBP Program only if they are specified under the Hospital IQR 
Program and included on the Hospital Compare Web site for at least one 
year prior to the beginning of the Hospital VBP performance period that 
applies for the fiscal year.
    Response: We believe that our proposal is consistent with section 
1886(o)(2)(C)(i) of the Act. That provision prohibits the Secretary 
from selecting a measure for the Hospital VBP Program unless the 
measure ``has been specified under the Hospital IQR Program and 
included on the Hospital Compare Web site for at least one year prior 
to the beginning of the applicable performance period.'' This provision 
does not require that a measure be specified for the Hospital IQR 
Program before it is included on the Hospital Compare Web site, nor 
does it require that we include on the Hospital Compare Web site 
performance data on the measure prior to selecting the measure for the 
Hospital VBP Program. We believe that by including measures on Hospital 
Compare, we are providing the public with sufficient notice that we 
might choose to select any or all of them for the Hospital IQR Program 
measure set and, possibly simultaneously, for the Hospital VBP Program 
measure set (provided the performance period for these measures begins 
at least one year after their initial Hospital Compare inclusion and 
other statutory requirements are met).
    Comment: Some commenters supported CMS' proposal to simultaneously 
specify measures in the Hospital IQR and Hospital VBP Programs. Some 
commenters generally supported the alignment of Hospital IQR Program 
and Hospital VBP Program measures.
    Response: We appreciate the commenters' support of our proposal. We 
believe that this policy will enable us to expand the measure set as 
quickly as possible.
    We note that we intend to provide as much notice as is feasibly 
possible before proposing to select any measure for the Hospital VBP 
Program. However, as we stated in the proposed rule, one of our main 
goals is to adopt measures as expeditiously as possible for the purpose 
of improving patient safety and the quality of care. After 
consideration of the public comments received, we are finalizing our 
proposal to adopt a policy under which we can simultaneously propose to 
adopt measures for use in both the Hospital IQR and Hospital VBP 
Programs.
6. Responses to Additional Hospital VBP Program Comments
    We received additional comments regarding other aspects of the 
Hospital VBP Program for which we did not make proposals in the FY 2012 
IPPS/LTCH PPS proposed rule. We offer the following clarifications and 
references in response to these comments.
    Comment: Several commenters stated that the performance period for 
the 8 HAC measures adopted for the FY 2014 Hospital VBP Program is 
incorrect because the measures were not displayed on Hospital Compare 
on March 3, 2011. These commenters further suggest that CMS must select 
a new performance period to meet the statutory requirements.
    Response: We disagree with commenters' assertion that we must 
change the performance period for these measures. The 8 finalized HAC 
measures were first included on Hospital Compare on March 3, 2011 in 
the ``Highlights'' section and the Hospital Compare ``Glossary.'' We 
believe that this display meets the requirement in section 
1886(o)(2)(C)(i) that measures be included on the Hospital Compare Web 
site for at least one year prior to the beginning of the performance 
period that applies to the FY 2014 Hospital VBP Program. As stated in 
the Hospital Inpatient VBP Program final rule (76 FR 26495), the FY 
2014 performance period for the 8 finalized HAC measures will begin on 
March 3, 2012.
    Comment: Some commenters opposed the use of HAC measures in the 
Hospital VBP Program, and argued that hospitals will be penalized on 
those measures under two separate payment policies.
    Response: As we stated in the Hospital Inpatient VBP Program final 
rule, we view the Hospital VBP Program and the program authorized under 
section 3008 of the Affordable Care Act as related but separate efforts 
to reduce HACs. We intend to monitor the various interactions of 
programs authorized by the Affordable Care Act and their overall impact 
on providers and suppliers (76 FR 26504).
    Comment: Some commenters suggested that CMS change the finalized 
domain weighting scheme for the FY 2013 Hospital VBP Program and weight 
all domains equally, arguing that doing so would help ``bend the cost 
curve'' and create a more equitable payment system. Other commenters 
expressed specific concern with the patient experience domain's 
weighting at 30 percent, arguing that cultural, regional, and 
educational differences can affect a patient's perspective of care.
    Response: We disagree with the comments' suggestions that we alter 
the domain weighting scheme we finalized for the FY 2013 Hospital VBP 
Program. As we explained in the Hospital Inpatient VBP Program final 
rule (76 FR 26526), we considered many factors when determining the 
appropriate weight for the FY 2013 Hospital VBP Program, including the 
number of measures in each domain, the reliability of individual 
measure data, systematic effects of alternative weighting schemes on 
hospitals according to their location and characteristics, and HHS 
quality improvement priorities. We also believe that delivery of high-
quality, patient-centered care requires us to carefully consider the 
patient's experience in the hospital inpatient setting.
    Taking all of these considerations into account, we finalized the 
use of a 70 percent clinical process of care and 30 percent patient 
experience of care (HCAHPS) weighting scheme for the FY 2013 Hospital 
VBP Program. We believe that assigning a 30 percent weight to the 
patient experience of care domain is appropriate because the HCAHPS 
measure is comprised of eight dimensions that address different aspects 
of patient satisfaction. We believe the finalized 30 percent weight 
appropriately balances hospitals' incentives to perform well on both 
the clinical process measures and the HCAHPS survey.
    We also refer readers to the CY 2012 OPPS/ASC proposed rule (76 FR 
42362 through 76 FR 42363) for our proposed weighting scheme for the FY 
2014 Hospital VBP Program.
    We adopted a number of HCAHPS dimensions for the FY 2013 Hospital 
VBP Program that assess the patient's communication experience with 
hospital staff (including doctors and nurses), and communication 
regarding medicines and discharge information. We believe that the 
communication experience of all patients is a critical aspect of 
quality of care, and one that should be measured and publicly reported 
for all hospitals. Accordingly, the communication items have been an 
integral part of HCAHPS since its national implementation in 2006, have 
been included in the Hospital IQR Program since 2007, have been 
publicly reported since 2008, and have been adopted in the Hospital VBP 
Program in a manner that rewards hospitals for either their performance 
compared to other hospitals, or their improvement

[[Page 51660]]

compared to their own previous performance.
    Comment: One commenter argued that because urban safety net 
hospitals typically serve a diverse patient population, these hospitals 
are likely to score poorly on the communication dimensions of the 
HCAHPS survey, and that for this reason, the use of HCAHPS in the 
Hospital VBP Program would be detrimental to them. Several commenters 
stated that CMS should distinguish safety net and urban safety net 
hospitals from other hospitals because of the distinct challenges faced 
by such hospitals and because such hospitals are disadvantaged by the 
Hospital VBP Program, particularly the HCAHPS domain.
    Response: We thank the commenters for their input. As we discussed 
in the Hospital Inpatient VBP Program final rule (76 FR 26502), we 
recognize that urban hospitals, particularly large ones, have 
historically not performed as well on HCAHPS as rural hospitals. 
However, our internal studies of HCAHPS results show that hospitals in 
some urban areas scored in the top 25 percent of hospitals overall. We 
believe that those results suggest that urban hospitals can achieve 
high scores under the HCAHPS domain.
    ``Safety net'' hospital is not an official CMS term or category. 
However, we are aware of several differing definitions of this term. 
Employing a definition of ``Safety Net hospital'' created by the AHRQ, 
we looked into the ability of safety net hospitals to score well on 
HCAHPS in the Hospital VBP Program. We found 30 hospitals that meet all 
three of AHRQ's criteria for Safety Net hospital: (1) high Medicaid 
percentage; (2) high percentage of uncompensated care; and (3) located 
in a high poverty county. Of these 30 hospitals, 3 hospitals (10 
percent) fall in the top 10 percent of all hospitals in terms of 
projected earned total HCAHPS points for the Hospital VBP Program. This 
suggests that safety net hospitals can achieve the highest HCAHPS 
Hospital VBP Program scores and at a similar rate to non-safety net 
hospitals.
    Comment: One commenter requested that CMS publicly report the 
patient mix characteristics of each hospital, and publicly report the 
non-patient-mix adjusted HCAHPS scores to allow hospitals to determine 
the impact of patient-mix adjustment in Hospital VBP Program payments.
    Response: We thank the commenter for the suggestion. We currently 
provide patient-mix adjustment coefficients for HCAHPS measures on our 
HCAHPS On-Line Web site, http://www.hcahpsonline.org, along with 
instructions on how hospitals can derive the adjustments that apply to 
their scores. We will consider the benefits of publicly reporting the 
patient mix characteristics and the pre- and post-patient-mix adjusted 
HCAHPS scores of participating hospitals.

C. Hospital Readmissions Reduction Program

1. Background
a. Overview
    CMS is committed to promoting high quality health care and 
improving patient health outcomes. Readmission to a hospital may be an 
adverse event for patients and many times imposes a financial burden on 
the health care system. Successful efforts to reduce preventable 
readmission rates will improve quality of care while simultaneously 
decreasing costs. Hospitals can work with their communities to lower 
readmission rates and improve patient care in a number of ways, such as 
ensuring patients are clinically ready to be discharged, reducing 
infection risk, reconciling medications, improving communication with 
community providers responsible for post-discharge patient care, 
improving care transitions, and ensuring that patients understand their 
care plans upon discharge.
    Many studies have demonstrated the effectiveness of these types of 
in-hospital and post-discharge interventions in reducing the risk of 
readmission, confirming that hospitals and their partners have the 
ability to lower readmission rates.37 38 39 These types of 
efforts taken during and after a hospitalization have been shown to be 
effective in reducing readmission rates in geriatric populations 
generally,40 41 as well as for multiple specific conditions. 
Moreover, such interventions can be cost saving. For example, in the 
case of heart failure, improved hospital \42\ and post-discharge 
care,43 44 including pre-discharge planning,45 46 
home-based follow-up, and patient education,47 48 have been 
shown to lower heart failure readmission rates, suggesting that heart 
failure readmission rates might be reduced if proven interventions were 
more widely adopted. Financial incentives to reduce readmissions will 
in turn promote improvement in care transitions and care coordination, 
as these are important means of reducing preventable readmissions.\49\
---------------------------------------------------------------------------

    \37\ Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH: A 
systematic review and meta-analysis of studies comparing readmission 
rates and mortality rates in patients with heart failure. Arch 
Intern Med. 2004;164(21):2315-2320.
    \38\ McAlister FA, Lawson FM, Teo KK, Armstrong PW.: A 
systematic review of randomized trials of disease management 
programs in heart failure. AmJMed. 2001;110(5):378-384.
    \39\ Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial 
of an education and support intervention to prevent readmission of 
patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89.
    \40\ Coleman EA, Parry C, Chalmers S, Min SJ.: The care 
transitions intervention: Results of a randomized controlled trial. 
Arch Intern Med. 2006;166:1822-8.
    \41\ Naylor MD, Brooten D, Campbell R, Jacobsen BS, Mezey MD, 
Pauly MV, Schwartz JS.: Comprehensive discharge planning and home 
follow-up of hospitalized elders: A randomized clinical trial. JAMA. 
1999;281:613-20.
    \42\ Gwadry-Sridhar FH, Flintoft V, Lee DS, Lee H, Guyatt GH.: A 
systematic review and meta-analysis of studies comparing readmission 
rates and mortality rates in patients with heart failure. Arch 
Intern Med. 2004;164(21):2315-2320.
    \43\ Lappe JM, Muhlestein JB, Lappe[acute] DL, et al.: 
Improvements in 1-year cardiovascular clinical outcomes associated 
with a hospital-based discharge medication program. Ann Intern Med. 
2004;141(6):446-453.
    \44\ Phillips CO, Wright SM, Kern DE, Singa RM, Shepperd S, 
Rubin HR.: Comprehensive discharge planning with postdischarge 
support for older patients with congestive heart failure: A 
metaanalysis [published correction appears in JAMA. 
2004;292(9):1022]. JAMA. 2004;291(11): 1358-1367.
    \45\ Rich MW, Beckham V, Wittenberg C, Leven CL, Freedland KE, 
Carney RM.: A multi disciplinary intervention to prevent the 
readmission of elderly patients with congestive heart failure. N 
Engl J Med. 1995;333(18):1190-1195.
    \46\ Schneider JK, Hornberger S, Booker J, Davis A, Kralicek R.: 
A medication discharge planning program: Measuring the effect on 
readmissions. Clin Nurs Res. 1993;2(1):41-53.
    \47\ Koelling TM, Johnson ML, Cody RJ, Aaronson KD.: Discharge 
education improves clinical outcomes in patients with chronic heart 
failure. Circulation. 2005;111(2):179-185.
    \48\ Krumholz HM, Amatruda J, Smith GL, et al.: Randomized trial 
of an education and support intervention to prevent readmission of 
patients with heart failure. J Am Coll Cardiol. 2002;39(1):83-89.
    \49\ Coleman EA.: 2005. Background Paper on Transitional Care 
Performance Measurement. Appendix I. In: Institute of Medicine, 
Performance Measurement: Accelerating Improvement. Washington, DC: 
National Academy Press.
---------------------------------------------------------------------------

    In its 2007 ``Report to Congress: Promoting Better Efficiency in 
Medicare,'' \50\ MedPAC noted the potential benefit to patients of 
lowering readmissions and suggested payment strategies that would 
incentivize hospitals to reduce these rates. MedPAC identified 7 
conditions and procedures that accounted for almost 30 percent of 
potentially preventable readmissions: Heart failure; chronic 
obstructive pulmonary disease; pneumonia; acute myocardial infarction; 
coronary artery bypass graft surgery; percutaneous transluminal 
coronary angioplasty; and other vascular procedures.
---------------------------------------------------------------------------

    \50\ Medicare Payment Advisory Commission (MedPAC). Report to 
Congress: Promoting Greater Efficiency in Medicare; 2007. Available 
at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed 
January 10, 2011.
---------------------------------------------------------------------------

    To promote quality of care, CMS developed hospital quality of care

[[Page 51661]]

measures that compare patient outcomes across different hospitals. 
These measures, including hospital risk-standardized readmission 
measures for Acute Myocardial Infarction (AMI), Heart Failure (HF) and 
Pneumonia (PN), were originally developed for public reporting as a 
part of the Hospital IQR Program. We adopted the HF readmission measure 
for the Hospital IQR Program in the FY 2009 IPPS final rule for the FY 
2010 payment determination (73 FR 48606) and the AMI and PN readmission 
measures in the CY 2009 OPPS/ASC final rule with comment period for the 
FY 2010 payment determination (73 FR 68781). Details about the 
methodology used for these measures may be found on the Web site at: 
http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    As described above, readmission rates are important markers of 
quality of care, particularly of the care of a patient in transition 
from an acute care setting to a non-acute care setting, and improving 
readmissions can positively influence patient outcomes and the cost of 
care. The above hospital risk-standardized readmission measures are 
endorsed by the National Quality Forum (NQF) and have been publicly 
reported on Hospital Compare Web site since 2009 (http://www.hospitalcompare.hhs.gov) to encourage quality improvement and lower 
readmission rates. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
25928 through 25937), we proposed that the readmission measures for 
these three conditions be used for the Hospital Readmissions Reduction 
Program under section 1886(q) of the Act, as added by section 3025 of 
the Affordable Care Act. Below is a discussion of the proposals we 
included regarding these measures, the public comments we received 
regarding these proposals, our response to these public comments, and 
our final policy decisions.
b. Statutory Basis for the Hospital Readmissions Reduction Program
    Section 3025 of the Affordable Care Act, as amended by section 
10309 of the Affordable Care Act, added a new subsection (q) to section 
1886 of the Act. Section 1886(q) of the Act establishes the ``Hospital 
Readmissions Reduction Program'' effective for discharges from an 
``applicable hospital'' beginning on or after October 1, 2012, under 
which payments to those hospitals under section 1886(d) of the Act will 
be reduced to account for certain excess readmissions.
    In this year's IPPS rulemaking, we address: (i) Those aspects of 
the Hospital Readmissions Reduction Program that relate to the 
conditions and readmissions to which the Hospital Readmissions 
Reduction Program will apply for the first program year beginning 
October 1, 2012; (ii) the readmission measures and related methodology 
used for those measures, as well as the calculation of the readmission 
rates; and (iii) public reporting of the readmission data. Specific 
information regarding the payment adjustment required under section 
1886(q) of the Act will be proposed in next year's IPPS/LTCH PPS 
proposed rule. Although we did not propose specific policies regarding 
the payment adjustment under the Hospital Readmissions Reduction 
Program in the FY 2012 IPPS/LTCH PPS proposed rule, we believe that it 
is still important to set forth the general framework of the Hospital 
Readmissions Reduction Program, including the payment adjustment 
provisions, in order for the public to understand how the measures 
discussed and finalized in this rulemaking will affect certain hospital 
payments beginning in FY 2013.
    Section 1886(q)(1) of the Act sets forth the methodology by which 
payments to ``applicable hospitals'' will be adjusted to account for 
excess readmissions. Pursuant to section 1886(q)(1) of the Act, 
payments for discharges from an ``applicable hospital'' will be an 
amount equal to the product of the ``base operating DRG payment 
amount'' and the adjustment factor for the hospital for the fiscal 
year. That is, the ``base operating DRG payments'' are reduced by an 
adjustment factor that accounts for excess readmissions. Section 
1886(q)(1) of the Act requires the Secretary to make payments for a 
discharge in an amount equal to the product of ``the base operating DRG 
payment amount'' and ``the adjustment factor'' for the hospital in a 
given fiscal year. Section 1886(q)(2) of the Act defines the base 
operating DRG payment amount as ``the payment amount that would 
otherwise be made under subsection (d) (determined without regard to 
subsection (o) [the Hospital VBP Program]) for a discharge if this 
subsection did not apply; reduced by * * * any portion of such payment 
amount that is attributable to payments under paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection (d).'' Paragraphs (5)(A), 
(5)(B), (5)(F), and (12) of subsection(d) refer to outlier payments, 
IME payments, DSH payments, and payments for low volume hospitals, 
respectively.
    Furthermore, section 1886(q)(2)(B) of the Act specifies special 
rules for defining ``the payment amount that would otherwise be made 
under subsection (d)'' for certain hospitals. Specifically, section 
1886(q)(2)(B) of the Act states that ``[i]n the case of a Medicare-
dependent, small rural hospital (with respect to discharges occurring 
during fiscal years 2012 and 2013) or a sole community hospital * * * 
the payment amount that would otherwise be made under subsection (d) 
shall be determined without regard to subparagraphs (I) and (L) of 
subsection (b)(3) and subparagraphs (D) and (G) of subsection (d)(5).'' 
We intend to propose regulations to implement the statutory provisions 
related to the definition of ``base operating DRG payment amount'' in 
the FY 2013 IPPS/LTCH PPS proposed rule.
    Section 1886(q)(3)(A) of the Act defines the ``adjustment factor'' 
for an applicable hospital for a fiscal year as equal to the greater of 
``(i) the ratio described in subparagraph (B) for the hospital for the 
applicable period (as defined in paragraph (5)(D)) for such fiscal 
year; or (ii) the floor adjustment factor specified in subparagraph 
(C).'' Section 1886(q)(3)(B) of the Act in turn describes the ratio 
used to calculate the adjustment factor. It states that the ratio is 
``equal to 1 minus the ratio of--(i) the aggregate payments for excess 
readmissions * * *; and (ii) the aggregate payments for all discharges 
* * *.'' Section 1886(q)(3)(C) of the Act describes the floor 
adjustment factor, which is set at 0.99 for FY 2013, 0.98 for FY 2014, 
and 0.97 for FY 2015 and subsequent fiscal years.
    Section 1886(q)(4) of the Act sets forth the definitions of 
``aggregate payments for excess readmissions'' and ``aggregate payments 
for all discharges'' for an applicable hospital for the applicable 
period. The term ``aggregate payments for excess readmissions'' is 
defined in section 1886(q)(4)(A) of the Act as ``the sum, for 
applicable conditions * * * of the product, for each applicable 
condition, of (i) the base operating DRG payment amount for such 
hospital for such applicable period for such condition; (ii) the number 
of admissions for such condition for such hospital for such applicable 
period; and (iii) the ``Excess Readmission Ratio * * * for such 
hospital for such applicable period minus 1.'' The ``Excess Readmission 
Ratio'' is a hospital-specific ratio based on each applicable 
condition. Specifically, section 1886(q)(4)(C) of the Act defines the 
Excess Readmission Ratio as the ratio of ``risk-adjusted readmissions 
based on actual readmissions'' for an applicable hospital

[[Page 51662]]

for each applicable condition, to the ``risk-adjusted expected 
readmissions'' for the applicable hospital for the applicable 
condition.
    Section 1886(q)(5) of the Act provides definitions of ``applicable 
condition,'' ``expansion of applicable conditions,'' ``applicable 
hospital,'' ``applicable period,'' and ``readmission.'' The term 
``applicable condition,'' which we addressed in detail below in section 
IV.C.3.a. of this preamble, is defined as a ``condition or procedure 
selected by the Secretary among conditions and procedures for which: 
(i) Readmissions * * * represent conditions or procedures that are high 
volume or high expenditures * * * and (ii) measures of such 
readmissions * * * have been endorsed by the entity with a contract 
under section 1890(a) * * * and such endorsed measures have exclusions 
for readmissions that are unrelated to the prior discharge (such as a 
planned readmission or transfer to another applicable hospital).'' The 
term ``expansion of the applicable condition'' refers to the 
Secretary's authority, beginning with FY 2015, ``to the extent 
practicable, [to] expand the applicable conditions beyond the 3 
conditions for which measures have been endorsed * * * to the 
additional 4 conditions that have been identified by the Medicare 
Payment Advisory Commission in its report to Congress in June 2007 and 
to other conditions and procedures as determined appropriate by the 
Secretary.''
    Section 1886(q)(5)(C) of the Act defines ``applicable hospital,'' 
that is, a hospital subject to the Hospital Readmissions Reduction 
Program, as a ``subsection (d) hospital or a hospital that is paid 
under section 1814(b)(3) [of the Act], as the case may be.'' The term 
``applicable period,'' as defined by section 1886(q)(5)(D) of the Act, 
``means, with respect to a fiscal year, such period as the Secretary 
shall specify.'' As explained in the FY 2012 IPPS/LTCH PPS proposed 
rule and in this final rule, the ``applicable period'' is the period 
from which data are collected in order to calculate various ratios and 
adjustments under the Hospital Readmissions Reduction Program.
    Section 1886(q)(6) of the Act sets forth the reporting requirements 
for hospital-specific readmission rates. Section 1886(q)(7) of the Act 
limits administrative and judicial review of certain determinations 
made pursuant to section 1886(q) of the Act. Finally, section 
1886(q)(8) of the Act requires the Secretary to collect data on 
readmission rates for all hospital inpatients for ``specified 
hospitals'' in order to calculate the hospital-specific readmission 
rates for all hospital inpatients and to publicly report these 
readmission rates.
2. Implementation of the Hospital Readmissions Reduction Program
a. Overview
    We intend to implement the requirements of the Hospital 
Readmissions Reduction Program in the FY 2012, FY 2013, and future 
IPPS/LTCH PPS rulemaking cycles.
    Comment: A few commenters supported CMS' implementation of the 
Hospital Readmissions Reduction Program and CMS's implementation 
approach. One commenter specifically appreciated the phased-in approach 
for implementation.
    Response: We appreciate the commenters' support for the Hospital 
Readmissions Reduction Program and the phased-in approach we have 
taken.
    Comment: Some commenters urged that, prior to next year's 
rulemaking in which CMS will discuss and implement the provisions 
related to the payment adjustment and other outstanding issues, CMS 
hold a series of stakeholder calls to solicit input in the development 
of the Hospital Readmissions Reduction Program.
    Response: We appreciate the comments on our implementation process 
of the Hospital Readmissions Reduction Program. We intend to solicit 
formal public input on our proposal related to the readmissions 
reduction through rulemaking. In addition, the public can provide input 
on proposals related to the Hospital Readmissions Reduction Program 
through the Hospital Open Door Forums calls that we hold periodically 
to provide hospitals with information on various issues and to listen 
to questions and concerns from hospitals. The public can find out more 
information about the Hospital Open Door Forums, including when they 
will be held, on the CMS Web site: http://www.cms.gov/OpenDoorForums/18_ODF_Hospitals.asp#TopOfPage.
    Comment: One commenter expressed concern that the Hospital 
Readmissions Reduction Program's payment adjustments are likely to have 
a disproportionate impact on rural hospitals.
    Response: We appreciate the comment on the impact of the Hospital 
Readmissions Reduction Program on rural hospitals. We note that we did 
not propose policies related to the Hospital Readmissions Reduction 
Program payment adjustment in the proposed rule. Therefore, this 
comment is outside the scope of the issues addressed in the proposed 
rule. As discussed in more detail below, we plan to propose policies 
related to the implementation of the payment adjustment set forth in 
section 1886(q) of the Act in the FY 2013 IPPS/LTCH PPS proposed rule. 
We will consider this comment when formulating these policies.
    Comment: One commenter stated that the simultaneous implementation 
of the readmissions reduction measures for AMI, HF, and PN in the 
Hospital Readmissions Reduction Program and the Hospital IQR Program 
would cause ``double jeopardy,'' that is, the hospital would be 
penalized twice for care provided to the same patients.
    Response: While the readmissions measures that we proposed for the 
Hospital Readmissions Reduction Program are also part of the Hospital 
IQR Program, hospitals are not assessed under the Hospital IQR Program 
based on their performance on the measures. Rather, under the Hospital 
IQR Program, hospitals are only required to participate in the program 
and to report the measure in order to avoid a payment reduction, 
regardless of their performance on the reported measures. Moreover, the 
readmission measures included in the Hospital IQR Program are not 
eligible to be included in the Hospital VBP Program. In the case of the 
three proposed NQF-endorsed 30-day risk standardized readmissions 
measures for AMI, HF, and PN, no additional information is required of 
hospitals because we use information that is already submitted on 
Medicare Part A and Part B claims for payment purposes. The Hospital 
Readmissions Reduction Program includes a payment adjustment based on 
the hospital's performance with regard to the claims-based readmissions 
measures. Therefore, in this situation, we do not believe hospitals 
will be penalized twice based on the same readmissions measures. 
However, we intend to monitor any potential interactions that the 
Hospital Readmissions Reduction Program may have with other programs. 
We anticipate implementing the readmissions payment adjustment through 
future rulemaking.
    Comment: One commenter expressed concern about a number of 
potential unintended consequences that could result from the Hospital 
Readmissions Reduction Program, including premature discharge of 
patients, providers avoiding certain types of patients who are more ill 
or complicated and therefore likely to be readmitted. Another commenter 
suggested that the Hospital Readmissions Reduction Program resulted in 
increased pressure on emergency physicians not to readmit

[[Page 51663]]

patients within the 30-day window. This commenter also expressed 
concerns that physicians in emergency departments do not have access to 
the patient's record if they have had a recent inpatient stay at 
another hospital.
    Response: We appreciate the commenters pointing out these potential 
unintended consequences of the Hospital Readmissions Reduction Program. 
As part of our implementation of the Hospital Readmissions Reduction 
Program, we will monitor trends to determine if there are unintended 
consequences of the policy, such as systematic shifting, diversion, and 
delays in care, in order to assess and take appropriate action to 
minimize any such unintended consequences.
    Comment: One commenter stated that it is important to ensure that 
transplant centers are not unduly penalized by the Hospital 
Readmissions Reduction Program, when transplant patients are readmitted 
for infections caused by the transplantation of organs from marginal 
donors.
    Response: The three applicable conditions for readmission measures 
only apply to patients discharged with a primary diagnosis code for 
AMI, HF, and PN, and do not apply to transplant patients who have 
contracted infections from the transplantation of infected organs. 
Therefore, patient admissions for transplants and corresponding 
discharges with those primary codes are not included in the index 
hospitalizations counted for these measures. However, if a transplant 
recipient is subsequently admitted with AMI, HF or PN and is readmitted 
within 30 days, the readmission would be included in the readmissions 
methodology. Therefore, we do not believe that transplant centers would 
be disproportionately penalized by the Hospital Readmissions Reduction 
Program.
    Comment: One commenter stated that it is important for hospitals to 
be able to track patients who are subsequently admitted to other 
hospitals and requested that CMS develop patient identifiers that would 
allow for this tracking. Two commenters stated that hospitals need a 
mechanism to track and understand patient readmissions in real time.
    Response: We recognize the value in being able to track patients' 
readmissions to other hospitals real time both for a hospital's 
internal quality improvement purpose, and for validating our 
readmission measure criteria. We thank the commenters for their 
suggestions, and we will consider whether it is operationally possible 
to provide these data to hospitals and whether sharing these data would 
be consistent with patient privacy considerations.
    Comment: One commenter recommended that CMS provide hospitals with 
their expected readmission ratio and actual readmission counts on a 
quarterly basis, as well as claims data for the prior 12 months for any 
readmission attributed to them.
    Response: To provide the measures quarterly, including the expected 
readmission rates and the actual counts of readmissions, is resource 
intensive. We thank the commenters for their suggestions and will 
consider them if resources allow us to do so in the future. The 
readmission measures are calculated using the data from the claims that 
hospitals submitted to CMS for payment. Therefore, hospitals should 
have access to at least their own facility's patient claims data for 
the prior 12 months for any readmission attributed to them.
    We thank the commenters for these suggestions. We will consider 
whether it is operationally possible to provide hospitals with these 
measures quarterly and the patient data for any readmission attributed 
to the hospitals. In addition we will look into whether sharing these 
patient data would be consistent with patient privacy considerations.
    Comment: Two commenters requested that data be made available to 
advocacy and watchdog organizations so that the proposed measures can 
be replicated and validated independently prior to the end of the 
comment period. One commenter recommended that CMS' calculations, 
including its methodology for all risk adjustments and how it 
calculates hospital-specific observed and expected rates be made 
available to the public so that CMS' work can be replicated and 
verified.
    Response: We have made the methodology reports for risk-adjusting 
the proposed measures and the software (in SAS format) to calculate the 
measures publicly available through https://www.Qualitynet.org. 
However, because of the comparative nature inherent to the calculating 
the measures, we note that the statistical models used to calculate the 
measures require data from all applicable hospitals, and cannot be 
replicated using only a single hospital's data. With regard to 
providing data to advocacy and watchdog groups for independent 
validation, we have provided the downloadable files on the Hospital 
Compare Web site. The downloadable files contain the aggregate-level 
data that we publicly reported. As we noted above, we will consider 
whether it is operationally possible to provide additional data to 
third parties and whether sharing these data would be consistent with 
patient privacy considerations.
b. Provisions in the FY 2012 IPPS/LTCH PPS Final Rule
    As explained above, the adjustment factor set forth in section 
1886(q) of the Act does not apply to discharges until FY 2013. 
Therefore, we are able to implement the Hospital Readmissions Reduction 
Program over two years. We are first addressing issues such as the 
selection of readmission measures and the calculation of the Excess 
Readmission Ratio, which will then be used, in part, to calculate the 
readmission payment adjustment factor. Specifically, in the FY 2012 
IPPS/LTCH PPS proposed rule and in this final rule, we addressed 
portions of section 1886(q) of the Act related to the following 
provisions:
     Selection of applicable conditions;
     Definition of ``readmission;''
     Measures for the applicable conditions chosen for 
readmission;
     Methodology for calculating the Excess Readmission Ratio;
     Public reporting of the readmission data; and
     Definition of ``applicable period.''
    With respect to the topics of ``measures for readmission'' for the 
applicable conditions, and ``methodology for calculating the Excess 
Readmission Ratio,'' we are specifically addressing the following:
     Index hospitalizations;
     Risk Adjustment;
     Risk Standardized Readmission Rate;
     Data sources; and
     Exclusion of Certain Readmissions.
c. Provisions To Be Included in the FY 2013 IPPS/LTCH PPS Proposed Rule
    In the FY 2013 IPPS/LTCH PPS rulemaking, we will address the 
provisions in section 1886(q) of the Act that are related to the 
payment adjustment, as well as the rest of the provisions in section 
1886(q) of the Act that are not addressed in the FY 2012 IPPS/LTCH PPS 
rulemaking. Specifically, in the FY 2013 IPPS/LTCH PPS proposed rule, 
we plan to address section 1886(q) of the Act related to the following 
provisions:
     Base operating DRG payment amount, including policies for 
SCHs and MDHs;
     Adjustment factor (both the ratio and floor adjustment 
factor);
     Aggregate payments for excess readmissions;
     Applicable hospital.

    We believe it is appropriate to first address the readmission 
measures and

[[Page 51664]]

the calculation of the Excess Readmission Ratio that will be used, in 
part, to calculate the readmission payment adjustment factor and the 
application of the readmission payment adjustment factor to inpatient 
hospital payments. We believe the 2-year rulemaking schedule provides 
adequate time and opportunities for careful consideration of the 
various aspects of the Hospital Readmissions Reduction Program by both 
CMS and stakeholders prior to implementation of the Hospital 
Readmissions Reduction Program in FY 2013.
    Comment: One commenter asked that cancer hospitals payment based on 
limits set by the Tax Equity and Fiscal Responsibility Act of 1982 be 
exempt from the Hospital Readmissions Reduction Program.
    Response: We appreciate the comment, but we note that this comment 
is not within the scope of the proposals in the FY 2012 IPPS/LTCH PPS 
proposed rule regarding the Hospital Readmissions Reduction Program. In 
the proposed rule, we noted that we plan to address the provisions of 
section 1886(q)(5)(C) of the Act related to the definition of 
``applicable hospital'' in the FY 2013 IPPS/LTCH PPS proposed rule.
    Comment: Several comments addressed the payment adjustment under 
section 1886(q) of the Act. One commenter expressed appreciation that 
the readmission payment adjustment factor would not be applied to 
Medicare DSH, IME, or outlier payments. Some commenters believed that 
the readmission payment adjustment factor should only be applied to 
discharges following readmissions and not all discharges. Other 
commenters believed that the formula set forth in the statute to 
calculate the aggregate payments due to excess readmissions would 
result in a payment penalty that is too severe. Commenters also stated 
that the formula to calculate the aggregate payments due to excess 
readmissions should be the product of the Excess Readmission Ratio, the 
average base DRG operating payment, and the expected number of 
readmissions, rather than the current statutory language that defines 
aggregate payments for excess readmissions as the product of the total 
number of admissions for the condition, the average base DRG payment 
for the condition, and the Excess Readmission Ratio.
    Commenters also stated that the statutory formula is inconsistent 
and combines quantities that are not comparable because the Excess 
Readmission Ratio is based on the ratio of risk-adjusted actual 
readmissions to risk-adjusted expected readmissions and that ratio, 
which is based on readmissions, is applied to the total number of 
admissions. Commenters believed that the statutory formula is contrary 
to Congressional intent, because the monetary savings if the formula 
were implemented consistent with the statute is far greater than the 
CBO score of the provision. Commenters suggested that CMS adopt a less 
literal and rigid interpretation of the statute or seek a technical 
amendment to the law.
    Response: We appreciate the comments on the readmission payment 
adjustment factor, but we again note that we did not propose policies 
related to the Hospital Readmissions Reduction Program payment 
adjustment in the proposed rule. Therefore, these comments are not 
within the scope of issues discussed in the FY 2012 IPPS/LTCH PPS 
proposed rule. We will consider these comments when formulating 
policies related to the Hospital Readmissions Reduction Program payment 
adjustment in next year's IPPS/LTCH PPS rulemaking.
d. Expansion of the Applicable Conditions To Be Included in the Future 
Rulemaking
    Pursuant to section 1886(q)(5)(B) of the Act, beginning in FY 2015, 
the Secretary ``shall, to the extent practicable,'' expand the list of 
applicable conditions for the Hospital Readmissions Reduction Program 
beyond the three conditions described in section 1886(q)(5)(A) of the 
Act to include additional conditions that have been identified by 
MedPAC as high cost or high volume in its 2007 Report to Congress, as 
well as other conditions as determined appropriate by the Secretary. We 
plan to implement this provision of the Hospital Readmissions Reduction 
Program in future rulemaking.
    Comment: A few commenters expressed support for the future 
expansion of applicable conditions for the Hospital Readmissions 
Reduction Program. One commenter requested that CMS consider some often 
undertreated clinical conditions that commonly afflict hospital 
patients (such as disorders associated with abnormal sodium level). 
Some commenters urged CMS to provide details about expansion of the 
applicable conditions soon so that they can begin interventions to 
improve readmissions for these conditions.
    Response: We appreciate the commenters' support and their proactive 
approach to reduce hospital readmissions. We will take these 
suggestions into account as we continue to implement the Hospital 
Readmissions Reduction Program in the future. We plan to consider the 
remaining four conditions that accounted for almost 12 percent of 
potentially preventable readmissions as identified by the MedPAC in its 
2007 ``Report to Congress'' as well as other conditions as determined 
appropriate by the Secretary.\51\
---------------------------------------------------------------------------

    \51\ Medicare Payment Advisory Commission (MedPAC). Report to 
Congress: Promoting Greater Efficiency in Medicare; 2007. Available 
at http://www.medpac.gov/documents/Jun07_EntireReport.pdf. Accessed 
January 10, 2011.
---------------------------------------------------------------------------

    Comment: One commenter stated that complying with the Hospital 
Readmissions Reduction Program measure requirements and concurrently 
undergoing the adoption of EHR technology is overwhelming. The 
commenter requested delaying the expansion of applicable conditions 
until after 2015, when the EHR transition is projected to be complete.
    Response: We appreciate the commenter's concerns. The Secretary is 
authorized under section 1886(q)(5)(B) of the Act to expand the list of 
applicable conditions beginning in FY 2015. Therefore, we believe 
hospitals would have sufficient time to prepare to address both the 
HITECH EHR Incentive Program and the Hospital Readmissions Reduction 
Program. We will collaborate with stakeholders to assess the impact of 
expanding the list of applicable conditions as 2015 approaches.
    Comment: Another commenter suggested that, if CMS were to adopt the 
Healthcare Associated Infection (HAI) measure of Clostridium Difficile 
infection proposed for the Hospital IQR Program, it should consider 
adopting a readmission measure for Clostridium Difficile infection for 
the Hospital Readmissions Reduction Program for FY 2013 or a subsequent 
year because doing so would help to achieve the goals of the HHS Action 
Plan to Prevent HAIs.
    Response: We appreciate the commenter's suggestion. However, we 
want to clarify that there is currently no NQF-endorsed readmission 
measure that covers the condition of Clostridium Difficile infection 
that could have been considered as an applicable condition for FY 2013. 
For the FY 2013 payment determination for the Hospital Readmissions 
Reduction Program, we are required to adopt NQF-endorsed measures for 
the high cost/high expenditure conditions that are selected.
    For the Hospital IQR Program, we proposed and are finalizing the 
clostridium Difficile infection measure that was listed among the 
targeted metrics in the HHS Action Plan to Prevent HAIs, and we believe 
that doing

[[Page 51665]]

so will further the goals of the Action Plan. In the future, should 
this condition meet the statutory criteria and should a readmission 
measure for the condition be established that also meets the statutory 
criteria, we will consider it for future expansion of the Hospital 
Readmissions Reduction Program in accordance with the applicable 
condition requirements set forth in section 1886(q)(5) of the Act.
3. Provisions for the Hospital Readmissions Reduction Program
a. Applicable Conditions for the FY 2013 Hospital Readmissions 
Reduction Program
    Section 1886(q) of the Act sets forth payment adjustments for 
applicable hospitals to account for excess readmissions, for applicable 
conditions, that are high volume or high expenditure, in the hospital. 
These payment adjustments are determined based on the occurrence of 
readmissions for ``applicable conditions.'' When selecting ``applicable 
conditions,'' the Secretary must select among conditions and procedures 
for which (1) readmissions are ``high volume or high expenditure''; and 
(2) ``measures of such readmissions'' have been endorsed by the entity 
with a contract under section 1890(a) of the Act'' (currently NQF) and 
(3) such endorsed measures have exclusions for readmissions that are 
unrelated to the prior discharge (such as a planned readmission or 
transfer to another applicable hospital).'' Consistent with these 
requirements, in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25931), 
we proposed to include AMI, HF, and PN as ``applicable conditions'' for 
the FY 2013 Hospital Readmissions Reduction Program. As set forth 
below, we believe these conditions meet the criteria for ``applicable 
conditions'' under section 1886(q)(5)(A) of the Act. We also note that 
in MedPAC's 2007 Report to Congress that we discussed in section 
IV.C.1.a. of this preamble, MedPAC listed three conditions (AMI, HF, 
and PN) as priorities for hospital-specific public reporting of 
readmission rates.
    With regards to the first criterion, that readmissions of 
``applicable conditions'' be ``high volume or high expenditure,'' 
MedPAC identified AMI, HF, and PN as being among the seven conditions 
and procedures associated with approximately 30 percent of potentially 
preventable readmissions, based on an 3M analysis conducted for MedPAC 
of 2005 MedPAR (Medicare FFS hospital claims). Of these seven 
conditions and procedures, HF and PN were the highest in terms of 
volume and expenditures.
    In addition, in our analysis of the 235 diagnostic categories for 
hospitalization based on 2008 Medicare hospital claims data, HF and PN 
were first and second, respectively, as the most frequent diagnostic 
category for both total admissions and total readmissions. AMI was 
ninth among the 235 conditions in terms of frequency of admission and 
8th in frequency of readmission. Therefore, we believe that AMI, HF and 
PN consitute high volume and high expenditure conditions particularly 
as this term relates to hospital admission and readmission.
    With regards to the second criterion, we believe that measures of 
readmissions for these applicable conditions also meet the statutory 
requirements. Section 1886(q)(5)(A)(ii) of the Act requires that each 
``applicable condition'' have ``measures of readmissions'' that ``(I) 
have been endorsed by the entity with a contract under section 1890(a) 
[of the Act]; and (II) such endorsed measures have exclusions for 
readmissions that are unrelated to the prior discharge (such as a 
planned readmission or transfer to another applicable hospital).'' As 
discussed in section IV.C.3.c. of this preamble, we believe selecting 
AMI, HF, and PN as ``applicable conditions'' is consistent with this 
statutory requirement. The NQF (the entity with a contract under 
section 1890(a) of the Act) has endorsed ``measures of readmissions'' 
for each of these three conditions, and those NQF-endorsed measures 
``have exclusions for readmissions that are unrelated to the prior 
discharge (such as a planned readmission or transfer to another 
applicable hospital).''
    We believe AMI, HF, and PN meet both prongs of the definition of 
``applicable condition.'' Therefore, in the FY 2012 IPPS/LTCH PPS 
proposed rule, we proposed to include AMI, HF, and PN as ``applicable 
conditions'' for the Hospital Readmissions Reduction Program for FY 
2013. We invited public comment on this proposal.
    Comment: One commenter encouraged CMS to carefully review and 
address the selection of applicable conditions. One commenter urged CMS 
to exercise caution in implementing financial incentives to reduce 
readmission of patients for pneumonia and COPD because of the clinical 
variability and uncertainty involving the effectiveness of 
interventions for such patients.
    Response: We note that we did not propose a COPD-based measure in 
the FY 2012 IPPS/LTCH PPS proposed rule, but we will take the comment 
into consideration should we consider proposing COPD as an applicable 
condition in future rulemaking. In the case of pneumonia, we note that 
studies suggest optimal care for pneumonia during the index 
hospitalization may reduce the risk of subsequent 
readmission.52 53 Furthermore, as we discussed above, 
pneumonia meets all of the statutory criteria to be included as a 
readmissions measure for the Hospital Readmissions Reduction Program 
for FY 2013.
---------------------------------------------------------------------------

    \52\ Dean NC, Bateman KA, Donnelly SM, et al. 2006. Improved 
clinical outcomes with utilization of a community-acquired pneumonia 
guideline. Chest 130(3):794-799.
    \53\ Gleason PP, Meehan TP, Fine JM, et al. 1999. Associations 
between initial antimicrobial therapy and medical outcomes for 
hospitalized elderly patients with pneumonia. Arch Intern Med 
159(21):2562-2572.
---------------------------------------------------------------------------

    As we discussed in the proposed rule, we believe the three 
applicable conditions that we have selected for the Hospital 
Readmissions Reduction Program for FY 2013 meet the stringent selection 
criteria as laid out in the statute and are conditions for which 
hospital interventions can lead to reduced readmissions. Specific 
interventions evaluated under the QIO 9th Statement of Work for 
reducing readmissions are listed at: http://www.cfmc.org/caretransitions/files/toolkit/intervention/QIO%20Developed%20Tools/Interventions_by_Driver_031011.pdf. We believe these three 
applicable conditions are most appropriate for the Hospital 
Readmissions Reduction Program.
    Comment: One commenter stated that using only three applicable 
conditions in the FY 2013 Hospital Readmissions Reduction Program will 
create opportunities for gaming.
    Response: We believe that the commenter was suggesting that 
hospitals might change coding practices to avoid identifying patients 
with AMI, HF, or PN. We plan to monitor trends in admissions and 
readmissions to ensure there no systematic shift in patients' primary 
discharge diagnoses codes occurs as a result of implementation of the 
Hospital Readmissions Reduction Program.
    After consideration of the public comments we received, we are 
finalizing the proposed applicable

[[Page 51666]]

conditions of AMI, HF, and PN for use in the Hospital Readmissions 
Reduction Program for FY 2013.
b. Definition of ``Readmission''
    Section 1886(q)(5)(E) of the Act defines ``readmission'' as, ``in 
the case of an individual who is discharged from an applicable 
hospital, the admission of the individual to the same or another 
applicable hospital within a time period specified by the Secretary 
from the date of such discharge.'' The definition further states that 
``[i]nsofar as the discharge relates to an applicable condition for 
which there is an endorsed measure * * * such time period (such as 30 
days) shall be consistent with the time period specified for such 
measure.''
    The three NQF-endorsed readmission measures define a readmission as 
occurring when a patient is discharged from the applicable hospital to 
a non-acute setting (for example, home health, skilled nursing, 
rehabilitation or home) and then is admitted to the same or another 
acute care hospital within a specified time period from the time of 
discharge from the index hospitalization (http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841. The time period specified for these measures is 30 days. 
Because the measures as endorsed by NQF are calculated based on 
readmissions occurring within 30 days, in the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25931 through 25932), we proposed 30 days as the 
time period specified from the date of discharge for the purpose of 
defining readmission for the Hospital Readmissions Reduction Program. 
The 30-day time period also meets the requirement set forth in section 
1886(q)(5)(E) of the Act that the time period specified by the 
Secretary for defining a readmission be consistent with the time period 
specified for the endorsed measures. We invited public comment on our 
proposal to adopt, without revision, a proposed definition of 
readmission with a time period of 30 days from the date of discharge 
from the index hospitalization as set forth in the existing NQF-
endorsed measures.
    Comment: One commenter asked how multiple readmissions will be 
calculated.
    Response: The readmissions measures are designed to measure whether 
a patient experienced at least one readmission within 30 days of an 
initial (or ``index'') discharge as a single binary (yes/no) event, 
rather than counting the number of readmissions experienced within 30 
days of discharge as a separate readmissions. For any given patient, 
only the first readmission they have will be counted for the Hospital 
Readmissions Reduction Program. In addition, only one readmission 
during the 30 days following the discharge from the initial 
hospitalization will count as a readmission for purposes of calculating 
the ratios set forth in section 1886(q) of the Act. For any given 
patient, none of the subsequent readmissions they experience within 30 
days after discharge would be counted as a new ``index'' admission 
(that is, an admission evaluated in the measure for a subsequent 
readmission). Any eligible admission after the 30-day time period will 
be considered a new index admission.
    Comment: One commenter recommended defining ``readmission'' to mean 
``readmission to the same hospital'' because hospitals cannot control 
the admitting practices of other institutions.
    Response: Section 1886(q)(5)(E) of the Act, as added by the 
Affordable Care Act, defines ``readmission'' as ``in the case of an 
individual who is discharged from an applicable hospital, the admission 
of the individual to the same or another applicable hospital.'' We do 
not believe that the commenter's suggestion to limit the definition of 
readmission to only those readmissions to the same hospital is 
consistent with the statutory definition of ``readmission.'' The 
statutory definition, which is consistent with the definition of 
``readmission'' in the NQF-endorsed measures, captures the more than 20 
percent of readmissions that occur at a hospital that is different from 
the hospital where the initial admission took place. We believe this is 
the appropriate approach. Although hospitals may not have influence 
over the admitting practices of outside institutions, we believe that 
hospitals can communicate effectively with post-acute care providers 
and take other measures that can better prepare a patient for discharge 
to reduce the risk of readmission.
    After consideration of the public comments we received, we are 
finalizing our proposal to adopt the definition of readmission as 
occurring when a patient is discharged from the applicable hospital and 
then is admitted to the same or another acute care hospital within a 
specified time period from the time of discharge from the index 
hospitalization.
c. Readmission Measures and Related Methodology
(1) Readmission Measures for Applicable Conditions
    As explained above, section 1886(q)(5)(A)(ii) of the Act requires 
that each ``applicable condition'' selected by the Secretary has 
``measures of readmissions'' that ``have been endorsed by the entity 
with a contract under section 1890(a) [of the Act]'' and that ``such 
endorsed measures have exclusions for readmissions that are unrelated 
to the prior discharge.'' In the FY 2012 IPPS/LTCH PPS proposed rule 
(76 FR 25932), we proposed to adopt three NQF-endorsed, hospital risk-
standardized readmission measures for AMI, HF, and PN which are 
currently included in the Hospital IQR Program. These existing measures 
are:
     Acute Myocardial Infarction [AMI] 30-day Risk Standardized 
Readmission Measure (NQF 0505);
     Heart Failure [HF] 30-day Risk Standardized Readmission 
Measure (NQF 0330); and
     Pneumonia [PN] 30-day Risk Standardized Readmission 
Measure (NQF 0506).
    CMS adopted these measures for the Hospital IQR Program in the FY 
2009 IPPS/LTCH PPS final rule for the FY 2010 payment determination (73 
FR 48606) and the CY 2009 OPPS/ASC final rule with comment period (73 
FR 68781). The NQF (the entity with a contract under section 1890(a) of 
the Act) has endorsed each of these ``measures of readmissions'' and, 
as explained in more detail below, those NQF-endorsed measures ``have 
exclusions for readmissions that are unrelated to the prior 
discharge.'' Therefore, we believe these measures meet the statutory 
requirements for selection for the Hospital Readmissions Reduction 
Program, and we proposed them, without modification, as measures for 
the program.
    Comment: Many commenters suggested changes to specific aspects of 
the three NQF-endorsed 30-day readmission measures for AMI, HF, and PN 
(for example, exclusions for unrelated readmissions and risk-adjustment 
of the readmission measures). These comments are summarized and 
included in the sections of this document that discuss those specific 
aspects of the measures.
    Response: For the FY 2013 Hospital Readmission Reduction Program, 
the statute requires us to adopt NQF-endorsed measures for the 3 
conditions selected. We have proposed to use the three measures as 
currently NQF endorsed. As we discuss below in the

[[Page 51667]]

section regarding NQF endorsement of the measures, we believe that 
altering specific aspects of the measures that are part of the NQF 
endorsed methodology (such as exclusions and risk adjustment) would be 
inconsistent with the statutory requirement to use NQF-endorsed 
readmission measures.
    Comment: One commenter supported CMS' proposal to adopt, without 
alteration, the three NQF-endorsed 30-day readmission measures for AMI, 
HF, and PN.
    Response: We appreciate the commenter's support of the readmission 
measures.
    After consideration of the public comments we received, we are 
finalizing three readmission reduction measures for the FY 2013 
Hospital Readmissions Reduction Program: AMI 30-day risk standardized 
readmission measure, HF 30-day risk standardized readmission measure, 
and PN 30-day risk standardized readmission measure.
(2) NQF Endorsement of Measures of Readmissions
    We note that these measures and their underlying methodologies were 
NQF-endorsed. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25932), 
we proposed to adopt, for purposes of the Hospital Readmissions 
Reduction Program, the measures and related methodologies as they are 
currently endorsed by NQF. This includes the currently endorsed 30-day 
time window, risk-adjustment methodology, and exclusions for certain 
readmissions that comprise the measures. We stated our belief that our 
proposal to adopt, without modification, these measures of readmission 
is consistent with the statutory language, which requires the measures 
of readmissions to be ``endorsed by the entity with a contract under 
section 1890(a) [of the Act].'' If we were to modify the endorsed 
measures, we are concerned that they would no longer be considered 
``endorsed.'' If the NQF were to later endorse a revised measure for 
one of these conditions, we would then propose through notice and 
comment rulemaking that the revised measure be used prospectively for 
purposes of the Hospital Readmissions Reduction Program.
    We welcomed public comment on our proposal to use, for each of the 
proposed applicable conditions, existing measures as endorsed by the 
NQF.
    We did not receive any public comments specifically on the NQF-
endorsement of the three proposed readmission measures. Therefore, we 
are finalizing the three NQF-endorsed Hospital Readmissions Reduction 
Program measures as proposed for the FY 2013 Hospital Readmissions 
Reduction Program.
(3) Endorsed Measures With Exclusions for Unrelated Readmissions
    Section 1886(q)(5)(A)(i)(ii)(II) of the Act requires that each of 
the readmission measures also have ``exclusions for readmissions that 
are unrelated to the prior discharge (such as a planned readmission or 
transfer to another applicable hospital).'' The three NQF-endorsed 
readmission measures that we proposed in the FY 2012 IPPS/LTCH PPS 
proposed rule for inclusion in the Hospital Readmissions Reduction 
Program have exclusions that meet this statutory requirement. Under 
each measure, certain unrelated readmissions are not taken into account 
when determining the number of readmissions under the measures.
    The AMI 30-day risk standardized readmission measure, as endorsed 
by the NQF and as proposed in the FY 2012 IPPS/LTCH PPS proposed rule, 
has exclusions for certain unrelated readmissions. Because admissions 
for Percutaneous Transluminal Coronary Angioplasty (PTCA) or Coronary 
Artery Bypass Graft (CABG) may be staged or are typically scheduled 
readmissions for patients initially admitted for AMI, the AMI 30-day 
risk standardized readmission measure does not count as readmissions 
those admissions after discharge that include PTCA or CABG procedures, 
unless the principal discharge diagnosis for the readmission is one of 
the following diagnoses that are not consistent with a scheduled 
readmission: Heart failure, acute myocardial infarction, unstable 
angina, arrhythmia, and cardiac arrest (that is, readmissions with 
these diagnoses and a PTCA or CABG procedure are counted as 
readmissions). We adopted this approach when first developing this 
measure after consultation with clinical experts, including 
cardiologists, and review of relevant readmissions data.
    During the development of the readmission measures for both HF and 
PN, we similarly asked clinical experts to identify planned 
readmissions for these conditions, that is, those which would not count 
as a readmission, after an admission for HF or PN. Specifically, the 
clinical experts were asked whether there were common follow-up causes 
of readmissions for a scheduled procedure that represented a 
continuation of care after either a HF or PN admission, respectively. 
No such related, planned procedures were identified as occurring 
commonly after the index admissions for HF or PN at the time of the 
development of the Hospital IQR Program measures. Therefore, no similar 
exclusions exist for the HF and PN measures of readmissions as they are 
currently endorsed.
    The three NQF-endorsed risk-standardized readmission measures that 
we proposed in the FY 2012 IPPS/LTCH PPS proposed rule exclude 
transfers to other acute care facilities from each of the readmission 
measures. The NQF-endorsed proposed measures consider these multiple 
contiguous hospitalizations to be a single acute episode of care. The 
measures attribute the readmission for transferred patients to the 
hospital that ultimately discharges the patient to a non-acute care 
setting (for example, to home or a skilled nursing facility). Thus, in 
the case of a patient who is transferred between two or more hospitals, 
if the patient is readmitted in the 30 days following the final 
hospitalization, the measures attribute such a readmission to the 
hospital that discharged the patient to a non-acute care setting. We 
believe that the exclusion of transfers to other applicable hospitals 
under the measures is sufficient to meet the requirement set forth in 
section 1886(q)(5)(A)(ii)(II) of the Act that certain ``unrelated'' 
readmissions be excluded from the measures selected for use in the 
program.
    Comment: Many commenters stated that the current set of existing 
exclusions for unrelated readmissions did not meet Congress' intent, 
which they believed requires additional exclusions for certain 
readmissions. These commenters noted that although the AMI measure 
contains exclusion for certain planned procedures, neither the heart 
failure nor the pneumonia measures contain such exclusions.
    Response: We thank the commenters for sharing their views on 
exclusions for the proposed readmission measures. Section 1886(q)(5)(A) 
of the Act requires us to select as the initial readmission measures 
those that are endorsed by the entity with a contract under section 
1890(a) (currently the NQF), and that have exclusions for readmissions 
that are unrelated to the prior discharges (such as a planned 
readmission or transfer to another applicable hospital). The statute 
does not state that the measures must account for all possible 
unrelated readmissions. Moreover, adding exclusions would be 
inconsistent with the statute, which requires us to adopt the measures 
as endorsed by the NQF, and the endorsements currently include specific 
exclusions for unrelated readmissions, which include transfers.
    We recognize that there could conceivably be additional 
readmissions

[[Page 51668]]

that could properly be excluded from the readmission measures, and we 
intend to further explore if there are any such readmissions. If we 
determine that changes should be made to the measures used for the 
Hospital Readmissions Reduction Program in FY 2013, we will bring them 
to NQF for review for continued endorsement for the measures and would 
subsequently propose the revised measure for use in the Hospital 
Readmissions Reduction Program in future rulemaking.
    Comment: Several commenters urged CMS to ``* * * conduct a study to 
thoroughly determine the common reasons for planned readmissions, as 
well as determine a subset of readmissions that are unrelated to a 
patient's initial admission. * * *'' These commenters also recommended 
three possible interim steps: (1) Not counting readmissions for certain 
patients (cancer, trauma, burns, end-stage renal disease, psychiatric 
disorders, substance abuse, and rehabilitation); (2) allowing a coding 
modifier on hospital claims to identify planned readmissions; or (3) 
using existing classification schemes such as MS-DRGs or AHRQ's 
classification system (http://www.hcup-us.ahrq.gov/toolssoftware/ccs/ccs.jsp), the clinical classification software, which ``groups 
diagnoses and procedure codes into clinically meaningful groups'' to 
identify related readmissions (and to exclude readmissions that are not 
identified as related).
    Response: We appreciate the commenters' suggestions. As part of our 
ongoing implementation of the Hospital Readmissions Reduction Program, 
we intend to further explore whether there are other readmissions that 
could be excluded from the readmission measures finalized in this rule, 
and we expect that we will solicit public input on this issue in future 
rulemaking. However, again we note that because the FY 2013 measures 
must be NQF-endorsed, any changes to the measures used for the program 
in FY 2013 would have to be brought to NQF for review for continued 
endorsement before we could, in future rulemaking, propose the measures 
for use in the Hospital Readmissions Reduction Program.
    Comment: Some commenters expressed concern that inappropriate 
transfers from acute care hospitals to a different acute care hospital 
might occur. Several of these commenters requested that CMS monitor 
transfers to ensure that potentially high-risk patients are not 
unnecessarily transferred in an attempt to artificially reduce hospital 
readmission rates.
    Response: We note that the NQF-endorsed readmission measures as 
finalized in this rule are designed to count all readmissions unless 
they meet the planned procedure definition for AMI or involve a 
transfer to another acute care hospital. This approach is consistent 
with section 1886(q)(5)(ii)(II) of the Act which requires that 
``endorsed measures have exclusions for readmissions that are unrelated 
to the prior discharge (such as a planned readmission or transfer to 
another applicable hospital).''
    With regard to the commenters' concerns about hospitals 
transferring patients to another acute care institution to avoid being 
accountable for readmissions, we will consider future monitoring of 
transfer rates to assess if there are any unexpected changes in 
transfer patterns in response to the Hospital Readmissions Reduction 
Program.
    Comment: Two commenters expressed concern regarding the 
appropriateness of the exclusion criteria for unrelated readmissions 
for use in measures when applied to hospitals that treat specialized 
patient populations, such as LTCHs and IPPS-exempt cancer hospitals. 
One commenter emphasized the importance to rural hospitals of not 
counting unrelated or planned readmissions. Another commenter suggested 
that CMS not count readmissions related to random events such as falls 
or readmissions that occur during natural disasters or states of 
emergency. One commenter suggested a method of reporting 
``nonreportable'' admissions via the claims payment system. One 
commenter believed that the upcoming implementation of ICD-10 would 
enhance CMS' ability to identify and remove readmissions related to 
random events.
    Response: We thank the commenters for their input on exclusion 
criteria, and we will consider these suggestions as we continue to 
implement the Hospital Readmissions Reduction Program. The proposed 
NQF-endorsed readmission measures were designed as ``all-cause'' 
readmission measures (that is, they count readmission regardless of the 
reason for readmission) because, from a patient perspective, 
readmission from any cause is an adverse event. Similarly, as we 
discussed above, many cases of seemingly unrelated diagnoses may, in 
fact, correspond to the original hospitalization, and differentiation 
is not always possible solely on the basis of the admitting diagnosis 
for the readmission. For instance, a patient with heart failure who 
develops a hospital-acquired infection may ultimately be readmitted 
with sepsis. In this context, we believe that the NQF-endorsed 
readmission measure for heart failure appropriately considers the 
readmission to be related to the care the patient received for heart 
failure during the first hospitalization.
    In our view, readmissions that are truly unrelated to the 
hospitalization should not affect some hospitals more than others, 
because these readmissions should have the same probability of 
occurring for similarly situated patients, regardless of where the 
patient was initially hospitalized. We also note that planned 
readmissions are easier to identify, especially those that are elective 
and scheduled in advance either as follow-on care for a procedure 
following a hospitalization or that have been scheduled by outpatient 
providers, and are not indicative of care quality.
    Comment: One commenter stated there is another readmission measure 
available that has excludes greater numbers of unrelated readmissions 
and is in use in a State.
    Response: The readmissions measure referred to by the commenter is 
3M's Potentially Preventable Readmission measure and is in use in the 
State of Florida. This measure was reviewed by NQF in 2009 and was not 
endorsed (NQF  HOE-007-08). It is our understanding that the 
NQF's Steering Committee's decision not to endorse the measure 
reflected the Committee's concern about the measure's approach to 
identifying preventable readmissions. The measure developer specified 
over 98,000 admission-readmission diagnoses pairs (for example, a heart 
failure admission followed by readmission for a fall) as either 
clinically related and therefore preventable or not related and 
therefore not preventable. The NQF Steering Committee did not think 
these judgments were reliable, and it rejected the measure in part on 
this basis. We agree with the Steering Committee that this measure did 
not accurately specify what is related or unrelated simply by looking 
at the diagnoses for the admission and the readmission.
    After consideration of the public comments we received, we are 
finalizing the NQF-endorsed measures with exclusions for unrelated 
conditions, as proposed.
(4) Methodology of Readmission Measures
    In the following section, we describe the major components of the 
measure methodology of the three NQF-endorsed risk-standardized 
readmission measures for AMI, HF and PN that we proposed for the 
implementation of the Hospital Readmissions Reduction Program.

[[Page 51669]]

Additional details about each of these measures may be found online at 
http://www.QualityNet.org>Hospital-Inpatient>Readmission 
Measures>methodologies. This Web page is located at http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    Briefly, as is described in more detail in the sections below, the 
measures are risk-standardized rates of readmission. For each hospital, 
qualifying index hospitalizations are identified based on the principal 
discharge diagnosis of the patient and the inclusion/exclusion criteria 
(section IV.C.3.c.(4)(A) of this preamble on index hospitalizations). 
Each hospitalization is evaluated for whether the patient had a 
readmission to an acute care setting in the 30-days following discharge 
(section IV.C.3.c.(4)(B) of this preamble on readmission). Patient-risk 
factors, including age, and chronic medical conditions are also 
identified from inpatient and outpatient claims for the 12-months prior 
to the hospitalization for risk-adjustment (section IV.C.3.c.(4)(D) of 
this preamble on risk-adjustment). The readmissions, sample size for 
each hospital, and patient risk-factors are then used to calculate a 
risk-standardized readmission ratio for each hospital. For the purposes 
of publicly-reporting the measures, this risk-standardized readmission 
ratio is then multiplied by the national crude rate of readmission for 
the given condition to produce a risk-standardized readmission rate 
(RSRR) (section IV.C.3.c.(5)(B) of this preamble).
(A) Index Hospitalization
    An index hospitalization for each of the readmission measures is 
the hospitalization from which we evaluate the 30 days after discharge 
for possible readmissions. The measures, as endorsed by the NQF, 
evaluate eligible hospitalizations and readmissions of Medicare 
patients discharged from an applicable hospital (as defined by section 
1886(q)(5)(C) of the Act) having a principal discharge diagnosis for 
the measured condition in an applicable period. The NQF-endorsed 
measures, as specified, exclude patients under 65 year of age.
    The discharge diagnoses for each applicable condition are based on 
a list of specific ICD-9-CM codes for that condition. These codes are 
listed in the 2010 Measures Maintenance Technical Report: Acute 
Myocardial Infarction, Heart Failure, and Pneumonia 30-Day Risk-
Standardized Readmission Measures. They also are posted on the 
QualityNet Web site: http://www.QualityNet.org>Hospital-
Inpatient>Readmission Measures>methodologies. See http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    The current NQF-endorsed CMS 30-day risk standardized readmission 
measures exclude the following admissions from the group of index 
hospitalizations:
     Hospitalizations for patients with an in-hospital death 
(because they are not eligible for readmission);
     Hospitalizations for patients without at least 30 days 
post-discharge enrollment in Medicare FFS (because the 30-day 
readmission outcome cannot be assessed in this group);
     Hospitalizations for patients discharged against medical 
advice (because providers did not have the opportunity to deliver full 
care and prepare the patient for discharge).
     Hospitalizations for patients under the age of 65.
    Comment: One commenter noted that admissions related to disaster 
preparedness or recovery should be excluded from the measures. One 
commenter noted that the nature of traumatic injuries is such that 
certain medical conditions are not always readily apparent upon 
admission and lead to the need for readmission.
    Response: We appreciate the commenter's recommendation, and we 
intend to consider whether to it would be appropriate to allow waivers 
for extraordinary regional or local circumstances, such as natural 
disasters that are not in the control of the hospital. Any such process 
would be proposed in a future rulemaking.
(B) Readmission
    As explained above, the initial hospitalization assessed for a 
readmission is called the index hospitalization. The proposed measures, 
as endorsed by the NQF, define readmission as a second admission to 
another acute care hospital within 30 days of the index 
hospitalization. Under the proposed measures, as endorsed by the NQF, a 
patient who is readmitted twice within 30 days simply is counted as 
having been readmitted; this patient's readmissions are not counted 
differently than a patient with a single readmission within 30 days of 
discharge.
    With the exception of the exclusions discussed previously 
(transfers and planned readmissions, as discussed in the Exclusions for 
Unrelated Readmissions section above), the proposed measures, as 
currently endorsed by the NQF, include readmissions for all causes, 
without regard to the principal diagnosis of the readmission. There are 
several reasons for this approach. First, from the patient's 
perspective, readmission from any cause is an adverse event. Second, 
although we would expect few hospitals to use gaming strategies, we 
strive to make sure that measures do not create incentives for 
hospitals to do so. Limiting the readmissions to particular diagnoses 
creates an opportunity for hospitals to potentially avoid having 
readmissions counted by changing coding practices. Further, doing so 
could create a perverse incentive whereby hospitals begin to avoid 
patients with conditions that are part of the readmissions measures. 
Third, as discussed above, there are not currently any clinically and 
technically sound and accepted strategies for accurately identifying 
readmission that are unrelated to hospital quality based on the 
documented cause of readmission. Finally, we believe it is important 
that hospitals strive to reduce readmissions from all causes, not just 
for patients with conditions that happen to be readmissions measures. 
While the measures do not presume that each readmission is preventable, 
interventions have generally shown reductions in all types of 
readmissions (including both related and unrelated readmissions). The 
NQF measures are intended to provide incentives for hospitals to reduce 
readmissions and not to achieve zero readmissions.
(C) Time Window
    The three proposed measures, as endorsed by the NQF, count 
readmissions within a 30-day period from the date of the initial 
discharge from the index hospitalization. The timeframe of 30 days is a 
clinically meaningful period for hospitals, in collaboration with their 
medical communities, to reduce readmission risk. This time period for 
assessing readmission is an accepted standard in research and 
measurement. We believe that during this 30-day time period, hospital 
and community partners can take steps to reduce risk by ensuring 
patients are clinically ready to be discharged, improving communication 
across providers, reducing risks of infections, and educating patients 
on symptoms to monitor whom to contact with questions and where and 
when to seek follow-up care can influence readmission rates.
    Comment: One commenter suggested the proposed 30-day time period 
(time window) is too long and should be reduced to 15 days. Another 
commenter

[[Page 51670]]

supported the 30-day time window, but indicated that they preferred 15 
days.
    Response: The proposed timeframe of 30 days from the date of the 
initial discharge from the index hospitalization is the timeframe that 
has been NQF-endorsed as part of the three readmission measures. The 
timeframe of 30 days is considered an acceptable standard in both the 
research and measurement communities as this time period is long enough 
to capture a substantial proportion of readmissions attributable to an 
index hospitalization, a greater proportion than captured in just 15 
days, and yet it is short enough that outcomes can be attributed to and 
influenced by hospital care and the early transition to the outpatient 
setting. The use of the 30-day timeframe is also a clinically 
meaningful period for hospitals to collaborate with their communities 
in an effort to reduce readmissions. Multiple studies have shown that 
interventions by hospitals can make an impact on 30-day readmission 
rates.54 55 56 Finally, we again note that, as required 
under the Act, we proposed the measures as they were endorsed by the 
NQF. Since the NQF-endorsed measures use a 30-day time period, we are 
finalizing our proposal to count readmissions within a 30-day period 
from the date of the initial discharge from the index hospitalization.
---------------------------------------------------------------------------

    \54\ Benbassat J, Taragin M. 2000. Hospital readmissions as a 
measure of quality of health care: advantages and limitations. Arch 
Intern Med 160(8):1074-1081.
    \55\ Benbassat J, Taragin M. 2000. Hospital readmissions as a 
measure of quality of health care: advantages and limitations. Arch 
Intern Med 160(8):1074-1081.
    \56\ Jonas M, Grossman E, Boyko V, et al. 1999. Relation of 
early and one-year outcome after acute myocardial infarction to 
systemic arterial blood pressure on admission. Am J Cardiol 84:162-
165.
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(D) Risk Adjustment
    Section 1886(q)(4)(C)(i)(I) of the Act requires that the number of 
readmissions used in the Excess Readmission Ratio be risk adjusted. 
This language requires us, when comparing hospitals' readmission rates, 
to account for differences in the severity of illnesses of the patients 
that hospitals treat. Risk adjustment essentially ``levels the playing 
field'' for comparing hospital performance by taking into account that 
some hospitals' patients are sicker than others on admission and 
therefore have a higher risk of readmission.
    The methodology for calculating the RSRRs under the NQF-endorsed 
measures that we proposed adjusts for key factors that are clinically 
relevant and have strong relationships with the outcome (for example, 
patient demographic factors, patient co-existing medical conditions, 
and indicators of patient frailty). Under the current NQF-endorsed 
methodology, these covariates are obtained from Medicare claims 
extending 12 months prior to, and including, the index admission. This 
risk-adjustment approach adjusts for differences in the clinical status 
of the patient at the time of the index admission as well as for 
demographic variables.
    A complete list of the variables used for risk adjustment and the 
clinical and statistical process for selecting the variables for each 
NQF-endorsed measure, as proposed, is available in the publicly-
available technical documentation of the existing measures for AMI, HF, 
and PN. The risk adjustment variables for each condition are presented 
in the 2010 Measures Maintenance Technical Report: Acute Myocardial 
Infarction, Heart Failure, and Pneumonia 30-Day Risk-Standardized 
Readmissions Measures that are posted on http://www.QualityNet.org>Hospital-Inpatient>Readmission Measures>Resources. 
The variables used are Condition Categories that group ICD-9-CM codes 
into clinically coherent variables. The 2010 Condition Category-ICD-9-
CM Crosswalk provides a map to the specific ICD-9-CM codes in each 
variable and is also posted on http://www.QualityNet.org>Hospital-
Inpatient>Readmission Measures>Measure Calculation Methodology or 
readers may use the following Web site address: http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841.
    Comment: Many commenters argued that CMS should risk-adjust for 
patient characteristics beyond the medical diagnosis, age and gender 
currently included in the NQF-endorsed risk adjustment methodology. 
Specifically, commenters believed that patient race, language, life 
circumstances, environmental factors, and socioeconomic status (SES) 
should be included in the risk-adjustment methodology, because these 
factors also have an impact on health outcomes. Commenters expressed 
concern that without adding these adjustment factors, the Hospital 
Readmissions Reduction Program may disproportionately affect hospitals 
serving a large number of minorities, and by penalizing these 
hospitals, the program could in turn disproportionately harm minority 
patients. Commenters stated that failure to account for these factors 
could result in ``disparate-impact discrimination,'' potentially 
violating Title VI of Civil Rights Act and 45 CFR 80.3.
    Response: We do not agree that the use of the current NQF-endorsed 
risk adjustment methodology in the Hospital Readmissions Reduction 
Program will harm minorities. The proposed readmission measures are 
risk-standardized readmission measures that adjust for case-mix 
differences based on the clinical status of the patient at the time of 
admission to the hospital. That is, they are risk-adjusted for certain 
key variables (for example, age, sex, co-morbid diseases and indicators 
of patient frailty) that are clinically relevant and/or have been found 
to have strong relationships with the outcome. To the extent that race 
or SES results in certain patient groups having a greater disease 
burden, those factors are accounted for in the measure. A more complete 
description of the risk adjustment model and its development is 
available on the QualityNet Web site (http://www.qualitynet.org/dcs/ContentServer?c=Page&pagename=QnetPublic%2FPage%2FQnetTier4&cid=1219069855841).
    However, these measures are not adjusted for other factors such as 
race, English language proficiency or SES. We believe such additional 
adjustments are not appropriate because the association between such 
patient factors and health outcomes can be due, in part, to differences 
in the quality of health care received by groups of patients with 
varying race/language/SES. Differences in the quality of health care 
received by certain racial and ethnic groups may be obscured if the 
measures risk-adjust for race and ethnicity. Additionally, risk-
adjusting for patient race, for instance, may suggest that hospitals 
with a high proportion of minority patients are held to different 
standards of quality than hospitals treating fewer minority patients.
    We appreciate the concerns of hospitals that care for 
disproportionately large numbers of disadvantaged populations. Our 
analysis indicates that better quality of care is achievable regardless 
of the demographics of the hospital's patients. (See: Medicare Hospital 
Quality Chartbook 2010).
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    \57\ http://www.cms.gov/HospitalQualityInits/20_OutcomeMeasures.asp#TopOfPage.
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    Although we believe the current risk-adjustment methodology 
properly accounts for different patient circumstances, we will monitor 
whether the Hospital Readmissions Reduction Program has a disparate 
impact on

[[Page 51671]]

hospitals that care for large numbers of disadvantaged patients. If 
such an impact is found, we will consider whether additional program 
modifications would be appropriate and consistent with the statutory 
requirements and intent of the program. For example, one option might 
be to refine the measures themselves to include factors such as SES in 
the risk adjustment. We also note that there are programs that provide 
technical and financial support that may assist hospitals in improving 
performance on the readmission measures included in the Hospital 
Readmissions Reduction Program such as the Community Based Care 
Transitions program authorized under section 3026 of the Affordable 
Care Act and the Partnership for Patients, a new public-private 
partnership that will help improve the quality, safety and 
affordability of health care. In addition, assistance in lowering 
readmission rates is available from the Quality Improvement 
Organizations.
    Comment: Several commenters suggested that trauma hospitals and 
safety-net hospitals are at increased risk of being subject to a 
payment adjustment under the Hospital Readmissions Reduction Program 
because of insufficient risk-adjustment for ``case-mix'' or the fact 
that their patients are sicker, lack access to appropriate post-
discharge care, may suffer numerous chronic conditions, and may have 
substance abuse or behavioral problems. Another commenter expressed 
concern that coding does not capture patients in palliative care or 
those readmitted from hospice, but acknowledged that CMS risk 
adjustment methodology is the state of the art at present.
    Response: We thank the commenters for their input. As noted above, 
our analyses suggest that trauma and safety net hospitals caring for 
high proportions of at-risk patients can, and frequently do, perform as 
well on the readmission measures as those hospitals with fewer at-risk 
patients (see: Medicare Hospital Quality Chartbook 2010, pp 14-19).
    We do not exclude hospice patients or those who have elected 
palliative care from the readmission measures because we do not believe 
that it is appropriate to differentiate, as to the appropriateness of 
care provided, between patients who have elected hospice or palliative 
care and those who have not.
    After consideration of the public comments we received, we are 
finalizing the risk-adjustment methodology as proposed and endorsed by 
the NQF.
(E) Applicable Period
    Section 1886 (q)(5)(D) of the Act authorizes the Secretary to 
specify the ``applicable period'' with respect to a fiscal year. 
Currently, for Hospital IQR Program public reporting purposes, we use 3 
years of data (three 12-month increments) to calculate the three 
proposed readmission measures. This provides substantially more data 
than a 1- or 2-year timeframe and increases the precision of the 
measure in distinguishing performance among hospitals. Additionally, it 
is advantageous to have three years worth of data for purposes of 
displaying the three proposed readmission measures on Hospital Compare 
where we categorize hospital performance into one of three discrete 
categories: ``Better than the US national rate,'' ``No different than 
the US national rate,'' and ``Worse than the US national rate.''
    For the FY 2013 Hospital Readmissions Reduction Program, in the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 25934), we proposed to use 3 
years of data for discharges from July 1, 2008 through June 30, 2011 as 
the applicable period upon which to calculate Excess Readmission Ratios 
for each of the three proposed measures. Based on our experience with 
the Hospital IQR Program, we believe that this timeframe increases the 
precision of the measures in distinguishing performance among 
hospitals. However, for purposes of the Hospital Readmissions Reduction 
Program, we will not be categorizing hospital performance in three 
categories; rather, we will be using the measures to calculate Excess 
Readmission Ratios for the three conditions. In the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25934), we proposed to use a 3-year data 
period spanning July 1, 2008 through June 30, 2011, as the applicable 
period for determining the FY 2013 Hospital Readmissions Reduction 
Program payment adjustment. We indicated that we are currently 
conducting analyses to determine an appropriate data period (for 
example, 1 year, 2 years, 3 years) that will yield reliable Excess 
Readmission Ratios for the three proposed measures, and that we intend 
to consider both the positive and negative consequences of using longer 
or shorter data periods for this program. We also indicated that should 
our analysis or public comment indicate that a shorter data period 
yields Excess Readmission Ratios with acceptable reliability, we may 
consider finalizing a shorter time period.
    We invited public comment and suggestions on the topic of an 
appropriate length for the applicable period to consider for the three 
proposed readmission measures for FY 2013.
    Comment: Many commenters recommended that CMS shorten the proposed 
applicable period of 3 years so that only more recent data would be 
used for the Hospital Readmissions Reduction Program. Some commenters 
urged CMS to shorten the timeframe because the commenters believed it 
was unfair to assess hospital performance on data that occurred during 
2008, which is ``long before [the Hospital Readmissions Reduction 
Program provision] was passed * * *''
    Response: We thank the commenters' for their views regarding the 
data used for the measures. We proposed 3 years as the applicable 
period because we believe that this time period would ensure the 
proposed measures covers a sufficient number of applicable patients for 
hospital performance to be fairly portrayed. For example, from 2006 
through 2008, only 2,500 of the 4,500 qualifying hospitals for the 
Hospital Readmissions Reduction Program reported at least 25 discharges 
for AMI during that time period.
    As stated above, we indicated that we are currently conducting 
analyses to determine if a different data period (for example, 1 or 2 
years) might also yield reliable Excess Readmission Ratios for the 
three proposed measures. We intend to consider both the positive and 
negative consequences of using longer or shorter data periods for this 
program. If our analysis or public comments indicate that a shorter 
data period yields Excess Readmission Ratios with acceptable 
reliability, we may consider finalizing a shorter time period.
    Because we did not receive any public comments demonstrating that a 
shorter period would yield reliable and meaningful results upon which 
differences in hospital performance could be appropriately 
distinguished, and because our own analysis indicated that 3 years 
continues to be an appropriate period, we are finalizing 3 years as the 
applicable period for the FY 2013 Hospital Readmissions Reduction 
Program.
(F) Data Sources
    As discussed above, the adjustment under section 1886(q) of the Act 
is made to the ``base operating DRG payment amount,'' and components of 
the ratio used to determine a hospital's adjustment factor also use 
that payment amount. Payments under section 1886 of the Act, including 
the ``base operating DRG payment amount,'' are made for services 
furnished to Medicare's fee-for-

[[Page 51672]]

service population under part A. Therefore, for purposes of 
implementing the Hospital Readmissions Reduction Program under section 
1886(q) of the Act, in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
25934), we proposed to use Medicare claims data for the Medicare FFS 
population over the age of 65 only. This is the same universe of claims 
used for calculating the NQF-endorsed measures for the purposes of the 
Hospital IQR Program.
    The administrative data sources for the risk adjustment analyses 
are Medicare administrative claims datasets that contain FFS inpatient 
and outpatient (Medicare Parts A and B) claims information in the prior 
12 months and subsequent one month for patients admitted in each of 
these years. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25934), 
we proposed to use claims from the index hospitalization included the 
measure and from the prior 12 months from all of these data sources to 
gather risk factors. If the patient does not have any claims in the 12 
months prior to the index hospitalization admission, only comorbidities 
from the included admission are used.
    We welcomed public comment on this proposal.
    We did not receive any public comments on this proposal. Therefore, 
we are finalizing the data sources used for the Hospital Readmissions 
Reduction Program as proposed in the FY 2012 IPPS/LTCH PPS proposed 
rule.
(G) Minimum Number of Discharges for Applicable Conditions
    Section 1886(q)(4)(C)(II)(ii) of the Act authorizes the Secretary 
to exclude readmissions for an applicable condition for which there are 
``fewer than a minimum number (as determined by the Secretary).'' 
Currently, for public reporting purposes under the Hospital IQR 
Program, only hospitals with at least 25 discharges for each of the 
three proposed applicable conditions are included in the display of the 
three proposed readmission measures on Hospital Compare. We chose this 
number of discharges for the Hospital IQR Program based on our findings 
that using fewer cases did not provide sufficiently reliable 
information on hospital performance. In general, the larger the number 
of cases, the more reliable the information. In the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25935), we indicated that we are currently 
conducting additional analyses to further evaluate the appropriate 
minimum number of discharges needed to yield reliable Excess 
Readmission Ratios for the three proposed measures. However, based on 
our experience with the Hospital IQR Program, in the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25934 through 25935), we proposed to use the 
current threshold of 25 discharges for each of the three measures for 
the Hospital Readmissions Reduction Program. However, we indicated that 
should our analysis or public comment indicate that a different minimum 
number of discharges would be more appropriate for this program, we 
would consider finalizing a different number.
    We invited public comment and suggestions on the topic of 
appropriate minimum number of discharges to consider for the three 
proposed readmission measures.
    Comment: Several commenters supported the proposed minimum number 
of 25 discharges. Other commenters stated that 25 discharges is too 
small a number to reliably profile hospitals.
    Response: We appreciate hearing from commenters regarding the 
proposed minimum number of discharges. We continue to believe that 25 
discharges is the appropriate cut-off. As noted in the proposed rule, 
we have been using 25 cases as the minimum sample size for publicly 
reporting hospital quality measures on Hospital Compare Web site for 
the Hospital IQR Program. Hospitals are familiar with this threshold. 
We also proposed to use this threshold of 25 discharges for each of the 
three measures to calculate the Excess Readmission Ratios because we 
believe this number helps maximize hospital participation and at the 
same time ensures that we achieve reasonable reliability for profiling 
hospital performance.
    After consideration of the public comments we received, we are 
finalizing our proposal to use 25 discharges as the minimum number of 
discharges for applicable conditions for the FY 2013 Hospital 
Readmissions Reduction Program. We note that analyses to determine 
appropriate sample size to yield reliable Excess Readmission Ratios for 
the three readmission measures are ongoing. If the results of our 
analyses suggest that a different minimum number of discharges would be 
more appropriate, we will propose to revise the minimum number 
accordingly through future rulemaking.
(H) Reporting Hospital-Specific Readmission Rates
    Section 1886(q)(6)(A) of the Act requires the Secretary to ``make 
information available to the public regarding readmission rates of each 
subsection (d) hospital under the [readmissions reduction] program.'' 
Section 1886(q)(6)(B) of the Act requires the Secretary to ``ensure 
that a subsection (d) hospital has the opportunity to review and submit 
corrections for, the information to be made public with respect to the 
hospital * * * prior to such information being made public.'' Section 
1886(q)(6)(C) of the Act requires the Secretary to post the hospital-
specific readmission information on the Hospital Compare Web site in an 
easily understandable format.
    We currently report information on the three readmission rates that 
we are finalizing in this rule on the Hospital Compare Web site for 
each subsection (d) hospital. We provide hospitals with an opportunity 
to preview their readmission rates for 30 days prior to posting on the 
Web site. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25935), we 
proposed to use a similar process and timeframe for the rates 
calculated for the Hospital Readmissions Reduction Program. Through 
this process, hospitals will be able to review the information and 
submit to CMS corrections in advance of the information to be made 
public. We will review all such correction submissions and determine 
the appropriateness of any revisions. We will inform the hospital 
requesting corrections of our findings, and we will make any 
appropriate revisions to the information to be made available to the 
public regarding the hospital's readmission rates.
    We invited public comment on this proposal.
    Comment: Several commenters supported our proposal to use a preview 
period and public reporting process that is similar to that used in the 
Hospital IQR Program. Two commenters requested more information about 
how the information will be presented on the Hospital Compare Web site. 
One recommended that more specific data on actual readmission rates be 
portrayed.
    Response: We appreciate the commenters' support for the proposed 
reporting procedure for hospital-specific readmission rates. This 
reporting procedure will be different from what is reported with the 
Hospital IQR Program. The Hospital IQR Program identifies hospitals on 
Hospital Compare as being better than, no different than, or worse than 
the national rate for readmission. However, the Hospital Readmissions 
Reduction Program will include hospital-specific readmission rates.
    Comment: One commenter requested clarification on ``what grounds 
and with

[[Page 51673]]

what data'' a hospital might appeal its calculated expected 
readmissions ratio.
    Response: As stated earlier, hospitals will be able to review the 
information and submit to CMS corrections related to their readmission 
rate in advance of the information to be made public. We will review 
all such correction submissions and determine the appropriateness of 
any revisions. The policies regarding what aspects of the readmission 
rates are subject to corrections, as well as specifics regarding the 
review and correction process will be proposed in future rulemaking. We 
will consider the commenter's concern as we develop our proposal.
    After consideration of the public comments we received, we are 
finalizing the proposed reporting procedure for hospital-specific 
readmission rates for the FY 2013 Hospital Readmissions Reduction 
Program.
(I) Readmission Rates for All Patients
    Section 1886(q)(8)(A) of the Act requires the Secretary to 
calculate readmission rates for all patients for a ``specified 
hospital'' for an applicable condition and ``other conditions deemed 
appropriate by the Secretary for an applicable period.'' Section 
1886(q)(8)(D)(ii) of the Act defines ``specified hospital'' as: ``a 
subsection (d) hospital; hospitals described in clauses (i) through (v) 
of subsection (d)(1)(B) (psychiatric hospitals, rehabilitation 
hospitals, children's hospitals, LTCHs, and cancer hospitals); and, as 
determined feasible and appropriate by the Secretary, other hospitals 
not otherwise described. * * *'' Such information is to be calculated 
in the same manner as used to calculate readmission rates for hospitals 
with respect to the postings on the CMS Hospital Compare Web site.
    Section 1886(q)(8)(C) of the Act requires specified hospitals, or a 
State or an appropriate entity on behalf of the hospitals, to submit to 
the Secretary, in a form, manner and time specified by the Secretary, 
data and information determined necessary to calculate the all patient 
readmission rates. Section 1886(q)(8)(D) of the Act defines ``all 
patients'' to mean patients who are treated on an inpatient basis and 
discharged from a specified hospital. In the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25935), we did not propose any specific policies 
to implement section 1886(q)(8) of the Act, but we invited public 
comment and suggestions for issues related to implementation of these 
provisions, such as the mechanisms to collect the all-patient data, the 
collection of patient identifiers to track patient care history across 
multiple settings to conduct risk adjustment for outcome measures, what 
entities could submit all patient data on behalf of hospitals, and more 
generally, the requirement for all patient data submission.
    Comment: One commenter supported the calculation of all-patient 
readmission rates. Another commenter supported the decision to defer 
proposals for the collection of data necessary for readmission rates of 
all patients to allow CMS enough time to put the underlying 
infrastructure in place. One commenter suggested allowing hospitals to 
either submit data directly to CMS, or through a third party that is 
not another payer.
    Response: We appreciate the comments provided on this issue. As we 
stated in the proposed rule, we will take them into account in the 
calculation and reporting of readmission rates for all patients in 
future rulemaking.
(5) Excess Readmission Ratio
(A) Statutory Background
    Section 1886(q)(4)(C) of the Act requires the Secretary to develop 
a risk-adjusted ``Excess Readmission Ratio.'' The Excess Readmission 
Ratio will be used in the calculation of ``aggregate payments for 
excess readmissions'' as required under section 1886(q)(4)(A)(iii) of 
the Act, which, in turn, is used to determine the adjustment factor 
under section 1886(q)(3) of the Act. Specifically, section 
1886(q)(4)(C)(i) of the Act states that the term `` `excess readmission 
ratio' means, with respect to an applicable condition for a hospital 
for an applicable period, the ratio * * * of * * * the risk adjusted 
readmissions based on actual readmissions * * * to * * * the risk 
adjusted expected readmissions. * * *'' The Act also requires that the 
numerator and denominator of the ratio, that is, ``risk adjusted 
readmissions based on actual readmissions'' and the ``risk adjusted 
expected readmissions,'' be determined ``consistent with a readmission 
measure methodology that has been endorsed under paragraph 
(5)(A)(ii)(I) [of the Act].''
(B) Excess Readmission Ratio Methodology
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25935 through 
25936), we proposed to use the risk-standardized ratio calculated for 
the NQF-endorsed measures for AMI, HF, and PN as the ``Excess 
Readmission Ratio.'' This risk-standardized ratio (Excess Readmission 
Ratio), as required by the Act, is a ratio of ``risk adjusted 
readmission based on actual'' to ``risk adjusted expected 
readmissions.'' Moreover, use of this ratio meets the statutory 
requirement that the numerator and denominator of the ratio be 
determined in a manner that is ``consistent with'' an NQF-endorsed 
readmission measure methodology.
    The proposed ratio is a measure of relative performance. If a 
hospital performs better than an average hospital that admitted similar 
patients (that is, patients with the same risk factors for readmission 
such as age and comorbidities), the ratio will be less than one. If a 
hospital performs worse than average, the ratio will be greater than 
one. Hospitals with a ratio greater than one have excess readmissions 
relative to average quality hospitals with similar types of patients.
    As part of the Hospital IQR Program, the risk-standardized ratio is 
used to generate the measure results for these three measures that are 
reported on Hospital Compare Web site. The risk-standardized ratio is 
the unique result produced by the measures for each hospital for each 
condition to assess relative hospital performance. Hospitals may not be 
familiar with this ratio because the measure result reported on 
Hospital Compare for each hospital and each condition is this ratio 
multiplied by a constant (the national raw rate of readmission for the 
condition), and it is currently presented as the risk-standardized 
readmission rate (RSRR). Multiplying by a constant transforms the ratio 
into a rate (the risk-standardized readmission rate) that is better 
understood by the public. Thus Hospital Compare results for CMS 
readmission measures are computed as follows:

[Hospital risk-standardized ratio] X [national raw readmission rate]
(i) Numerator and Denominator of the Risk-Standardized Ratio (Excess 
Readmission Ratio)
    The NQF-endorsed measures, which we are finalizing in this rule for 
the Hospital Readmissions Reduction Program, calculate this risk-
standardized ratio (Excess Readmission Ratio) using hierarchical 
logistic modeling, which is a widely accepted statistical method that 
evaluates relative hospital performance based on outcomes such as 
readmission. The method adjusts for variation across hospitals in how 
sick their patients are when admitted to the hospital (and therefore 
variation in hospitals' patients' readmission risk) as well as the 
variation in the number of patients that a hospital treats to reveal 
difference in

[[Page 51674]]

quality. The detailed methodology for these measures is publicly-
available and the calculation ``SAS packs'' are made available upon 
request. This is the calculation software that permits the measures to 
be calculated. We describe the key details of the methodology here.
    In order to model the extent to which hospitals affect patients' 
risk of readmission, this statistical model first analyzes data on all 
the patients discharged from all hospitals for a given condition that 
indicate for each patient what comorbidities were present when the 
patient was admitted and whether or not the patient was readmitted and 
calculates:
     How much variation in hospital readmission rates overall 
is accounted for by variation across hospitals in patients' individual 
risk factors (such as age and other medical conditions); a risk weight 
(beta-coefficient) is calculated for each patient risk factor at all 
hospitals. The specific approach and variables used in the risk 
adjustment are discussed below.
     How much variation in readmission rates is accounted for 
by hospitals' contribution to readmission risk, after adjusting for 
differences in readmission due to differences in patients' risk 
factors. The model estimates the amount by which a specific hospital 
increases or decreases patients' risk of readmission relative to an 
average hospital based on the hospitals actual readmission relative to 
hospitals with similar patients. The estimated amount each hospital 
contributes (or subtracts) from its patients readmission risk compared 
to hospitals with similar patients is called the ``hospital-specific 
readmission effect.'' It is used only in the numerator to estimate the 
adjusted actual readmissions. The hospital-specific effect will be 
negative for a hospital above the national average (that is, with lower 
than average adjusted rates of readmissions), positive for a hospital 
below the national average (that is, with higher than average adjusted 
rates of readmissions), and close to zero for an average hospital. If 
there are no quality differences resulting in excess readmissions among 
hospitals (if all hospitals had the same readmission rates relative to 
hospitals with similar patients), the hospital-specific effects for all 
hospitals will be zero and the ratio for all hospitals will be one.
    Comment: One commenter expressed concern that multiplying the ratio 
by the national raw rate of readmissions could inflate the readmission 
rate for a given hospital.
    Response: As discussed above, the Excess Readmission Ratio is 
calculated using hierarchical logistic regression which produces an 
adjusted actual (or ``predicted'') number in the numerator and an 
``expected'' number in the denominator. The expected calculation is 
similar to that for logistic regression--it is the sum of all patients' 
expected probabilities of readmission given their risk factors and the 
risk of readmission at an average hospital. The excess readmissions 
ratio is multiplied by the national readmission rate for reporting of 
risk-standardized readmission rates to the public as a part of the 
Hospital IQR Program for ease of interpretation. This serves to 
standardize all hospitals rates to the national rate but should not be 
interpreted as the unadjusted rate for a given hospitals. Depending on 
the hospital's performance it may be higher or lower than the 
hospital's raw readmission rate. The Hospital Readmissions Reduction 
Program uses the Excess Readmission Ratio rather than the raw 
readmission rate.
(ii) Numerator Calculation--Adjusted Actual Readmissions
    For each hospital, the numerator of the ratio used in the NQF-
endorsed methodology (actual adjusted readmissions) is calculated by 
estimating the probability of readmission for each patient at that 
hospital and summing up over all the hospital's patients to get the 
actual adjusted number of readmissions for that hospital. This 
estimated probability of readmission for each patient is calculated 
using:
     The hospital-specific effect (probability of readmission 
relative to the probability of readmission at an average hospital);
     The intercept term for the model (this is the average 
hospital-specific effect and is the same for all hospitals and for both 
numerator and denominator equations). The intercept term is the 
probability of readmission for each patient when the value of all the 
patient risk factors is zero;
     The probability of readmission contributed by each of the 
patients' risk factors (risk adjustment coefficients multiplied by the 
patient's risk factors, X)
    Mathematically, the numerator equation can be expressed as:
    [GRAPHIC] [TIFF OMITTED] TR18AU11.016
    

[[Page 51675]]

    Comment: One commenter requested clarification on how the numerator 
calculation of probable readmissions is related to the adjusted actual 
readmission. The commenter suggested that CMS take actual readmissions 
(observed) divided by the expected readmission.
    Response: As explained in the FY 2012 IPPS/LTCH PPS proposed rule 
and this final rule, consistent with the requirements in section 
1886(q)(4)(C)(i)(I) of the Act, the numerator is the adjusted actual 
number of readmissions, which is the sum of the probability of 
readmission for all patients admitted at the particular hospital given 
the patients' risk factors and the hospitals estimated contribution to 
readmission risk. This estimated contribution to readmission risk--the 
hospital-specific effect discussed in the rule--is derived from the 
hospital's actual readmission rate relative to hospitals with similar 
patients. Thus, the numerator is each hospital's adjusted actual 
readmissions. This approach to calculating the numerator, although more 
complex than that used for logistic regression, is the method 
traditionally used in hierarchical regression modeling and is 
statistically more accurate given the type of data being used. Other 
methods may overestimate the differences between hospitals.
(iii) Denominator Calculation--Expected Readmissions (at an Average 
Quality Hospital Treating the Same Patients)
    The denominator of the risk-standardized ratio (Excess Readmission 
Ratio) under this NQF-endorsed methodology sums the probability of 
readmission for each patient at an average hospital. This probability 
is calculated using:
     The intercept term for the model (the same for all 
hospitals and for both numerator and denominator equations); and
     The increase or decrease in the probability of readmission 
contributed by each of the patients' risk factors (risk adjustment 
coefficients multiplied by the patient's risk factors, X).
    This can be expressed mathematically as:
    [GRAPHIC] [TIFF OMITTED] TR18AU11.017
    
    Thus, the ratio compares the total adjusted actual readmissions at 
the hospital to the number that would be expected if the hospital's 
patients were treated at an average hospital with similar patients. 
Hospitals with more adjusted actual readmissions than expected 
readmissions will have a risk-standardized ratio (Excess Readmission 
Ratio) greater than one.
    Because the ratio is risk-adjusted, a hospital may have high crude 
readmission rates (number of 30-day readmissions among patients with 
the applicable condition divided by number of admissions for patients 
with the applicable condition) yet have a risk-standardized ratio 
(Excess Readmission Ratio) less than one. For example, if a hospital 
with a higher than average raw readmission rate cares for very sick 
patients, the ratio may show that the adjusted actual number of 
readmissions (the numerator), which accounts for the case-mix, is 
actually lower than what would be expected for an average hospital 
caring for these patients (denominator) and therefore the Excess 
Readmission Ratio, as proposed, will be less than one, demonstrating 
that this hospital performs better than average, despite having a high 
crude readmission rate. Similarly, if a hospital has a seemingly low 
unadjusted readmission rate but cares for a very low risk population of 
patients, it may be found to have an adjusted actual number of 
readmissions that is higher than the expected number of readmissions, 
and therefore a ratio greater than one.
    In summary, in the FY 2012 IPPS/LTCH PPS proposed rule, we proposed 
to use the risk-standardized readmission ratio of the NQF-endorsed 
readmission measures as the Excess Readmission Ratio. The ratio is a 
measure of relative performance. If a hospital performs better than an 
average hospital that admitted similar patients (that is, patients with 
the same risk factors for readmission such as age and comorbidities), 
the ratio will be less than 1.0. If a hospital performs worse than 
average, the ratio will be greater than 1.0.
    We welcomed public comment on our proposal to use this methodology 
for

[[Page 51676]]

calculating the ``risk adjusted readmissions based on actual 
readmissions'' as well as the ``risk adjusted expected readmissions'' 
used to determine the Excess Readmission Ratio, as set forth in section 
1886(q)(5)(C) of the Act.
    Comment: Some commenters interpreted the Affordable Care Act as 
requiring CMS to calculate observed and expected rates and, therefore, 
these commenters suggested that CMS revise the measures to use the 
calculation of observed and expected rates. Some commenters compared 
the hierarchical modeling approach to the logistic regression model, 
which produces an expected rate for the denominator and uses the 
observed (raw count of readmission) for the numerator. One commenter 
requested CMS to provide reasons for not using a conventional observed 
over expected ratio in the methodology.
    Response: We appreciate the commenter's thoughts on the Excess 
Readmission Ratio. Consistent with the statutory requirement that the 
Secretary must develop a risk-adjusted Excess Readmission Ratio that is 
the ratio of ``the risk adjusted readmissions based on actual 
readmission, as determined consistent with a readmission measure 
methodology that has been endorsed under paragraph (5)(A)(ii)(I) * * * 
to the risk adjusted expected readmissions,'' we proposed to calculate 
the Excess Readmission Ratio using hierarchical modeling (rather than 
logistic regression, which produces an observed over expected ratio).
    We believe that hierarchical modeling is a more appropriate 
statistical approach for hospital outcomes measures than the 
calculation of observed over expected ratio using the logistic 
regression model for various reasons. First, the hierarchical model 
meets the requirement under section 1886(q)(4)(C)(i)(I) of the Act for 
NQF-endorsement and risk-adjustment. Second, we believe that 
hierarchical modeling is a more appropriate statistical approach given 
the structure of the data and the underlying assumption of such 
measures which is that hospital quality of care influences 30-day 
readmission rates. Patients are clustered within hospitals and, as 
such, have a shared exposure to the hospital's quality processes. The 
advantage of using the hierarchical modeling is that it accounts for 
the clustering of patients within hospitals. Third, hierarchical models 
distinguish within-hospital variation and between-hospital variation in 
the estimation of the hospital's contribution to the risk of mortality. 
The estimation of the hospital's influence on patient outcomes is more 
noticeable. Finally, within hierarchical models, we can account for 
both differences in case mix and sample size to more fairly profile 
hospital performance. If we did not use hierarchical modeling, we may 
overestimate variation and potentially mischaracterize hospitals' 
performance with respect to readmissions.
    After consideration of the public comments we received, we are 
finalizing the proposed methodology for readmission measures, including 
the definitions of ``index hospitalization,'' ``readmission,'' ``time 
window,'' ``risk adjustment methodology,'' ``applicable periods,'' 
``data sources,'' ``minimum number of discharges for applicable 
conditions,'' and ``reporting hospital-specific readmission rates,'' as 
proposed, for use in the FY 2013 Hospital Readmissions Reduction 
Program.

D. Rural Referral Centers (RRCs) (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as an RRC. For discharges that 
occurred before October 1, 1994, RRCs received the benefit of payment 
based on the other urban standardized amount rather than the rural 
standardized amount (as discussed in the FY 1993 IPPS final rule (59 FR 
45404 through 45409)). Although the other urban and rural standardized 
amounts are the same for discharges occurring on or after October 1, 
1994, RRCs continue to receive special treatment under both the DSH 
payment adjustment and the criteria for geographic reclassification.
    Section 402 of Public Law 108-173 raised the DSH payment adjustment 
for RRCs such that they are not subject to the 12-percent cap on DSH 
payments that is applicable to other rural hospitals. RRCs are also not 
subject to the proximity criteria when applying for geographic 
reclassification. In addition, they do not have to meet the requirement 
that a hospital's average hourly wage must exceed, by a certain 
percentage, the average hourly wage of the labor market area where the 
hospital is located.
    Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny 
hospital classified as an RRC by the Secretary * * * for fiscal year 
1991 shall be classified as such an RRC for fiscal year 1998 and each 
subsequent year.'' In the August 29, 1997 IPPS final rule with comment 
period (62 FR 45999), CMS reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification. 
However, CMS did not reinstate the status of hospitals that lost RRC 
status because they were now urban for all purposes because of the OMB 
designation of their geographic area as urban. Subsequently, in the 
August 1, 2000 IPPS final rule (65 FR 47089), we indicated that we were 
revisiting that decision. Specifically, we stated that we would permit 
hospitals that previously qualified as an RRC and lost their status due 
to OMB redesignation of the county in which they are located from rural 
to urban, to be reinstated as an RRC. Otherwise, a hospital seeking RRC 
status must satisfy all of the other applicable criteria. We use the 
definitions of ``urban'' and ``rural'' specified in Subpart D of 42 CFR 
Part 412. One of the criteria under which a hospital may qualify as an 
RRC is to have 275 or more beds available for use (Sec.  
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size 
requirement can qualify as an RRC if the hospital meets two mandatory 
prerequisites (a minimum CMI and a minimum number of discharges), and 
at least one of three optional criteria (relating to specialty 
composition of medical staff, source of inpatients, or referral 
volume). (We refer readers to Sec.  412.96(c)(1) through (c)(5) and the 
September 30, 1988 Federal Register (53 FR 38513).) With respect to the 
two mandatory prerequisites, a hospital may be classified as an RRC 
if--
     The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
     The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index (CMI)
    Section 412.96(c)(1) provides that CMS establish updated national 
and regional CMI values in each year's annual notice of prospective 
payment rates for purposes of determining RRC status. The methodology 
we used to determine the national and regional CMI values is set forth 
in the regulations at Sec.  412.96(c)(1)(ii). The national median CMI 
value for FY 2012 includes data from all urban hospitals nationwide, 
and the regional values for FY 2012 are the median CMI values of urban 
hospitals within each census region, excluding those hospitals with

[[Page 51677]]

approved teaching programs (that is, those hospitals that train 
residents in an approved GME program as provided in Sec.  413.75). 
These values are based on discharges occurring during FY 2010 (October 
1, 2009 through September 30, 2010), and include bills posted to CMS' 
records through March 2011.
    For the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25938), we 
proposed that, in addition to meeting other criteria, if rural 
hospitals with fewer than 275 beds are to qualify for initial RRC 
status for cost reporting periods beginning on or after October 1, 
2011, they must have a CMI value for FY 2010 that is at least--
     1.5292; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located. (We refer readers to the table set forth 
in the FY 2012 IPPS/LTCH PPS proposed rule at 76 FR 25938.)
    The final CMI criteria for FY 2012 are based on the latest 
available data (FY 2010 bills received through March 2011). In addition 
to meeting other criteria, if rural hospitals with fewer than 275 beds 
are to qualify for initial RRC status for cost reporting periods 
beginning on or after October 1, 2011, they must have a CMI value for 
FY 2010 that is at least--
     1.5305; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    The final median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                               Case-mix
                           Region                            index value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)....................       1.3237
2. Middle Atlantic (PA, NJ, NY)............................       1.3745
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....       1.4589
4. East North Central (IL, IN, MI, OH, WI).................       1.4620
5. East South Central (AL, KY, MS, TN).....................       1.3996
6. West North Central (IA, KS, MN, MO, NE, ND, SD).........       1.4456
7. West South Central (AR, LA, OK, TX).....................       1.5689
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............       1.6277
9. Pacific (AK, CA, HI, OR, WA)............................       1.5169
------------------------------------------------------------------------

    A hospital seeking to qualify as an RRC should obtain its hospital-
specific CMI value (not transfer-adjusted) from its fiscal intermediary 
or MAC. Data are available on the Provider Statistical and 
Reimbursement (PS&R) System. In keeping with our policy on discharges, 
the CMI values are computed based on all Medicare patient discharges 
subject to the IPPS MS-DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS set forth the national 
and regional numbers of discharges in each year's annual notice of 
prospective payment rates for purposes of determining RRC status. As 
specified in section 1886(d)(5)(C)(ii) of the Act, the national 
standard is set at 5,000 discharges. In the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25938 and 25939), we proposed to update the 
regional standards based on discharges for urban hospitals' cost 
reporting periods that began during FY 2009 (that is, October 1, 2008 
through September 30, 2009), which are the latest cost report data 
available at the time the proposed rule was developed.
    Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25938 
and 25939), we proposed that, in addition to meeting other criteria, a 
hospital, if it is to qualify for initial RRC status for cost reporting 
periods beginning on or after October 1, 2011, must have, as the number 
of discharges for its cost reporting period that began during FY 2009, 
at least--
     5,000 (3,000 for an osteopathic hospital); or
     The median number of discharges for urban hospitals in the 
census region in which the hospital is located. (We refer readers to 
the table set forth in the FY 2012 IPPS/LTCH PPS proposed rule at 76 FR 
25939).)
    Based on the latest discharge data available at this time, that is, 
for cost reporting periods beginning on or after October 1, 2011, the 
final median numbers of discharges for urban hospitals by census region 
are set forth in the following table.

------------------------------------------------------------------------
                                                              Number of
                          Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...................         8,141
2. Middle Atlantic (PA, NJ, NY)...........................        11,919
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)....        11,422
4. East North Central (IL, IN, MI, OH, WI)................         8,981
5. East South Central (AL, KY, MS, TN)....................         7,528
6. West North Central (IA, KS, MN, MO, NE, ND, SD)........         8,116
7. West South Central (AR, LA, OK, TX)....................         6,426
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)..............         9,608
9. Pacific (AK, CA, HI, OR, WA)...........................         8,900
------------------------------------------------------------------------

    We note that the median number of discharges for hospitals in each 
census region is greater than the national standard of 5,000 
discharges. Therefore, 5,000 discharges is the minimum criterion for 
all hospitals under this final rule.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2011, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2009.

E. Payment Adjustment for Low-Volume Hospitals (Sec.  412.101)

1. Background
    Section 1886(d)(12) of the Act, as added by section 406(a) of 
Public Law 108-173, provides for a payment adjustment to account for 
the higher costs per discharge for low-volume hospitals under the IPPS, 
effective beginning FY 2005. The additional payment adjustment to a 
low-volume hospital provided for under section 1886(d)(12) of the Act 
is ``in addition to any payment calculated under this section.'' 
Therefore, the additional payment adjustment is based on the per 
discharge amount paid to the qualifying hospital under section 1886 of 
the Act. In other words, the low-volume add-on payment amount is based 
on all other per discharge payments made under section 1886 of the Act, 
including capital, DSH, IME, and outliers. For SCHs and MDHs, the low-
volume add-on payment amount is based on either the Federal rate or the 
hospital-specific rate, whichever results in a greater operating IPPS 
payment. Sections 3125 and 10314 of the Affordable Care Act amended the 
definition of a low-volume hospital under section 1886(d)(12)(C) of the 
Act. Sections 3125 and 10314 of the Affordable Care Act also revised 
the methodology for calculating the payment adjustment for low-volume 
hospitals.
    Prior to the amendments made by the Affordable Care Act, section 
1886(d)(12)(C)(i) of the Act defined a low-volume hospital as ``a 
subsection (d) hospital (as defined in paragraph (1)(B)) that the 
Secretary determines is

[[Page 51678]]

located more than 25 road miles from another subsection (d) hospital 
and that has less than 800 discharges during the fiscal year.'' Section 
1886(d)(12)(C)(ii) of the Act further stipulates that the term 
``discharge'' means ``an inpatient acute care discharge of an 
individual regardless of whether the individual is entitled to benefits 
under Part A.'' Therefore, the term ``discharge'' refers to total 
discharges, not merely Medicare discharges. Furthermore, under section 
406(a) of Public Law 108-173, which initially added subparagraph (12) 
to section 1886(d) of the Act, the provision requires the Secretary to 
determine an applicable percentage increase for these low-volume 
hospitals based on the ``empirical relationship'' between ``the 
standardized cost-per-case for such hospitals and the total number of 
discharges of such hospitals and the amount of the additional 
incremental costs (if any) that are associated with such number of 
discharges.'' The statute thus mandates that the Secretary develop an 
empirically justifiable adjustment based on the relationship between 
costs and discharges for these low-volume hospitals. The statute also 
limits the adjustment to no more than 25 percent.
    Based on an analysis we conducted for the FY 2005 IPPS final rule 
(69 FR 49099 through 49102), a 25-percent low-volume adjustment to all 
qualifying hospitals with less than 200 discharges was found to be most 
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher 
incremental costs are associated with low numbers of total discharges. 
In the FY 2006 IPPS final rule (70 FR 47432 through 47434), we stated 
that a multivariate analyses supported the existing low-volume 
adjustment implemented in FY 2005. Therefore, the low-volume adjustment 
of an additional 25 percent would continue to be provided for 
qualifying hospitals with less than 200 discharges.
2. Temporary Changes for FYs 2011 and 2012
    Section 1886(d)(12) of the Act was amended by sections 3125 and 
10314 of the Affordable Care Act. The changes made by these sections of 
the Affordable Care Act are effective only for discharges occurring 
during FYs 2011 and 2012. Beginning with FY 2013, the preexisting low-
volume hospital payment adjustment and qualifying criteria, as 
implemented in FY 2005, will resume. Specifically, as discussed above, 
the provisions of the Affordable Care Act revised the definition of a 
low-volume hospital and also revised the methodology for calculating 
the payment adjustment for low-volume hospitals for FYs 2011 and 2012.
    Sections 3125(3) and 10314(1) of the Affordable Care Act amended 
the qualifying criteria for low-volume hospitals under section 
1886(d)(12)(C)(i) of the Act to make it easier for hospitals to qualify 
for the low-volume adjustment. Specifically, the revised provision 
specifies that, for FYs 2011 and 2012, a hospital qualifies as a low-
volume hospital if it is ``more than 15 road miles from another 
subsection (d) hospital and has less than 1,600 discharges of 
individuals entitled to, or enrolled for, benefits under Part A during 
the fiscal year.'' In addition, section 1886(d)(12)(D) of the Act, as 
added by section 3125(4) and amended by section 10314 of the Affordable 
Care Act, provides that the payment adjustment (the applicable 
percentage increase) is to be determined ``using a continuous linear 
sliding scale ranging from 25 percent for low-volume hospitals with 200 
or fewer discharges of individuals entitled to, or enrolled for, 
benefits under Part A in the fiscal year to 0 percent for low-volume 
hospitals with greater than 1,600 discharges of such individuals in the 
fiscal year.''
    Section 3125(3)(A) of the Affordable Care Act revised the distance 
requirement of ``25 road miles'' to ``15 road miles'' for FYs 2011 and 
2012 such that a low-volume hospital is required to be only more than 
15 road miles, rather than more than 25 road miles, from another 
subsection (d) hospital for purposes of qualifying for the low-volume 
payment adjustment in FYs 2011 and 2012. The mileage requirement will 
revert back to ``more than 25 road miles'' for fiscal years after FY 
2012.
    Sections 3125(3)(B) and 10314(1) of the Affordable Care Act revised 
the discharge requirement for FYs 2011 and 2012 to less than 1,600 
discharges of individuals entitled to, or enrolled for, benefits under 
Medicare Part A during the fiscal year. Prior to enactment of the 
Affordable Care Act, under section 1886(d)(12) of the Act, as added by 
section 406(a) of Public Law 108-173, the discharge requirement to 
qualify as a low-volume hospital is less than 800 total discharges 
annually, which includes discharges of both Medicare and non-Medicare 
patients. This discharge requirement will apply also for fiscal years 
after FY 2012.
    Section 3125(4) of the Affordable Care Act added section 
1886(d)(12)(D) to the Act, and section 10314(2) of the Affordable Care 
Act further modified that section of the Act. Section 1886(d)(12)(D) of 
the Act, as modified, revises the methodology for calculating the 
payment adjustment under section 1886(d)(12)(A) of the Act for low-
volume hospitals for discharges occurring in FYs 2011 and 2012. For FY 
2010 and prior fiscal years, and beginning again in FY 2013, sections 
1886(d)(12)(A) and (B) of the Act require the Secretary to determine an 
applicable percentage increase for low-volume hospitals based on the 
``empirical relationship'' between ``the standardized cost-per-case for 
such hospitals and the total number of discharges of such hospitals and 
the amount of the additional incremental costs (if any) that are 
associated with such number of discharges.'' The statute thus requires 
the Secretary to develop an empirically justifiable adjustment based on 
the relationship between costs and discharges for these low-volume 
hospitals. The statute also limits the adjustment to no more than 25 
percent. Based on analyses we conducted for the FY 2005 IPPS final rule 
(69 FR 49099 through 49102) and the FY 2006 IPPS final rule (70 FR 
47432 through 47434), a 25-percent low-volume adjustment to all 
qualifying hospitals with less than 200 discharges was found to be most 
consistent with the statutory requirement to provide relief to low-
volume hospitals where there is empirical evidence that higher 
incremental costs are associated with low numbers of total discharges. 
However, section 1886(d)(12)(D) of the Act, as added by the Affordable 
Care Act, provides that, for discharges occurring in FYs 2011 and 2012, 
the Secretary shall determine the applicable percentage increase using 
a continuous linear sliding scale ranging from an additional 25-percent 
payment adjustment for hospitals with 200 or fewer Medicare discharges 
to a 0-percent additional payment adjustment for hospitals with more 
than 1,600 Medicare discharges.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50275 
and 50414), we revised our regulations at 42 CFR 412.101 to reflect the 
changes to the payment adjustment for low-volume hospitals provided for 
by the provisions of the Affordable Care Act. We also clarified the 
existing regulations to indicate that a hospital must continue to 
qualify as a low-volume hospital in order to receive the payment 
adjustment in that year; that is, it is not based on a one-time 
qualification. Furthermore, we established a procedure for a hospital 
to request low-volume hospital status.
    Specifically, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 
and

[[Page 51679]]

50414), we revised our regulations at Sec.  412.101(b)(2)(ii) to 
provide that, to qualify for the low-volume payment adjustment in FYs 
2011 and 2012, a hospital must be located more than 15 road miles from 
the nearest subsection (d) hospital. We also defined, at Sec.  
412.101(a), the term ``road miles'' to mean ``miles'' as defined at 
Sec.  412.92(c)(i). This change in the qualifying criteria from 25 to 
15 road miles is applicable only for FYs 2011 and 2012, but the 
definition of ``road miles'' continues to apply even after the distance 
requirement reverts to 25 road miles beginning in FY 2013.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50238 through 50239 
and 50414), we revised our regulations at Sec.  412.101(b)(2)(ii) to 
provide that, to qualify for the low-volume adjustment in FYs 2011 and 
2012, a hospital must have fewer than 1,600 ``Medicare discharges'' 
during the fiscal year based on the hospital's Medicare discharges from 
the most recently available MedPAR data as determined by CMS. We also 
revised the regulations to specify at Sec.  412.101(a) that the term 
``Medicare discharges'' means a ``discharge of inpatients entitled to 
Medicare Part A, including discharges associated with individuals whose 
inpatient benefits are exhausted or whose stay was not covered by 
Medicare and also discharges of individuals enrolled in a MA 
organization under Medicare Part C.''
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50240 through 
50241), we adopted a continuous linear sliding scale equation to 
determine the low-volume payment adjustment for FYs 2011 and 2012 for 
eligible low-volume hospitals with Medicare discharges of more than 200 
and less than 1,600 (that is, from 201 to 1,599 Medicare discharges). 
Consistent with the statute, for FYs 2011 and 2012 for eligible low-
volume hospitals with 200 or fewer Medicare discharges, we established 
a low-volume payment adjustment of 25 percent.
    Under the regulations at Sec.  412.101(c)(2), for FYs 2011 and 
2012, the low-volume adjustment is determined as follows:
     Low-volume hospitals with 200 or fewer Medicare discharges 
will receive a low-volume adjustment of an additional 25 percent for 
each discharge.
     Low-volume hospitals with Medicare discharges of more than 
200 and fewer than 1,600 will receive for each discharge a low-volume 
adjustment of an additional percent calculated using the formula: [(4/
14)-(Medicare discharges/5600)]. For additional information on the 
mathematical interpretation of this formula, we refer readers to the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50241).
    While we revised the qualifying criteria and the payment adjustment 
for low-volume hospitals for FYs 2011 and 2012, consistent with the 
amendments made by the Affordable Care Act, we also noted in the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50240) that we did not modify the 
process for requesting and obtaining the low-volume hospital payment 
adjustment. In general, in order to qualify for the low-volume hospital 
payment adjustment, a hospital must provide to its fiscal intermediary 
or MAC sufficient evidence to document that it meets the discharge and 
distance requirements. The fiscal intermediary or MAC will determine, 
based on the most recent data available, if the hospital qualifies as a 
low-volume hospital, so that the hospital will know in advance whether 
or not it will receive a payment adjustment and, if so, the applicable 
add-on percentage. The fiscal intermediary or MAC and CMS may review 
available data, in addition to the data the hospital submits with its 
request for low-volume hospital status, in order to determine whether 
or not the hospital meets the qualifying criteria.
3. Discharge Data Source To Identify Qualifying Low-Volume Hospitals 
and Calculate the Payment Adjustment (Percentage Increase) for FY 2012
    As described above, for FYs 2005 through 2010 and FY 2013 and 
subsequent years, since the discharge determination is made based on 
the hospital's number of total discharges, the hospital's most recently 
submitted cost report is used to determine if the hospital meets the 
criteria to receive the low-volume payment adjustment in the current 
year (Sec.  412.101(b)(2)(i)). For FYs 2011 and 2012, the hospital's 
Medicare discharges from the most recently available MedPAR data, as 
determined by CMS, are used to determine if the hospital meets the 
discharge criteria to receive the low-volume payment adjustment in the 
current year (Sec.  412.101(b)(2)(ii)). As also described above, the 
applicable low-volume percentage increase is determined using a 
continuous linear sliding scale equation that results in a low-volume 
adjustment ranging from an additional 25 percent for hospitals with 200 
or fewer Medicare discharges to a 0 percent additional payment 
adjustment for hospitals with 1,600 or more Medicare discharges.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50241), we 
established that, for FY 2011, the low-volume payment adjustment would 
be determined using Medicare discharge data for FY 2009 from the March 
2010 update of the MedPAR files, as these were the most recent 
available data. We also stated that we expected to use Medicare claims 
data from FY 2010 to determine the low-volume payment adjustment for FY 
2012, as these would be the most recent available data at that time.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25941), we 
proposed that, for FY 2012, qualifying low-volume hospitals and their 
payment adjustment would be determined using Medicare discharge data 
from the most recent update of the FY 2010 MedPAR file, that is, the 
December 2010 update, as these data were the most recent data available 
at that time. We also proposed that if more recent FY 2010 Medicare 
discharge data are available (such as data from the March 2011 update 
of the MedPAR files), we would use such data in the final rule. Table 
14 in the proposed rule (which was listed in section VI. of the 
Addendum to the proposed rule and available via the Internet) listed 
the ``subsection (d)'' hospitals with fewer than 1,600 Medicare 
discharges based on the December 2010 update of the FY 2010 MedPAR 
files and their proposed FY 2012 low-volume payment adjustment. We 
noted that eligibility for the proposed low-volume payment adjustment 
for FY 2012 is also dependent upon meeting (if the hospital is 
qualifying for the low-volume payment adjustment for the first time in 
FY 2012), or continuing to meet (if the hospital qualified in FY 2011) 
the mileage criteria specified at Sec.  412.101(b)(2)(ii). In addition, 
we proposed a procedure for a hospital to request low-volume hospital 
status for FY 2012 (as described below).
    Comment: Commenters supported the proposal to update the Medicare 
discharge data upon which to base the low-volume hospital adjustment 
for FY 2012 (we note that there were no public comments opposed to the 
proposal). In addition, a few commenters urged CMS to explore ways to 
continue increased payments to the hospitals that received additional 
payments in FYs 2011 and 2012 under the temporary expansion of the low-
volume hospital adjustment provided for by the Affordable Care Act 
rather than revert to the prior low-volume hospital adjustment policy 
for FY 2013 and subsequent years.
    Response: We appreciate the commenters' support. We are finalizing 
our proposal to determine the FY 2012 low-volume hospitals and their 
payment adjustments based on the number of

[[Page 51680]]

Medicare discharges from the most recent update of the FY 2010 MedPAR 
file. Specifically, we will make these determinations using the March 
2011 update, as these data are the most recent data available. Table 
14, which is referenced in section VI. of the Addendum to this final 
rule and available via the Internet on the CMS Web site, lists the 
``subsection (d)'' hospitals with fewer than 1,600 Medicare discharges 
based on the March 2011 update of the FY 2010 MedPAR file and their 
payment adjustments for FY 2012. The eligibility for the low-volume 
payment adjustment for FY 2012 is also dependent upon meeting (if the 
hospital is qualifying for the low-volume payment adjustment for the 
first time in FY 2012), or continuing to meet (if the hospital 
qualified in FY 2011) the mileage criteria specified at Sec.  
412.101(b)(2)(ii).
    With regard to commenters who urged CMS to explore ways to continue 
the enhanced low-volume hospital payment adjustment beyond FYs 2011 and 
2012, we note that the statute restricts the temporary increases in the 
low-volume payment adjustments to FYs 2011 and 2012. Therefore, 
beginning with FY 2013, the low-volume hospital qualifying criteria and 
the amount of the payment adjustment to such hospitals will revert back 
to those policies that were in effect prior to the amendments made by 
the Affordable Care Act.
    We note that the list of hospitals with fewer than 1,600 Medicare 
discharges in Table 14 does not reflect whether or not the hospital 
meets the mileage criterion, and a hospital also must be located more 
than 15 road miles from any other IPPS hospital in order to qualify for 
a low-volume hospital payment adjustment in FY 2012.
    In order to receive a low-volume hospital payment adjustment under 
Sec.  412.101, a hospital must notify and provide documentation to its 
fiscal intermediary or MAC that it meets the mileage criterion. The use 
of a Web-based mapping tool, such as MapQuest, as part of documenting 
that the hospital meets the mileage criterion for low-volume hospitals, 
is acceptable. The fiscal intermediary or MAC will determine if the 
information submitted by the hospital, such as the name and street 
address of the nearest hospitals, location on a map, and distance (in 
road miles, as defined in the regulations at Sec.  412.101(a)) from the 
hospital requesting low-volume hospital status, is sufficient to 
document that it meets the mileage criterion. If not, the fiscal 
intermediary or MAC will follow up with the hospital to obtain 
additional necessary information to determine whether or not the 
hospital meets the low-volume mileage criterion. In addition, the 
fiscal intermediary or MAC will refer to the hospital's Medicare 
discharge data determined by CMS (for FY 2012 as shown in Table 14 of 
this final rule (which is listed in section VI. of the Addendum to this 
final rule and available via the Internet)), to determine whether or 
not the hospital meets the discharge criterion, and the amount of the 
payment adjustment, once it is determined that both the mileage and 
discharge criteria are met. The Medicare discharge data shown in Table 
14, as well as the Medicare discharge data for all ``subsection (d)'' 
hospitals with claims in the March 2011 update of the FY 2010 MedPAR 
file, is also available on the CMS Web site for hospitals to check 
their Medicare discharges to help them to decide whether or not to 
apply for low-volume hospital status.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25941), we 
proposed that for FY 2012, a hospital must make its request for low-
volume hospital status in writing to its fiscal intermediary or MAC by 
September 1, 2011, in order for the applicable low-volume percentage 
add-on to be applied to payments for its discharges beginning on or 
after October 1, 2011. This proposal is similar to the policy we 
established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 20574 
through 20575). We did not receive any public comments on this proposed 
procedure. Therefore, in this final rule, we are finalizing this 
procedure for a hospital to request low-volume hospital status for FY 
2012. We also are finalizing our proposal that a hospital that 
qualified for the low-volume payment adjustment in FY 2011 may continue 
to receive a low-volume payment adjustment in FY 2012, without 
reapplying, if it continues to meet the Medicare discharge criterion, 
based on the latest available FY 2010 MedPAR data (as finalized above 
and shown in Table 14) and the distance criterion. However, the 
hospital must verify in writing to its fiscal intermediary or MAC that 
it continues to be more than 15 miles from any other ``subsection (d)'' 
hospital no later than September 30, 2011. Further, similar to the 
policy we established for FY 2011 (Transmittal 2060, Change Request 
7134; October 1, 2010), we are finalizing our proposal with regard to 
requests for low-volume hospital status for FY 2012 received after 
September 1, 2011. In such cases, if the hospital meets the criteria to 
qualify as a low-volume hospital, the fiscal intermediary or MAC will 
apply the applicable low-volume adjustment in determining payments to 
the hospital's FY 2012 discharges prospectively within 30 days of the 
date of the fiscal intermediary's or MAC's low-volume status 
determination.

F. Indirect Medical Education (IME) Adjustment (Sec.  412.105)

1. Background
    Section 1886(d)(5)(B) of the Act provides for an additional payment 
amount under the IPPS for hospitals that have residents in an approved 
graduate medical education (GME) program in order to reflect the higher 
indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment, known as the indirect medical education (IME) 
adjustment, are located at Sec.  412.105.
    Public Law 105-33 (BBA 1987) established a limit on the number of 
allopathic and osteopathic residents that a hospital may include in its 
full-time equivalent (FTE) resident count for direct GME and IME 
payment purposes. Under section 1886(h)(4)(F) of the Act, for cost 
reporting periods beginning on or after October 1, 1997, a hospital's 
unweighted FTE count of residents for purposes of direct GME may not 
exceed the hospital's unweighted FTE count for its most recent cost 
reporting period ending on or before December 31, 1996. Under section 
1886(d)(5)(B)(v) of the Act, a similar limit on the FTE resident count 
for IME purposes is effective for discharges occurring on or after 
October 1, 1997. Changes to the policies regarding counting residents 
for both IME and direct GME payment purposes as a result of the 
implementation of sections 5503 through 5506 of the Affordable Care Act 
were issued in a final rule published in the Federal Register on 
November 24, 2010 (75 FR 72133).
2. IME Adjustment Factor for FY 2012
    The IME adjustment to the MS-DRG payment is based in part on the 
applicable IME adjustment factor. The IME adjustment factor is 
calculated by using a hospital's ratio of residents to beds, which is 
represented as r, and a formula multiplier, which is represented as c, 
in the following equation: c x [{1 + r{time}  .405-1]. The 
formula is traditionally described in terms of a certain percentage 
increase in payment for every 10-percent increase in the resident-to-
bed ratio.
    Section 502(a) of Public Law 108-173 modified the formula 
multiplier (c) to be used in the calculation of the IME

[[Page 51681]]

adjustment. Prior to the enactment of Public Law 108-173, the formula 
multiplier was fixed at 1.35 for discharges occurring during FY 2003 
and thereafter. In the FY 2005 IPPS final rule, we announced the 
schedule of formula multipliers to be used in the calculation of the 
IME adjustment and incorporated the schedule in our regulations at 
Sec.  412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modified 
the formula multiplier beginning midway through FY 2004 and provided 
for a new schedule of formula multipliers for FYs 2005 and thereafter 
as follows:
     For discharges occurring on or after April 1, 2004, and 
before October 1, 2004, the formula multiplier is 1.47.
     For discharges occurring during FY 2005, the formula 
multiplier is 1.42.
     For discharges occurring during FY 2006, the formula 
multiplier is 1.37.
     For discharges occurring during FY 2007, the formula 
multiplier is 1.32.
     For discharges occurring during FY 2008 and fiscal years 
thereafter, the formula multiplier is 1.35.
    Accordingly, for discharges occurring during FY 2012, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for the FY 2012 IME adjustment will result in an increase in 
IPPS payment of 5.5 percent for every approximately 10-percent increase 
in the hospital's resident-to-bed ratio.
    Comment: Several commenters supported CMS' proposal to maintain the 
IME formula multiplier at 1.35. Commenters stated they support the 
continued IME adjustment factor because IME payments are an important 
part of guaranteeing both a strong cardiothoracic surgery and general 
surgery workforce, both of which are currently facing increasing 
shortages. Another commenter stated that it supported maintaining the 
current level of IME payments because it is an important funding source 
for safety net teaching hospitals.
    Response: We appreciate the commenters' support. We note that the 
IME formula multiplier is set by Congress; any change to the multiplier 
would require a legislative change. Therefore, we are finalizing our 
proposal that the IME formula multiplier for FY 2012 be set at 1.35, 
which we estimate will result in an increase in IPPS payments of 5.5 
percent for every approximately 10-percent increase in the hospital's 
resident-to-bed ratio.

G. Payment Adjustment for Medicare Disproportionate Share Hospitals 
(DSHs) and Indirect Medical Education (IME) (Sec. Sec.  412.105 and 
412.106)

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional Medicare 
payments to subsection (d) hospitals that serve a significantly 
disproportionate number of low-income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) adjustment. Under the first 
method, hospitals that are located in an urban area and have 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. This method is commonly referred to as the ``Pickle method.''
    The second method for qualifying for the DSH payment adjustment, 
which is the most common, is based on a complex statutory formula under 
which the DSH payment adjustment is based on the hospital's geographic 
designation, the number of beds in the hospital, and the level of the 
hospital's disproportionate patient percentage (DPP). A hospital's DPP 
is the sum of two fractions: the ``Medicare fraction'' and the 
``Medicaid fraction.'' The Medicare fraction (also known as the ``SSI 
fraction'' or ``SSI ratio'') is computed by dividing the number of the 
hospital's inpatient days that are furnished to patients who were 
entitled to both Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan) and Supplemental Security Income 
(SSI) benefits by the hospital's total number of patient days furnished 
to patients entitled to benefits under Medicare Part A (including 
patients who are enrolled in a Medicare Advantage (Part C) plan). The 
Medicaid fraction is computed by dividing the hospital's number of 
inpatient days furnished to patients who, for such days, were eligible 
for Medicaid, but were not entitled to benefits under Medicare Part A, 
by the hospital's total number of inpatient days in the same period.
    Because the DSH payment adjustment is part of the IPPS, the DSH 
statutory references (under section 1886(d)(5)(F) of the Act) to 
``days'' apply only to hospital acute care inpatient days. Regulations 
located at Sec.  412.106 govern the Medicare DSH payment adjustment and 
specify how the DPP is calculated as well as how beds and patient days 
are counted in determining the Medicare DSH payment adjustment. Under 
Sec.  412.106(a)(1)(i), the number of beds for the Medicare DSH payment 
adjustment is determined in accordance with bed counting rules for the 
IME adjustment under Sec.  412.105(b).
    As we did in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25942), 
we are combining, under section IV.G.2. of this preamble, our 
discussion of changes to the policies for counting beds in relation to 
the calculations for the IME adjustment at Sec.  412.105(b) and the DSH 
payment adjustment at Sec.  412.106(a)(1)(i) and for counting patient 
days for purposes of the DSH payment adjustment at Sec.  
412.106(a)(1)(ii).
2. Policy Change Relating to the Exclusion of Hospice Beds and Patient 
Days From the Calculation of the Medicare DSH Payment Adjustment and 
the IME Payment Adjustment
a. Background
    As discussed in the FY 2004 IPPS final rule (68 FR 45415 through 
45420), when determining a hospital's Medicare DSH payment, our policy 
is to include patient days in hospital units or wards that would be 
directly included in determining the allowable costs of inpatient 
hospital care payable under the IPPS on the Medicare cost report. Under 
this policy, CMS uses the level of care generally provided in such a 
unit or ward as a proxy for determining the level of care provided to a 
particular patient on a particular day within that unit. As stated in 
the FY 2004 IPPS final rule, our policy is ``not intended to focus on 
the level or type of care provided to individual patients in a unit, 
but rather on the level and type of care provided in the unit as a 
whole.'' (68 FR 45417) In the FY 2005 IPPS final rule, we amended this 
policy to specifically exclude observation and swing days from the 
patient day count. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
25942 and 25943), we proposed to establish an additional exclusion with 
respect to counting bed days and patient days for patients receiving 
hospice services in an inpatient setting of a hospital.
b. Hospice Inpatient Services
    Section 1861(dd)(1) of the Act defines hospice care to include a 
limited set of ``items and services provided to a terminally ill 
individual by, or by others under arrangements made by, a hospice 
program under a written plan (for providing such care to such 
individual) established and periodically reviewed by the individual's 
attending physician

[[Page 51682]]

and by the medical director.'' Among those items and services specified 
under section 1861(dd)(1)(G) of the Act is ``short-term inpatient care 
(including both respite care and procedures necessary for pain control 
and acute and chronic symptom management) in an inpatient facility 
meeting such conditions as the Secretary determines to be appropriate 
to provide such care, but such respite care may be provided only on an 
intermittent, nonroutine, and occasional basis and may not be provided 
consecutively over longer than five days.'' Based on these statutory 
definitions of hospice care, the Secretary, through regulation at Sec.  
418.302, has grouped hospice care services into four categories for 
payment purposes. Two of these payment categories describe hospice 
services in an inpatient setting: Inpatient respite care day and 
general inpatient care day.
    Section 418.302(b)(3) of the regulations defines an inpatient 
respite care day as ``a day on which the individual who has elected 
hospice care receives care in an approved facility on a short-term 
basis for respite.'' Section 40.2.2 of Chapter 9 of the Medicare 
Benefit Policy Manual (https://www.cms.gov/manuals/Downloads/bp102c09.pdf) further describes an inpatient respite care day as a 
short-term inpatient day provided only when necessary to relieve family 
members or other caregivers caring for the individual at home. Under 
the Act, inpatient respite care is limited to 5 consecutive days for a 
given stay. Similarly, the regulations at Sec.  418.302(b)(4) describe 
a general inpatient care day as ``a day on which an individual who has 
elected hospice care receives general inpatient care in an inpatient 
facility for pain control or acute or chronic symptom management which 
cannot be managed in other settings.''
    Section 40.1.5 of Chapter 9 of the Medicare Benefit Policy Manual 
provides that general inpatient care is appropriate when care for pain 
control or acute or chronic symptom management cannot feasibly be 
provided in another setting. This section of the Medicare Benefit 
Policy Manual further states that such care is ``not equivalent to a 
hospital level of care.'' That hospice care is not hospital level care 
is further supported by the provision at Sec.  418.202(e), which 
provides that general inpatient care and inpatient respite care hospice 
services can be ``provided in a participating hospice inpatient unit, 
or a participating hospital or [skilled nursing facility], that 
additionally meets the standards in Sec.  418.202(a) and (e) regarding 
staffing and patient areas * * * [and] must conform to the [hospice 
provider's] written plan of care.''
    Furthermore, hospice services provided in an inpatient hospital 
setting are not payable under the IPPS. Rather, at this time, these 
services are payable under two of the four prospectively determined 
all-inclusive categories of care under the hospice payment system. In 
the FY 2004 IPPS final rule (68 FR 45418), we stated that we believed 
it ``reasonable to interpret the phrase `hospital's patient days,' to 
mean only the hospital's inpatient days at a level of care that would 
be covered under the IPPS as a means to determine an IPPS payment 
adjustment.'' In that rule, we acknowledged that it would be 
``administratively inefficient and impracticable'' to calculate a 
hospital' inpatient days based on a determination of whether a 
particular patient in a particular inpatient bed for a particular stay 
is receiving a level of care that would be covered under the IPPS (68 
FR 45418). Accordingly, we adopted a policy under which we use the 
level of care that is generally provided in particular units or wards 
as a proxy for determining whether the care provided to a particular 
patient is of a type that would be covered under the IPPS. However, we 
have recognized exceptions to this policy for certain categories of 
nonacute care, even if that care is provided in an acute care unit.
    Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule, we proposed 
to revise Sec.  412.106(a)(1)(ii) to exclude patient days associated 
with hospice patients receiving inpatient hospice services in an 
inpatient hospital setting from the Medicare and Medicaid fractions of 
the DPP. We also proposed to amend our cost reporting instructions 
accordingly. Our proposal to exclude hospice inpatient days was 
analogous to our decision in the FY 2005 IPPS final rule to exclude 
observation and swing-bed days from the Medicare and Medicaid fractions 
of the DPP. In that rule, we stated that our policies to exclude 
observation days and swing-bed days from the count of patient days 
``stem from the fact that although the services are provided in beds 
that would otherwise be available to provide an IPPS level of services, 
these days are not payable under the IPPS * * *'' (69 FR 49097). 
Similarly, our proposal to exclude inpatient hospice days stemmed from 
the fact that these days are not acute care services generally payable 
under the IPPS.
    We noted in the proposed rule that, on rare occasions, patients 
receiving care under a third payment category, routine home care, may 
also receive services in an inpatient hospital setting. Unlike 
inpatient respite care or general inpatient services, routine home care 
services are not intended to be provided in a hospital setting. For the 
same reasons stated above, such days should also be excluded from the 
Medicare and Medicaid fractions of the DPP.
    We also proposed to exclude from the hospital's bed count days 
associated with hospice patients who receive inpatient hospice services 
in the hospital for purposes of both the IME payment adjustment and the 
DSH payment adjustment. The rules for counting hospital beds for the 
purposes of the IME adjustment are codified in the IME regulations at 
Sec.  412.105(b), which is cross-referenced in Sec.  412.106(a)(1)(i) 
for purposes of the DSH payment adjustment. Our bed counting policy is 
to include bed days available for IPPS-level acute care hospital 
services. Inpatient hospice services provided in an acute unit or ward 
are occasional, alternative uses of acute inpatient beds that would 
otherwise be considered available for IPPS-level acute care hospital 
services (as long as other criteria for a bed to be considered as an 
available bed are met under Sec.  412.105(b)). A bed used for inpatient 
hospice services on a given day is not available to be used for IPPS-
level services. Therefore, we proposed to revise Sec.  412.105(b)(4) to 
state that such hospice days are excluded from the counts of available 
beds for purposes of the IME payment adjustment. Because the same rules 
govern the counting of available beds for purposes of the DSH payment 
adjustment under Sec.  412.106(a)(1)(i), under the proposal, hospice 
days would also be excluded from the count of available beds for 
purposes of the DSH payment adjustment.
    In the proposed rule, we noted that there is a circumstance in 
which a hospital will provide IPPS-level acute care hospital services 
to a hospice patient for which it would receive payment under the IPPS. 
This occurs when a Medicare beneficiary receiving hospice care under 
his or her hospice benefit requires acute care hospital services to 
treat a condition unrelated to his or her hospice plan of care. For 
example, an individual who has elected the hospice benefit could be 
treated in the inpatient hospital setting for a condition or illness, 
such as a broken bone, that is unrelated to his or her terminal 
illness. Under these circumstances, the patient is receiving acute care 
hospital services of the sort payable under the IPPS. As such, 
consistent with Sec.  412.106(a)(1)(ii), we did not propose to exclude 
these patient

[[Page 51683]]

days from the Medicare and Medicaid fractions of the DPP or from the 
count of available beds under Sec.  412.105(b)(4) and Sec.  
412.106(a)(1)(i).
    We further noted that hospitals may have hospice units that are 
separate and distinct from their acute care inpatient units. Under 
existing regulations at Sec.  412.105(b)(3) and Sec.  
412.106(a)(1)(ii)(A), services provided in distinct nonacute care 
inpatient units are excluded from the patient day and bed day count. 
Our proposal with respect to inpatient hospice services did not change 
or affect this policy.
    Comment: Several commenters believed that the proposal would have 
an immaterial impact on providers' DSH payment adjustments while 
creating an unnecessary administrative burden to the extent that 
providers would have to take steps to identify the excluded days. The 
commenters requested that CMS reevaluate the administrative burden 
created by the need to identify hospice days in light of what the 
commenters describe as the immaterial impact of hospice days on the DSH 
payment adjustments.
    Response: We do not agree with the commenters that our proposal 
would create an undue administrative burden for providers. Hospitals 
already identify hospice patients for the purpose of billing and 
payment. Because hospice patients in an inpatient setting are already 
being specifically identified for other purposes, we do not believe it 
would be an undue administrative burden for hospitals to identify and 
exclude these patients for purposes of the DSH payment adjustment.
    Comment: Commenters requested clarification regarding the effective 
date of the proposal, including whether the regulation change is 
intended to be prospective. The commenters also questioned whether the 
change in policy would be reflected on the cost report.
    Response: Our proposal to exclude hospice bed days from the 
calculation of the DSH payment adjustment is a regulation change that 
will be effective for cost reporting periods beginning on or after 
October 1, 2011. As we stated in the proposed rule, we plan to amend 
the cost reporting instructions to reflect our change in policy.
    Comment: A few commenters requested that CMS not apply the intern-
to-resident bed (IRB) ratio cap with respect to the proposed removal of 
hospice bed days from the calculation of the DSH payment adjustment. 
Instead, the commenters requested that hospitals be allowed to exclude 
these inpatient hospice days from their prior year's IRB ratio for 
purposes of applying that ratio as the cap on the hospital's current 
year IRB ratio.
    Response: We believe the commenters are referring to a provision 
that was included in the Balanced Budget Act of 1997, known as the cap 
on the intern and resident-to-bed (IRB) ratio that is applicable to the 
IME payment that teaching hospitals receive under the IPPS. Under 
section 1886(d)(5)(B)(vi)(I) of the Act, and implemented in the 
regulations at Sec.  412.105(a)(1)(i), a hospital's IRB ratio in the 
current cost reporting period generally cannot exceed, or is capped by, 
the value of the IRB ratio in the preceding cost reporting period. 
Therefore, if a teaching hospital's IRB ratio increases in the current 
cost reporting period relative to the prior cost reporting period, its 
receipt of an increase in IME payment as a result of that increase to 
the IRB ratio is delayed by 1 year. Because, effective for cost 
reporting periods beginning on or after October 1, 2011, certain 
inpatient hospice bed days are to be excluded from the count of 
available beds under Sec.  412.105(b)(4), assuming there are no changes 
in the FTE resident count in the numerator of the IRB ratio from the 
cost reporting period occurring prior to October 1, 2011, a reduced bed 
count in the cost reporting period that begins on or after October 1, 
2011, could cause an increase in the IRB ratio. However, because the 
prior cost reporting period's bed count would still reflect the 
inclusion of the inpatient hospital beds, the IRB ratio for the cost 
reporting period that begins on or after October 1, 2011 will be capped 
by the lower IRB ratio from the preceding period, thereby limiting the 
IME payment somewhat for the cost reporting period that begins on or 
after October 1, 2011.
    We do not agree with the commenters' request to not apply the IRB 
ratio cap with respect to inpatient hospice days by permitting teaching 
hospitals to exclude the inpatient hospice days from the denominator of 
the IRB ratio of the prior period. While it is true that the law and 
regulations permit teaching hospitals to make adjustments to their 
prior year IRB ratios under certain circumstances such as for Medicare 
GME affiliation agreements, new programs, or absorption of residents 
displaced by another hospital's closure, we do not believe a similar 
exception is warranted under this policy. In this instance, no harm is 
occurring to either the teaching hospital or residents in the GME 
programs as a result of not including the bed days of hospice 
inpatients in the denominator of the IRB ratio. Rather, it is simply a 
matter of receiving an increased IME payment immediately in the current 
cost reporting period, or, through application of the IRB ratio cap, on 
a 1-year delay in the following cost reporting period. In fact, the 
intent of the IRB ratio cap is to modulate such changes in a hospital's 
IRB ratio from year to year. Therefore, we are not waiving the IRB 
ratio cap effective for cost reporting periods that begin on or after 
October 1, 2011.
    Comment: One commenter requested that CMS begin implementation of 
the Affordable Care Act amendments to the DSH payment adjustment 
provisions of the Act through this rulemaking.
    Response: We believe that this comment is outside of the scope of 
the proposed rule. The referenced statutory changes made by the 
Affordable Care Act do not go into effect in FY 2012 and were not 
addressed in this year's proposed rule.
    After consideration of the public comments we received, we are 
adopting our proposed policies without modifications. In summary, we 
are excluding inpatient hospice days from the patient day count under 
Sec.  412.106(a)(1)(ii) (for DSH) and the bed day count under Sec.  
412.105(b) (for IME) and under Sec.  412.106(a)(1)(i) (for DSH).

H. Medicare-Dependent, Small Rural Hospitals (MDHs) (Sec.  412.108)

1. Background
    Under the IPPS, separate special payment protections are provided 
to a Medicare-dependent, small rural hospital (MDH). MDHs are paid for 
their hospital inpatient services based on the higher of the Federal 
rate or a blended rate based in part on the Federal rate and in part on 
the MDH's hospital-specific rate. Section 1886(d)(5)(G)(iv) of the Act 
defines an MDH as a hospital that is located in a rural area, has not 
more than 100 beds, is not an SCH, and has a high percentage of 
Medicare discharges (that is, not less than 60 percent of its inpatient 
days or discharges either in its 1987 cost reporting year or in two of 
its most recent three settled Medicare cost reporting years). The 
regulations at 42 CFR 412.108 set forth the criteria that a hospital 
must meet to be classified as an MDH.
    Although MDHs are paid under an adjusted payment methodology, they 
are still IPPS hospitals paid under section 1886(d) of the Act. Like 
all IPPS hospitals paid under section 1886(d) of the Act, MDHs are paid 
for their discharges based on the DRG weights calculated under section 
1886(d)(4) of the Act.

[[Page 51684]]

    Through and including FY 2006, under section 1886(d)(5)(G) of the 
Act, MDHs are paid based on the Federal rate or, if higher, the Federal 
rate plus 50 percent of the amount by which the Federal rate is 
exceeded by the updated hospital-specific rate based on the hospital's 
FY 1982 or FY 1987 costs per discharge, whichever of these hospital-
specific rates is higher. Section 5003(b) of Public Law 109-171 (DRA 
2005) amended section 1886(d)(5)(G) of the Act to provide that, for 
discharges occurring on or after October 1, 2006, MDHs are paid based 
on the Federal rate or, if higher, the Federal rate plus 75 percent of 
the amount by which the Federal rate is exceeded by the updated 
hospital-specific rate based on FY 1982, FY 1987, or FY 2002 costs per 
discharge, whichever of these hospital-specific rates is highest.
    For each cost reporting period, the fiscal intermediary or MAC 
determines which of the payment options will yield the highest 
aggregate payment. Interim payments are automatically made at the 
highest rate using the best data available at the time the fiscal 
intermediary or MAC makes the determination. However, it may not be 
possible for the fiscal intermediary or MAC to determine in advance 
precisely which of the rates will yield the highest aggregate payment 
by year's end. In many instances, it is not possible to accurately 
forecast the outlier payments, the amount of the DSH adjustment or the 
IME adjustment, all of which are applicable only to payments based on 
the Federal rate and not to payments based on the hospital-specific 
rate. The fiscal intermediary or MAC makes a final adjustment at the 
settlement of the cost report after it determines precisely which of 
the payment rates would yield the highest aggregate payment to the 
hospital.
    If a hospital disagrees with the fiscal intermediary's or the MAC's 
determination regarding the final amount of program payment to which it 
is entitled, it has the right to appeal the determination in accordance 
with the procedures set forth in 42 CFR Part 405, Subpart R, which 
govern provider payment determinations and appeals.
2. Extension of the MDH Program
    As we discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50286 and 50287), section 3124 of the Affordable Care Act extended the 
MDH program from the end of FY 2011 (that is, for discharges occurring 
before October 1, 2011) to the end of FY 2012 (that is, for discharges 
occurring before October 1, 2012). Under prior law, as specified in 
section 5003(a) of Public Law 109-171 (DRA 2005), the MDH program was 
to be in effect through the end of FY 2011 only. Section 3124(a) of the 
Affordable Care Act amended sections 1886(d)(5)(G)(i) and 
1886(d)(5)(G)(ii)(II) of the Act to extend the MDH program and payment 
methodology from the end of FY 2011 to the end of FY 2012, by striking 
``October 1, 2011'' and inserting ``October 1, 2012''. Section 3124(b) 
of the Affordable Care Act also made conforming amendments to sections 
1886(b)(3)(D)(i) and 1886(b)(3)(D)(iv) of the Act. Section 3124(b)(2) 
of the Affordable Care Act also amended section 13501(e)(2) of OBRA 
1993 to extend the provision permitting hospitals to decline 
reclassification as an MDH through FY 2012. In the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50287 and 50414), we amended the regulations at 
Sec.  412.108(a)(1) and (c)(2)(iii) to reflect the statutory extension 
of the MDH program through FY 2012. In the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 25944), we did not propose any additional changes 
to this regulatory text for FY 2012.
    We did not receive any public comments regarding the extension of 
the MDH program.

I. Certified Registered Nurse Anesthetist (CRNA) Services Furnished in 
Rural Hospitals and CAHs (Sec.  412.113)

    Section 2312 of the Deficit Reduction Act of 1984 (Pub. L. 98-369) 
provided for reimbursement to hospitals on a reasonable cost basis for 
the costs that certain hospitals incur in connection with the services 
of certified registered nurse anesthetists (CRNAs). Section 2312(c) 
provided that pass-through payment of CRNA costs was effective for cost 
reporting periods beginning on or after October 1, 1984, and before 
October 1, 1987. Section 9320 of the Omnibus Budget Reconciliation Act 
of 1986 (Pub. L. 99-509) (which established a fee schedule for the 
services of nurse anesthetists) amended section 2312(c) of Public Law 
98-369 by extending the CRNA pass-through provision through cost 
reporting periods beginning before January 1, 1989. In addition, Public 
Law 99-509 amended section 1861 of the Act to add a new subsection 
(bb), which provides that CRNA services include anesthesia services and 
related care furnished by a CRNA. Section 1861(bb)(2) of the Act states 
that the term ``certified registered nurse anesthetist'' includes an 
anesthesiologist assistant. Section 608 of the Family Support Act of 
1988 (Pub. L. 100-485) extended pass-through payments for CRNA services 
through 1991 and amended section 9320 of Public Law 99-509 by including 
language referring to eligibility for pass-through payments for CRNA 
services if the facility is ``* * * a hospital located in a rural area 
(as defined for purposes of section 1886(d) of the Social Security 
Act).'' Reasonable cost-based payment for CRNA services was extended 
indefinitely by section 6132 of the Omnibus Budget Reconciliation Act 
of 1989 (Pub. L. 101-239).
    Section 1886(d) of the Act defines ``rural'' as any area outside an 
urban area. This definition of ``rural'' was in effect when Public Law 
100-485 was implemented. In 1999, the Balanced Budget Refinement Act 
(Pub. L. 106-113) amended section 1886(d)(8) of the Act by adding a new 
subparagraph (E), which permits a hospital physically located in an 
urban area to apply for reclassification to be treated as rural. In 
addition, Public Law 106-113 made a corresponding change to section 
1820(c)(2)(B)(i) of the Act, which specifies the rural location 
requirement for CAH designation, by adding the phrase ``or is treated 
as being located in a rural area pursuant to section 1886(d)(8)(E).''
    The regulations implementing pass-through payments for anesthesia 
services and related care furnished by qualified nonphysician 
anesthetists (that is, both CRNAs and anesthesiologist assistants) 
employed by a hospital or CAH, are located at Sec.  412.113(c). In the 
FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24010), we proposed to 
revise Sec.  412.113(c)(2)(i)(A) to state that, effective for cost 
reporting periods beginning on or after October 1, 2010, CAHs and 
hospitals that have reclassified as rural pursuant to section 
1886(d)(8)(E) of the Act and Sec.  412.103 of the regulations also are 
rural for purposes of section 1886(d) of the Act and, therefore, are 
eligible to be paid based on reasonable cost for anesthesia services 
and related care furnished by a qualified nonphysician anesthetist.
    After consideration of the public comments, in the FY 2011 IPPS/
LTCH PPS final rule (75 FR 50303), we adopted a policy that would allow 
otherwise eligible critical access hospitals (CAHs) or hospitals, that 
have reclassified from urban to rural status under section 
1886(d)(8)(E) of the Act and 42 CFR 412.103, to receive reasonable cost 
payments for anesthesia services and related care furnished by 
qualified nonphysician anesthetists (also referred to in this section 
as CRNA pass-through payments), effective for cost reporting periods 
beginning on or after October 1, 2010. After the issuance of the final 
rule, we received an inquiry from a public commenter who indicated that 
CMS had misunderstood its submitted comment on the FY 2011

[[Page 51685]]

IPPS/LTCH PPS proposed rule in which the commenter stated that the 
policy should be effective on the basis of a calendar year, not a cost 
reporting period, since as a rule a hospital can only begin receiving 
CRNA pass-through payments at the beginning of a calendar year. Our 
response to this public comment in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50303) indicated that it was unnecessary to modify the effective 
date in the final rule because ``if the provision is effective for cost 
reporting periods beginning on or after October 1, 2010, it will also 
be in effect for the calendar year beginning January 1, 2011.'' While 
this statement was accurate, it did not take into account that if a 
hospital's cost reporting period begins on or after January 1, 2011, 
the hospital would be ineligible to receive CRNA pass-through payments 
until the beginning of the next calendar year, on January 1, 2012. 
Under the finalized policy in the FY 2011 IPPS/LTCH PPS final rule, 
hospitals reclassifying from urban to rural areas with cost reporting 
periods beginning between October 1, 2010, and December 31, 2010, would 
be able to first receive CRNA pass-through payments effective January 
1, 2011, while hospitals with cost reporting periods beginning on or 
after January 1, 2011, would not be able to receive CRNA pass-through 
payments until one year later on January 1, 2012.
    In an interim final rule with comment period included in the 
Federal Register on November 24, 2010 (75 FR 72256), we stated that our 
intention in the FY 2011 IPPS/LTCH PPS final rule was not to make the 
provision for CRNA pass-through payment for anesthesia services and 
related care furnished by qualified nonphysician anesthetists effective 
January 1, 2011, for some hospitals and CAHs and January 1, 2012, for 
other hospitals and CAHs. We stated our belief that the provision would 
be more equitable if it had a uniform effective date for all eligible 
hospitals and CAHs. While we considered changing the effective date to 
January 1, 2011, for all hospitals and CAHs to begin receiving CRNA 
pass-through payments under this provision, we noted that our 
regulations at 42 CFR 412.113(c)(2)(iii) state that the hospital or CAH 
must demonstrate to its fiscal intermediary prior to the start of the 
calendar year that it meets the requirements for receiving CRNA pass-
through payments. For this reason, we stated our belief that the best 
option was to adopt an effective date of December 2, 2010, for all 
hospitals and CAHs, which we provided for in the interim final rule 
with comment period. With an effective date of December 2, 2010, any 
hospital or CAH, regardless of its specific fiscal year beginning date, 
was provided the opportunity to demonstrate prior to January 1, 2011, 
that it met the requirements for receiving CRNA pass-through payments 
beginning January 1, 2011. In the interim final rule with comment 
period, we amended the regulations at Sec.  412.113(c)(2)(i)(A) to 
provide for an effective date of December 2, 2010, for all eligible 
hospitals and CAHs to receive CRNA pass-through payments for anesthesia 
services and related care furnished by qualified nonphysician 
anesthetists.
    As we indicated in the FY 2012 IPPS/LTCH PPS proposed rule, in this 
final rule, we are responding to the one public comment received on the 
interim final rule with comment period and setting forth our final 
policy.
    Comment: One commenter supported CMS' decision to change the 
effective date of the policy to December 2, 2010, because this change 
will allow all eligible hospitals and CAHs to begin receiving CRNA 
pass-through payments effective January 1, 2011.
    Response: We appreciabe the commenter's support. In this final 
rule, we are finalizing the effective date established in the interim 
final rule with comment period.
    We received two additional comments in response to the FY 2012 
IPPS/LTCH PPS proposed rule.
    Comment: One commenter suggested that CMS consider, for future 
rulemaking, an increase in the limit on the number of procedures and 
FTE hours that a facility may have and remain qualified for reasonable 
cost-based reimbursement for services furnished by qualified 
nonphysician anesthetists. The commenter stated that this increase 
would ensure better coverage for emergency rooms and surgery cases, 
which would support patient services and improve patient safety and 
efficiency of treatment. Another commenter stated that while it 
appreciated and supported changing the regulations to permit CRNA pass-
through payments for reclassified hospitals, it urged CMS to permit 
hospitals in Lugar counties the same benefit.
    Response: Because we did not propose any further changes to the 
CRNA pass-through payment policy in the FY 2012 IPPS/LTCH PPS proposed 
rule, we consider these comments to be outside the scope of the 
proposed rule. Therefore, we are not responding to these comments in 
this final rule. However, we may consider these public comments in the 
development of future rulemaking.
    After consideration of the public comments we received, we are 
finalizing the effective date of December 2, 2010, that was established 
in the interim final rule with comment period. Effective December 2, 
2010, in addition to hospitals and CAHs geographically located in rural 
areas, as defined in Sec.  412.62(f), and are not deemed to be located 
in an urban area under Sec.  412.64(b)(3), hospitals and CAHs that have 
reclassified as rural under the regulations at Sec.  412.103 are also 
eligible to receive CRNA pass-through payments.

J. Additional Payments for Qualifying Hospitals With Lowest Per 
Enrollee Medicare Spending

1. Background
    Section 1109 of the Affordable Care Act requires additional 
payments for FYs 2011 and 2012 for ``qualifying hospitals.'' Section 
1109(d) defines a ``qualifying hospital'' as a ``subsection (d) 
hospital * * * that is located in a county that ranks, based upon its 
ranking in age, sex and race adjusted spending for benefits under parts 
A and B * * * per enrollee within the lowest quartile of such counties 
in the United States.'' Therefore, a ``qualifying hospital'' is one 
that meets the following conditions: (1) It is a ``subsection (d) 
hospital'' as defined in section 1886(d)(1)(B) of the Act; and (2) it 
is located in a county that ranks within the lowest quartile of 
counties based upon its spending for benefits under Medicare Part A and 
Part B per enrollee adjusted for age, sex, and race. Section 1109(b) of 
the Affordable Care Act makes available $400 million to qualifying 
hospitals for FY 2011 and FY 2012. Section 1109(c) of the Affordable 
Care Act requires the $400 million to be divided among each qualifying 
hospital in proportion to the ratio of the individual qualifying 
hospital's FY 2009 IPPS operating hospital payments to the sum of total 
FY 2009 IPPS operating hospital payments made to all qualifying 
hospitals.
    Section 1109 is one of several provisions in the Affordable Care 
Act that addresses concerns about how Medicare makes adjustments for 
geographic differences in the cost of providing services and geographic 
variation in the volume and intensity of health care spending. Some 
other provisions in the Affordable Care Act that relate to concerns 
about geographic variation in Medicare payments include:
     Section 3102(a), which provides a floor of 1.0 on the 
physician fee schedule work geographic practice cost

[[Page 51686]]

index (GPCI) through the end of CY 2010 (later extended by the Medicare 
and Medicaid Extension Act of 2010 through the end of CY 2011);
     Section 3102(b), as amended by section 1108 of the 
Affordable Care Act, which requires that only one-half of the relative 
cost differences in employee wages and office rents be reflected in the 
practice expense GPCIs in 2010 and 2011;
     Section 10324, which provides for a floor on the wage 
index and the practice expense GPCI in frontier States (defined as 50 
percent or more of the counties in the State having a population 
density of less than 6 people per square mile).
    These provisions provide temporary adjustments in payments while 
other initiatives are underway to evaluate geographic adjustment 
factors that are used in Medicare's payment systems. For instance, 
section 3101 of the Affordable Care Act requires the Secretary, not 
later than January 1, 2012, to make appropriate adjustments to the 
practice expense GPCI considering alternative data sources such as the 
American Community Survey for the nonphysician employee portion of the 
GPCI. Section 3137 of the Affordable Care Act requires the Secretary to 
submit to Congress a report that includes a plan to reform the hospital 
wage index system under section 1886 of the Act by December 31, 2011. 
In addition to these provisions, the Secretary has contracted with the 
Institute of Medicine (IOM) to study the hospital wage index and the 
physician fee schedule GPCI. The IOM released its first report to CMS 
on June 1, 2011. The report provides an evaluation and assessment of:
    (1) The empirical validity of the adjustment factors (the hospital 
wage index and physician fee schedule GPCI);
    (2) The methodology used to determine the adjustment factors;
    (3) Measures used for the adjustment factors, taking into account--
     Timeliness of data and frequency of revisions to such 
data;
     Sources of data and the degree to which such data are 
representative of costs; and
     Operational costs of providers who participate in 
Medicare.
    The report includes recommendations for the Secretary to consider. 
It is available on the Web site at: http://iom.edu/Reports/2011/Geographic-Adjustment-in-Medicare-Payment-Phase-I-Improving-Accuracy.aspx. We are looking forward to reviewing IOM's report and 
acting expeditiously on its recommendations to improve Medicare's 
payment systems and better adjust for geographic differences in the 
cost of hospital labor as well as the cost of operating a physician 
practice.
2. Methodology for Identifying Qualifying Hospitals and Eligible 
Counties
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50303 through 
50342), we finalized our methodology for distributing the $400 million 
to qualifying hospitals located in the lowest quartile of counties in 
per enrollee Medicare spending. First, we provided our methodology for 
determining the bottom quartile of counties with the lowest Medicare 
Part A and Part B spending adjusted by age, sex, and race for the 
purpose of disbursing the available $400 million. We developed an 
adjustment model by age, sex, and race, as required under the 
provisions of section 1109. We then applied this adjustment to the 
county Medicare Part A and Part B spending data to account for the 
demographics of the Medicare beneficiaries in those counties. After 
those adjustments were applied, we determined the Medicare Part A and 
Part B spending by county per enrollee. As we explained in the final 
rule, our methodology for determining the Medicare Part A and Part B 
spending per enrollee by county adjusted for age, sex, and race is 
similar to the methodology we use to calculate risk adjustment models 
for Medicare Advantage (MA) ratesetting. For more information on the 
methodology we used to calculate the county Medicare per enrollee 
spending rates, we refer readers to the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50303 through 75 FR 50307).
    In addition, in the FY 2011 IPPS/LTCH PPS final rule, we developed 
a methodology to identify the qualifying hospitals located in each of 
the eligible counties. As we stated earlier, section 1109 defines a 
qualifying hospital as a ``subsection (d) hospital'' (as defined for 
purposes of section 1886(d) of the Act) that is ``located in'' an 
eligible county. A subsection (d) hospital is defined in section 
1886(d)(1)(B) of the Act, in part, as a ``hospital located in one of 
the 50 States or the District of Columbia.'' Therefore, we excluded 
Puerto Rico hospitals and CAHs from the provisions of section 1109 
because they do not meet the definition of a ``subsection (d) 
hospital.''
    In the FY 2011 IPPS/LTCH PPS final rule, we identified ``qualifying 
hospitals'' based on their Medicare provider number (now referred to as 
the ``CMS certification number'' (CCN)) because this number is used by 
hospitals to identify themselves on their Medicare cost reports. We 
also provided that, in order to meet the definition of a ``qualifying 
hospital,'' the hospital, as identified by its CCN, must: (1) Have 
existed as a subsection (d) hospital as of April 1, 2010; (2) be 
geographically located in an eligible county; and (3) have received 
IPPS operating payments (in accordance with section 1886(d) of the Act) 
under its CCN in FY 2009. We used the Online Survey, Certification and 
Reporting (OSCAR) database to determine a hospital's county location 
associated with that CCN. We also specified that the address listed for 
a hospital's CCN must be currently located in a qualifying county in 
order for a hospital to meet the definition of a ``qualifying 
hospital.'' For more information on how we identified the qualifying 
hospitals, we refer readers to the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50307 and 50308). We note that we did not propose to clarify, nor in 
this final rule are we clarifying, the application of our definition in 
section IV.J.4. of this preamble.
3. Determination of Annual Payment Amounts
    The third step in the implementation of section 1109 of the 
Affordable Care Act required that we determine the payment amount that 
each qualifying hospital would receive. Specifically, section 1109(c) 
of the Affordable Care Act required that the payment amount for a 
qualifying hospital be determined ``in proportion to the portion of the 
amount of the aggregate payments under section 1886(d) of the Social 
Security Act to the hospital for fiscal year 2009 bears to the sum of 
all such payments to all qualifying hospitals for such fiscal year.'' 
As specified in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50310 
through 50312), we determined that a qualifying hospital's payment 
amount will be based on the proportion of its IPPS operating payments 
made in FY 2009 under section 1886(d) of the Act relative to the total 
IPPS operating payments made to all qualifying hospitals in FY 2009 
under section 1886(d) of the Act. The FY 2009 IPPS operating payments 
made under section 1886(d) of the Act includes DRG and wage-adjusted 
payments made under the IPPS standardized amount with add-on payments 
for operating DSH, operating IME, operating outliers, and new 
technology (collectively referred to in this preamble as the IPPS 
operating payment amount). We used the March 2010 update of the FY 2009 
MedPAR hospital inpatient claims data to determine the IPPS operating 
payment amounts for each qualifying hospital in order to calculate the 
proportion of money that each qualifying hospital

[[Page 51687]]

would receive under this provision. For more information on the 
methodology we used to calculate the payment determinations, we refer 
readers to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50310 through 75 
FR 50312).
4. Eligible Counties and Qualifying Hospitals
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50312 through 
50342), we published the list of eligible counties, that is, the lowest 
quartile of counties with Medicare Part A and Part B spending per 
enrollee adjusted for age, sex, and race, the qualifying hospitals 
located in those counties, and the qualifying hospitals' payment 
weighting factors, for purposes of making payments under section 1109 
for FY 2011 and FY 2012. We identified 3,142 counties in the United 
States. Therefore, there are 786 eligible counties (rounded from 785.5 
eligible counties). Of those 786 eligible counties, there are only 273 
counties in which qualifying hospitals are located, using the 
methodology that we finalized in the FY 2011 IPPS/LTCH PPS final rule. 
Using CCNs, we identified 416 IPPS hospitals that are currently located 
in those eligible counties and that received IPPS operating payments in 
FY 2009.
    In response to public comments on the FY 2011 IPPS/LTCH PPS 
proposed rule, in the FY 2011 IPPS/LTCH PPS final rule, we corrected 
the list of eligible counties by replacing two counties on our list of 
eligible counties (adding Crooks County, OR and Bottineu County, ND). 
However, we did not identify any qualifying hospitals located in those 
two eligible counties. Therefore, we provided the public an opportunity 
to notify CMS by August 30, 2010, if there were any qualifying IPPS 
hospitals located in either of the two newly added counties. We stated 
that if we added qualifying hospitals in these counties as a result of 
accurate notification from the public, we would publish a revised list 
of qualifying hospitals and their payment weighting factors on the CMS 
Web site after August 30, 2010. We did not receive any public comments 
that there were qualifying hospitals located in Crooks County, OR or 
Bottineu County, ND. Therefore, the list of eligible counties and 
qualifying hospitals that was finalized in Tables 1 and 2 in the FY 
2011 IPPS/LTCH PPS final rule remained valid for distribution of 
payments under section 1109 for FY 2011 and FY 2012.
    In auditing our determination of qualifying hospitals prior to the 
distribution of payments for FY 2011, we found that the following 
providers on the list of qualifying hospitals which we finalized in the 
FY 2011 IPPS/LTCH PPS final rule were not subsection (d) hospitals in 
FY 2011:

------------------------------------------------------------------------
         CMS Certification No.                    Provider name
------------------------------------------------------------------------
110231.................................  Landmark Hospital of Athens
                                          LLC.
130024.................................  Bonner General Hospital.
130069.................................  SW Idaho Advanced Care.
130070.................................  Complex Care Hospital of Idaho.
160156.................................  Continuing Care Hospital at St.
                                          Luke's.
250112.................................  Calhoun Health Services.
260221.................................  Select Specialty Hospital--
                                          Springfield Inc.
270002.................................  Holy Rosary Healthcare.
320088.................................  Advanced Care of South New
                                          Mexico.
330010.................................  Amsterdam Memorial Hospital.
500143.................................  Providence St. Peter Chemical
                                          Dependency Center.
------------------------------------------------------------------------

    Because these providers were not subsection (d) hospitals in FY 
2011, the statute precludes them from being qualifying hospitals 
eligible to receive section 1109 payments for FY 2011. In the FY 2012 
IPPS/LTCH PPS proposed rule (76 FR 25947), we proposed to clarify that, 
in applying our definition of qualifying hospitals for making payments 
under section 1109 of the Affordable Care Act, these 11 providers (and 
other providers that do not meet the statutory definition) are not 
qualifying hospitals and, therefore, are removed from the list of 
qualifying hospitals. Furthermore, we proposed to clarify that, in 
order to meet the definition of ``qualifying hospital'' under section 
1109 for FY 2012, a hospital that is on the list of qualifying 
hospitals in the proposed rule must meet the statutory criteria of a 
``qualifying hospital'' for some portion of FY 2012 (a hospital must be 
a subsection (d) hospital for some part of FY 2012).
    In addition, we noted that, prior to the issuance of the FY 2012 
final rule and prior to making section 1109 payments for FY 2012, we 
intend to review providers' status vis-[agrave]-vis the statutory 
definition of qualifying hospital. Accordingly, we noted that, in this 
FY 2012 final rule and again prior to distribution of section 1109 
payments for FY 2012, we would update the list of qualifying hospitals 
and payment weighting factors based on these findings. We indicated 
that, in addition to the opportunity to submit comments on the proposed 
rule, we were proposing to provide hospitals an opportunity after the 
FY 2012 IPPS rulemaking cycle to notify CMS whether any qualifying 
hospitals removed from the list have been removed in error and to 
notify CMS if a hospital is on the list of qualifying hospitals and 
will not be a qualifying hospital (for example, a subsection (d) 
hospital) for any or all part of FY 2012. We also stated that the 
public would be allowed to submit input on these two topics via e-mail 
to Nisha Bhat, nisha.bhat@cms.hhs.gov. All information, including 
relevant documentation, must be received by November 1, 2011.
5. Payment Determinations and Distributions for FY 2011 and FY 2012
    Under section 1109(b) of the Affordable Care Act, the total pool of 
payments available to qualifying hospitals for FY 2011 and FY 2012 is 
$400 million. In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50308 
through 50310), we stated that we would distribute $150 million for FY 
2011 and $250 million for FY 2012. We stated that we would distribute 
payments to the qualifying hospitals through an annual one-time payment 
during each of FY 2011 and FY 2012 through their Medicare contractor 
(fiscal intermediary or MAC). We instructed qualifying hospitals to 
report these additional payments on their Medicare hospital cost report 
corresponding to the appropriate cost reporting period that the 
hospitals receive the payments and that hospitals should report these 
payments on the ``Other adjustment'' line on Worksheet E, Part A of the 
Medicare hospital cost report Form 2552. We noted that we require these 
payments to be reported on the cost report for tracking purposes only 
and that these additional payments will not be adjusted or settled by 
the fiscal intermediary or MAC on the cost report.
    In the FY 2012 IPPS/LTCH PPS proposed rule, we noted that at the 
time of the issuance of the proposed rule, we had not yet made the 
payments to the qualifying hospitals for FY 2011. As we stated in the 
FY 2011 IPPS/LTCH PPS final rule, and again in the FY 2012 proposed 
rule, we will make the FY 2011 payments during FY 2011 (that is, by 
September 30, 2011). However, in the proposed rule, we indicated that 
we were notifying the public that we intended to change the method we 
would use to distribute the payment for FY 2011 and FY 2012, in order 
to ease the reporting burden on hospitals. Rather than making a one-
time annual payment to the qualifying hospitals through their Medicare 
contractor using the Medicare cost report, in the proposed rule, we 
indicated that we planned to make payments to the qualifying hospitals 
through a one-time

[[Page 51688]]

annual payment made by one Medicare contractor who would directly pay 
all of the qualifying hospitals. We stated that we would send each 
qualifying hospital a letter stating the specifics of how the hospital 
will receive its payments. Because these one-time annual payments would 
be made through a special process outside of the scope of normal 
payments by their Medicare contractor, the hospitals' Medicare 
contractor would no longer need to track the payment amounts made to 
the hospitals under this provision. We believed this would simplify and 
expedite the payment process so that one Medicare contractor is 
responsible for overseeing the distribution of payments. In addition, 
we believed that this simplified process would ease the administrative 
burden within CMS to track that payments have been properly made to the 
qualifying hospitals. In addition, the burden to hospitals is reduced 
because hospitals would no longer have to report these additional 
payments on their Medicare hospital cost report corresponding to the 
appropriate cost reporting period for which the hospitals receive 
payments in FY 2011 or FY 2012 (as we instructed in the FY 2011 IPPS/
LTCH PPS final rule and note above).
    In the FY 2011 IPPS/LTCH PPS final rule, we also stated that we 
would make only one determination of eligible counties and qualifying 
hospitals for FY 2011 and FY 2012, with the caveat that we would accept 
additional public input on the limited issue of whether there are any 
qualifying hospitals in the two newly identified eligible counties. As 
we stated earlier, we did not receive any public input on qualifying 
hospitals for the two newly identified eligible counties. However, as 
we describe above, 11 hospitals that were included on the list of 
qualifying hospitals do not meet the statutory criteria in section 1109 
of the Affordable Care Act. Therefore, in the proposed rule, we 
proposed to revise our list of qualifying hospitals and their payment 
weighting factors finalized in the FY 2011 IPPS/LTCH PPS final rule to 
exclude these 11 hospitals. As explained in the FY 2011 IPPS/LTCH PPS 
final rule, we finalized in that rule (to the best of our ability) the 
list of eligible counties and qualifying hospitals once for ease of 
implementation of the section 1109 provision and to allow hospitals to 
plan their budgets accordingly. We indicated that the proposed revision 
of our determination to exclude these 11 hospitals would result in 
changes to the payment weighting factors. We proposed to update the 
payment weighting factors accordingly. Therefore, we proposed to 
distribute the remaining $250 million in FY 2012 to those qualifying 
hospitals included in the proposed rule based on the payment weighting 
factors proposed in the proposed rule. In addition, in order to 
distribute the section 1109 payments for FY 2011 in as timely a manner 
as possible, we indicated that we intended to make preliminary section 
1109 payments for FY 2011 using the proposed list of qualifying 
providers and payment weighting factors using the payment method 
described above. We stated that if additional hospitals are deleted 
from the proposed list of qualifying hospitals for FY 2011 because they 
do not meet the statutory criteria, the payment weighting factors would 
need additional revision. If this situation occurs, we proposed to 
further amend the payment weighting factors for payments to be made in 
FY 2012 so that each qualifying hospital receives its appropriate share 
of the total $400 million.
    We referred readers to the CMS Web site at: http://www.cms.gov/AcuteInpatientPPS/TopOfPage for the tables listed below. The tables 
were included collectively as the ``Section 1109 Files'' for the FY 
2012 IPPS/LTCH proposed rule.
     The final list of eligible counties that was published in 
the FY 2011 IPPS/LTCH PPS final rule. We noted that we were not 
updating this table.
     The finalized list of qualifying hospitals, location, and 
payment weighting factors (based on the March 2010 update of the FY 
2009 MedPAR file); based on the proposed clarifications described above 
for FY 2011.
     The distribution of the $400 million for FY 2011 and FY 
2012 by State based on the proposed list of qualifying hospitals, 
location, and payment weighting factors.
    We noted that the Web address for this Web site was effective as of 
April 19, 2011, and that, in the future, these tables may be archived 
to the Web site at: http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Comment: Commenters supported CMS' continuation of its policy to 
distribute the remaining of the $400 million allocated under the 
provision of section 1109 of the Act in FY 2012. Commenters also 
supported CMS' proposal to make one-time annual payments through one 
Medicare contractor rather than individual Medicare contractors. 
Commenters asked CMS to provide the name and the contact information of 
the contractor who will be making the one-time annual payments to the 
qualifying hospitals. In addition, commenters urged CMS to notify the 
qualifying hospitals of the timing of their FY 2011 and FY 2012 
payments.
    Response: We appreciate the commenters' support of the 
implementation of the section 1109 provision. Qualifying hospitals 
received their share of the $150 million for their FY 2011 payments on 
July 14, 2011. The payments were made directly to the hospitals by one 
Medicare contractor. We will continue this payment process for FY 2012. 
If hospitals have questions with regard to this process, they can 
contact their Medicare contractor or CMS directly.
    As we proposed, we are providing hospitals, in addition to the 
opportunity to submit comments on the proposed rule, the opportunity 
after the FY 2012 IPPS rulemaking cycle to notify CMS as to whether any 
qualifying hospitals removed from the list have been removed in error 
and to notify CMS if a hospital is on the list of qualifying hospitals 
and will not be a qualifying hospital (for example, a subsection (d) 
hospital) for any part of FY 2012. The public is allowed to submit 
input on these two topics via e-mail to Nisha Bhat, 
nisha.bhat@cms.hhs.gov by November 1, 2011. Given the November 1, 2011 
deadline for hospitals to comment on the list of qualifying hospitals 
to receive section 1109 payments for FY 2012, we plan to distribute 
$250 million to the qualifying hospitals for FY 2012 in the end of 2011 
or early 2012.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25947), we 
identified 11 providers that were not subsection(d) hospitals in FY 
2011 and, therefore, do not qualify to receive section 1109 payments 
for FY 2011. In preparation of this final rule, we again reviewed our 
list of qualifying hospitals and have found that an additional 
hospital, Columbia Regional Hospital (CNN 260178), has not been a 
subsection(d) hospital for any part of FY 2011 and, therefore, does not 
meet the statutory criteria to receive payments under section 1109 for 
FY 2011 and FY 2012. We have revised the list of qualifying hospitals 
and their payment weighting factors for FY 2011 accordingly. In 
addition, we found that the following hospitals have converted to 
become CAHs during FY 2011 and will not be subsection (d) hospitals in 
FY 2012.

------------------------------------------------------------------------
        CMS Certification No.                    Provider name
------------------------------------------------------------------------
200032..............................  Stephens Memorial Hospital.

[[Page 51689]]

 
320069..............................  Miners' Colfax Medical Center.
------------------------------------------------------------------------

    Thus, these two hospitals will receive payments under section 1109 
for FY 2011 but they will no longer qualify to receive payments for FY 
2012. We have posted the list of qualifying hospitals and payment 
weighting factors for FY 2012 on the CMS Web site.
    We refer readers to the CMS Web site at: http://www.cms.gov/AcuteInpatientPPS/TopOfPage for the tables listed below. The tables are 
included collectively as the ``Section 1109 Files'' for the FY 2012 
IPPS/LTCH final rule.
     The final list of eligible counties that was published in 
the FY 2011 IPPS/LTCH PPS final rule. We note that we were not updating 
this table.
     The finalized list of qualifying hospitals, location, and 
payment weighting factors (based on the March 2010 update of the FY 
2009 MedPAR file); based on the clarifications finalized above for FY 
2011.
     The proposed list of qualifying hospitals, location, and 
payment weighting factors (based on the March 2010 update of the FY 
2009 MedPAR file) based on the clarifications above for FY 2012. The 
final list of qualifying hospitals, location, and payment weighting 
factors for FY 2012 will be posted after comments on the accuracy of 
the list of qualifying hospitals are received and evaluated after 
November 1, 2011.
     The distribution of the $400 million for FY 2011 and FY 
2012 by State based on the proposed list of qualifying hospitals, 
location, and payment weighting factors.
    The Web address for this Web site is effective on the date of 
display of this final rule and, in the future, these tables may be 
archived to the Web site at: http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.

K. Changes in the Inpatient Hospital Update

1. FY 2012 Inpatient Hospital Update
    In accordance with section 1886(b)(3)(B)(i) of the Act, each year 
we update the national standardized amount for hospital inpatient 
operating costs by a factor called the ``applicable percentage 
increase.'' Prior to enactment of the Affordable Care Act, section 
1886(b)(3)(B)(i)(XX) of the Act set the applicable percentage increase 
equal to the rate-of-increase in the hospital market basket for 
subsection (d) hospitals (hereafter referred to as ``IPPS hospitals'') 
in all areas, subject to the hospital submitting quality information 
under rules established by the Secretary in accordance with section 
1886(b)(3)(B)(viii) of the Act. For hospitals that did not provide 
these data, the update was equal to the market basket percentage 
increase less an additional 2.0 percentage points. The update for the 
hospital-specific rates for SCHs and MDHs is set by section 
1886(b)(3)(B)(iv) of the Act as discussed further below.
    As discussed below in section IV.K.3. of this preamble, section 
1886(b)(3)(B) of the Act, as amended by sections 3401(a) and 10319(a) 
of the Affordable Care Act, sets the applicable percentage increase 
under the IPPS for FY 2012 as equal to the rate-of increase in the 
hospital market basket for IPPS hospitals in all areas (which is 
currently based on the second quarter 2011 forecast of the FY 2006-
based IPPS market basket), subject to a reduction of 2.0 percentage 
points if the hospital fails to submit quality information under rules 
established by the Secretary in accordance with section 
1886(b)(3)(B)(viii) of the Act, and then subject to an adjustment based 
on changes in economy-wide productivity (the multifactor productivity 
(MFP) adjustment), and an additional reduction of 0.1 percentage point. 
Sections 1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of the Act, as added by 
section 3401(a) of the Affordable Care Act, state that application of 
the MFP adjustment and the additional FY 2012 adjustment of 0.1 
percentage point may result in the applicable percentage increase being 
less than zero.
    In accordance with section 1886(b)(3)(B) of the Act, as amended by 
section 3401(a) of the Affordable Care Act, in the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25949), based on IHS Global Insight, Inc.'s 
(IGI's) first quarter 2011 forecast of multifactor productivity (MFP), 
we proposed an MFP adjustment (the 10-year moving average of MFP for 
the period ending FY 2012) of 1.2 percent.
    Consistent with current law, and based on IGI's first quarter 2011 
forecast of the FY 2012 market basket increase, we proposed an 
applicable percentage increase to the FY 2012 operating standardized 
amount of 1.5 percent (that is, the FY 2012 estimate of the market 
basket rate-of-increase of 2.8 percent less an adjustment of 1.2 
percentage points for economy-wide productivity and less 0.1 percentage 
point) for hospitals in all areas, provided the hospital submits 
quality data in accordance with our rules. For hospitals that do not 
submit quality data, we proposed an applicable percentage increase to 
the operating standardized amount of -0.5 percent (that is, the FY 2012 
estimate of the market basket rate-of-increase of 2.8 percent, less 2.0 
percentage points for failure to submit quality data, less an 
adjustment of 1.2 percentage points for economy-wide productivity, and 
less an additional adjustment of 0.1 percentage point).
    We did not receive any public comments on these proposals to 
implement the applicable percentage increase. However, we did receive 
public comments concerning our proposed MFP adjustment. We address 
these public comments in section IV.K.3. of this preamble. For this 
final rule, in accordance with section 1886(b)(3)(B) of the Act, as 
amended by section 3401(a) of the Affordable Care Act, we are 
finalizing an applicable percentage increase to the FY 2012 operating 
standardized amount of 1.9 percent (that is, the FY 2012 estimate of 
the market basket rate-of-increase of 3.0 percent less an adjustment of 
1.0 percentage point for economy-wide productivity and less 0.1 
percentage point) for hospitals in all areas, provided the hospital 
submits quality data in accordance with our rules. For hospitals that 
do not submit quality data, we are finalizing an applicable percentage 
increase to the operating standardized amount of -0.1 percent (that is, 
the FY 2012 estimate of the market basket rate-of-increase of 3.0 
percent, less 2.0 percentage points for failure to submit quality data, 
less an adjustment of 1.0 percentage point for economy-wide 
productivity, and less an additional adjustment of 0.1 percentage 
point). We note that, for the proposed rule, we used the first quarter 
2011 forecast of the FY 2006-based IPPS market basket rate-of-increase. 
For this final rule, we used the most recent data available, which was 
the second quarter 2011 forecast of the FY 2006-based IPPS market 
basket rate-of-increase. Similarly, for the proposed rule, we used 
IGI's first quarter 2011 forecast of MFP. For this final rule, we used 
the most recent data available, which was IGI's second quarter 2011 
forecast of MFP. We also note that between the proposed and final 
rules, we also incorporated Bureau of Labor Statistics (BLS) revised 
historical data for MFP from 1987 to 2010, with 2010 being a 
preliminary value.
    In the proposed rule, we proposed to revise the existing 
regulations at 42 CFR 412.64(d) to reflect the current law. 
Specifically, in accordance with section 1886(b)(3)(B) of the Act, as 
amended by sections 3401(a) and 10319(a) of the Affordable Care Act, we 
proposed to

[[Page 51690]]

add a new paragraph (iv) to Sec.  412.64(d)(1) to set the applicable 
percentage increase to the FY 2012 operating standardized amount as the 
percentage increase in the market basket index, subject to a reduction 
of 2.0 percentage points if the hospital fails to submit quality 
information under rules established by the Secretary in accordance with 
section 1886(b)(3)(B)(viii) of the Act, and then subject to a 
multifactor productivity adjustment and, lastly, subject to the 
additional reduction of 0.1 percentage point. We did not receive any 
public comments on this proposal. Therefore, in this final rule, we are 
adopting as final, without modification, the proposed changes to Sec.  
412.64(d) to reflect current law.
    Section 1886(b)(3)(B)(iv) of the Act provides that the applicable 
percentage increase to the hospital-specific rates for SCHs and MDHs 
equals the applicable percentage increase set forth in section 
1886(b)(3)(B)(i) of the Act (that is, the same update factor as for all 
other hospitals subject to the IPPS). Therefore, the update to the 
hospital specific rates for SCHs and MDHs is also subject to section 
1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 
10319(a) of the Affordable Care Act. Accordingly, in the FY 2012 IPPS/
LTCH PPS proposed rule (76 FR 25949), we proposed an update to the 
hospital-specific rates applicable to SCHs and MDHs of 1.5 percent for 
hospitals that submit quality data or -0.5 percent for hospitals that 
fail to submit quality data. We did not receive any public comments on 
this proposal. Therefore, for this final rule, we are finalizing an 
update to the hospital-specific rates applicable to SCHs and MDHs of 
1.9 percent for hospitals that submit quality data or -0.1 percent for 
hospitals that fail to submit quality data. As we noted above, for the 
proposed rule, we used IGI's first quarter 2011 forecast of the FY 
2006-based IPPS market basket rate-of-increase. For this final rule, we 
used the most recent data available, which was IGI's second quarter 
2011 forecast of the FY 2006-based IPPS market basket rate-of-increase. 
Similarly, for the proposed rule, we used IGI's first quarter 2011 
forecast of MFP. For this final rule, we used the most recent data 
available, which was IGI's second quarter 2011 forecast of MFP. We also 
note that between the proposed rule and the final rule, we also 
incorporated BLS revised historical data for MFP from 1987 to 2010, 
with 2010 being a preliminary value. For FY 2012, the regulations in 
Sec. Sec.  412.73(c)(16), 412.75(d), 412.77(e), 412.78(e), and 
412.79(d) already contain provisions that set the update factor for 
SCHs and MDHs equal to the update factor applied to the national 
standardized amount for all IPPS hospitals. Therefore, as we proposed, 
we are not making further changes to these five regulatory provisions 
to reflect the FY 2012 update factor for SCHs and MDHs.
2. FY 2012 Puerto Rico Hospital Update
    Puerto Rico hospitals are paid a blended rate for their inpatient 
operating costs based on 75 percent of the national standardized amount 
and 25 percent of the Puerto Rico-specific standardized amount. Section 
1886(d)(9)(C)(i) of the Act is the basis for determining the applicable 
percentage increase applied to the Puerto Rico-specific standardized 
amount. Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act, which states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located in 
any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for fiscal year 2003 for hospitals 
in a large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount equals the applicable percentage increase set forth 
in section 1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act (that is, the same update 
factor as for all other hospitals subject to the IPPS). Accordingly, in 
the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25949), we proposed an 
applicable percentage increase to the Puerto Rico-specific operating 
standardized amount of 1.5 percent. We did not receive any public 
comments on this proposal. Therefore, for this final rule, we are 
finalizing an applicable percentage increase to the Puerto Rico-
specific operating standardized amount of 1.9 percent. As we noted 
above, for the proposed rule, we used IGI's first quarter 2011 forecast 
of the FY 2006-based IPPS market basket rate-of-increase. For this 
final rule, we used the most recent data available, which was IGI's 
second quarter 2011 forecast of the FY 2006-based IPPS market basket 
rate-of-increase. Similarly, for the proposed rule, we used IGI's first 
quarter 2011 forecast of MFP. For this final rule, we used the most 
recent data available, which was IGI's second quarter 2011 forecast of 
MFP. We also note that between the proposed rule and the final rule, we 
also incorporated BLS revised historical data for MFP from 1987 to 
2010, with 2010 being a preliminary value.
    For FY 2012, under the authority of section 1886(d)(9)(C)(i) of the 
Act, as amended by section 401(c) of Public Law 108-173, we proposed to 
revise the existing regulations at Sec.  412.211(c) to set the update 
factor for the Puerto Rico-specific operating standardized amount equal 
to the update factor applied to the national standardized amount for 
all IPPS hospitals (76 FR 25949). We did not receive any public 
comments on this proposal. Therefore, in this final rule, we are 
adopting as final, without modification, the proposed changes to Sec.  
412.211(c) to reflect current law.
3. Productivity Adjustment
    Section 3401(a) of the Affordable Care Act amended section 
1886(b)(3)(B) of the Act to require certain adjustments to the 
``applicable percentage increase'' to the operating IPPS. One such 
change is to require that, in FY 2012 (and in subsequent fiscal years), 
the applicable percentage increase be annually adjusted by changes in 
economy-wide productivity. Section 1886(b)(3)(B)(xi)(II) of the Act, as 
added by section 3401(a) of the Affordable Care Act, defines this 
productivity adjustment as equal to the 10-year moving average of 
changes in annual economy-wide, private nonfarm business multifactor 
productivity (MFP) (as projected by the Secretary for the 10-year 
period ending with the applicable fiscal year, calendar year, cost 
reporting period, or other annual period) (the ``MFP adjustment''). The 
Bureau of Labor Statistics (BLS) is the agency that publishes the 
official measure of private nonfarm business MFP. We refer readers to 
the BLS Web site at: http://www.bls.gov/mfp to obtain the BLS 
historical published MFP data.
    The projection of MFP is currently produced by IHS Global Insight, 
Inc. (IGI), an economic forecasting firm. In order to generate a 
forecast of MFP, IGI replicated the MFP measure calculated by the BLS 
using a series of proxy variables derived from its U.S. macroeconomic 
models. These models take into account a broad range of factors that 
influence the total U.S. economy. IGI forecasts the underlying proxy 
components such as Gross Domestic Product (GDP), capital, and labor 
inputs required to estimate MFP and then combines those projections 
according to the BLS methodology. In Table IV.K.1 below, we identify 
each of the major MFP component series

[[Page 51691]]

employed by the BLS to measure MFP. We also provide the corresponding 
concepts forecasted by IGI and determined by IGI and CMS to be the best 
available proxies for the BLS series.

   Table IV.K.1--Multifactor Productivity Component Series Employed by the Bureau of Labor Statistics and IHS
                                                 Global Insight
----------------------------------------------------------------------------------------------------------------
                     BLS series                                               IGI series
----------------------------------------------------------------------------------------------------------------
Real value-added output, constant 2005 dollars.      Non-housing, non-government, nonfarm real GDP, Billions of
                                                      chained 2005 dollars--annual rate.
Private nonfarm business sector labor input; 2005 =  Hours of all persons in private non-farm establishments,
 100.00.                                              2005 = 100.00, adjusted for labor composition effects.
Aggregate capital inputs; 2005 = 100.00.             Real effective capital stock used for full employment GDP,
                                                      Billions of chained 2005 dollars.
----------------------------------------------------------------------------------------------------------------

    IGI found that the historical growth rates of the BLS components 
used to calculate MFP and the IGI components identified are consistent 
across all series and, therefore, suitable proxies for calculating MFP. 
We have included below a more detailed description of the methodology 
used by IGI to construct a forecast of MFP, which is aligned closely 
with the methodology employed by the BLS. For more information 
regarding the BLS method for estimating productivity, we refer readers 
to the BLS Web site at: http://www.bls.gov/mfp/mprtech.pdf.
    At the time of the development of this FY 2012 final rule, the BLS 
had published a historical time series of private nonfarm business MFP 
for 1987 through 2010, with 2010 being a preliminary value. Using this 
historical MFP series and the IGI forecasted series, the IGI had 
developed a forecast of MFP for 2011 through 2021, as described below.
    To create a forecast of BLS' MFP index, the forecasted annual 
growth rates of the ``non-housing, non-government, nonfarm, real GDP,'' 
``hours of all persons in private non-farm establishments adjusted for 
labor composition,'' and ``real effective capital stock'' series 
(ranging from 2011 to 2021) are used to ``grow'' the levels of the 
``real value-added output,'' ``private nonfarm business sector labor 
input,'' and ``aggregate capital inputs'' series published by the BLS. 
Projections of the ``hours of all persons'' measure are calculated 
using the difference between projections of the BLS index of output per 
hour and real GDP. This difference is then adjusted to account for 
changes in labor composition in the forecast interval.
    Using these three key concepts, MFP is derived by subtracting the 
contribution of labor and capital inputs from output growth. However, 
in order to estimate MFP, we need to understand the relative 
contributions of labor and capital to total output growth. Therefore, 
two additional measures are needed to operationalize the estimation of 
the IGI MFP projection: Labor compensation and capital income. The sum 
of labor compensation and capital income represents total income. The 
BLS calculates labor compensation and capital income (in current dollar 
terms) to derive the nominal values of labor and capital inputs. IGI 
uses the ``nongovernment total compensation'' and ``flow of capital 
services from the total private nonresidential capital stock'' series 
as proxies for the BLS' income measures. These two proxy measures for 
income are divided by total income to obtain the shares of labor 
compensation and capital income to total income. In order to estimate 
labor's contribution and capital's contribution to the growth in total 
output, the growth rates of the proxy variables for labor and capital 
inputs are multiplied by their respective shares of total income. These 
contributions of labor and capital to output growth are subtracted from 
total output growth to calculate the ``change in the growth rates of 
multifactor productivity'':

MFP = Total output growth-((labor input growth * labor compensation 
share) + (capital input growth * capital income share))

    The change in the growth rates (also referred to as the compound 
growth rates) of the IGI MFP are multiplied by 100 in order to 
calculate the percent change in growth rates (the percent change in 
growth rates are published by the BLS for its historical MFP measure). 
Finally, the growth rates of the IGI MFP are converted to index levels 
based to 2005 to be consistent with the BLS' methodology. For 
benchmarking purposes, the historical growth rates of IGI's proxy 
variables were used to estimate a historical measure of MFP, which was 
compared to the historical MFP estimate published by the BLS. The 
comparison revealed that the growth rates of the components were 
consistent across all series and, therefore, validated the use of the 
proxy variables in generating the IGI MFP projections. The resulting 
MFP index was then interpolated to a quarterly frequency using the 
Bassie method for temporal disaggregation. The Bassie technique 
utilizes an indicator (pattern) series for its calculations. IGI uses 
the index of output per hour (published by the BLS) as an indicator 
when interpolating the MFP index.
    As described in section I. of the Addendum to this final rule, we 
proposed to determine the IPPS market basket percentage increase for FY 
2012, which is used to determine the FY 2012 applicable percentage 
increase, based on the FY 2006-based IPPS market basket. The FY 2006-
based IPPS market basket was finalized and adopted in the FY 2010 IPPS/
LTCH PPS final rule (74 FR 43843). Section 3401(a) of the Affordable 
Care Act amended section 1886(b)(3)(B) of the Act in part by adding a 
new clause (xi) which requires that, after determining the applicable 
percentage increase for a fiscal year, ``such percentage increase shall 
be reduced by the productivity adjustment described in subclause (II)'' 
(which we refer to as the ``MFP adjustment''). Section 
1886(b)(3)(B)(i)(XX) of the Act establishes the applicable percentage 
increase for FY 2007 and each subsequent fiscal year as equal to the 
rate-of-increase (that is, the percentage increase) in the hospital 
market basket for IPPS hospitals, subject to the hospital submitting 
quality data under rules established by the Secretary in accordance 
with section 1886(b)(3)(B)(viii) of the Act and to other statutory 
adjustments, including the productivity adjustment.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25951), we 
proposed that the MFP adjustment be subtracted from the FY 2012 
operating applicable percentage increase. We proposed that the end of 
the 10-year moving average of changes in the MFP should coincide with 
the end of the

[[Page 51692]]

appropriate FY update period. Because the applicable percentage 
increase is reduced by the MFP adjustment, we believed it is 
appropriate for the numbers associated with both components of the 
calculation (the underlying market basket percentage increase used to 
determine the applicable percentage increase and the productivity 
adjustment) to line up so that changes in market conditions are 
aligned. Therefore, for the FY 2012 update, the MFP adjustment is 
calculated as the 10-year moving average of changes in MFP for the 
period ending September 30, 2012. We proposed to round the final annual 
adjustment to the one-tenth of one percentage point level up or down as 
applicable according to conventional rounding rules (that is, if the 
number we are rounding is followed by 5, 6, 7, 8, or 9, we would round 
the number up; if the number we are rounding is followed by 0, 1, 2, 3, 
or 4, we would round the number down).
    In accordance with section 1886(b)(3)(B) of the Act, as amended by 
section 3401(a) of the Affordable Care Act, we proposed to base the FY 
2012 market basket update used to determine the applicable percentage 
increase for the IPPS on the first quarter 2011 forecast of the FY 
2006-based IPPS market basket, which was estimated to be 2.8 percent. 
This percentage increase, subject to the hospital submitting quality 
data under rules established by the Secretary in accordance with 
section 1886(b)(3)(B)(viii) of the Act, was then reduced by the 
proposed MFP adjustment (the 10-year moving average of MFP for the 
period ending FY 2012) of 1.2 percent, which was calculated as 
described above and based on IGI's first quarter 2011 forecast. We also 
proposed that if more recent data were subsequently available (for 
example, a more recent estimate of the market basket and MFP 
adjustment), we would use such data, if appropriate, to determine the 
FY 2012 market basket update and MFP adjustment in the final rule. 
Following application of the productivity adjustment, the applicable 
percentage increase is then reduced by 0.1 percentage point, as 
required by section 1886(b)(3)(B)(xii) of the Act, as added and amended 
by sections 3401 and 10319(a) of the Affordable Care Act (as discussed 
in section I. of the Addendum to this final rule).
    Comment: One commenter expressed concern about the impact of the 
proposed productivity adjustment, the Affordable Care Act mandated 
reduction, and the documentation and coding adjustment. The commenter 
specifically stated that further reductions cannot be sustained and 
will continue to deplete scarce resources, making hospitals' mission of 
providing high quality care to patients even more challenging.
    Response: As the commenter acknowledged, the Affordable Care Act 
requires that a productivity adjustment and a 0.1 percentage point 
reduction be applied to IPPS provider payment updates for FY 2012. 
Therefore, CMS is mandated to apply these adjustments to the IPPS 
hospital payments for FY 2012. We refer readers to section II.D. of 
this preamble for our responses to public comments on the documentation 
and coding adjustment.
    After consideration of the public comments we received and based on 
a more recent estimate of the market basket and MFP adjustment, we are 
finalizing our proposed method for calculating and applying the MFP 
adjustment. In accordance with section 1886(b)(3)(B) of the Act, as 
amended by section 3401(a) of the Affordable Care Act, we base the FY 
2012 market basket update used to determine the applicable percentage 
increase for the IPPS on IGI's second quarter 2011 forecast of the FY 
2006-based IPPS market basket rate-of-increase, which is estimated to 
be 3.0 percent. This percentage increase, subject to the hospital 
submitting quality data under rules established by the Secretary in 
accordance with section 1886(b)(3)(B)(viii) of the Act, is then reduced 
by the MFP adjustment (the 10-year moving average of MFP for the period 
ending FY 2012) of 1.0 percent, which was calculated as described above 
and based on IGI's second quarter 2011 forecast. Following application 
of the productivity adjustment, the applicable percentage increase is 
then reduced by 0.1 percentage point, as required by section 
1886(b)(3)(B)(xii) of the Act, as added and amended by sections 3401 
and 10319(a) of the Affordable Care Act (as discussed in section I. of 
the Addendum to this final rule).

L. Additional Payments to Hospitals With High Percentage of End-Stage 
Renal Disease (ESRD) Discharges (Sec.  412.104)

    Under existing regulations at Sec.  412.104(a), we provide 
additional Medicare payments to a hospital for inpatient services 
provided to Medicare beneficiaries with end-stage renal disease (ESRD) 
who receive dialysis during a hospital stay if the hospital's ESRD 
Medicare beneficiary discharges, excluding certain MS-DRGs noted below, 
where the beneficiary receives dialysis during the inpatient stay, are 
10 percent or more of its total Medicare discharges. These additional 
payments are intended to lessen the impact of the added costs for 
hospitals that deliver inpatient dialysis services to a high 
concentration of ESRD Medicare beneficiaries. The regulation provides 
that discharges classified into MS-DRG 652 (Renal Failure), MS-DRG 682 
(Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), MS-DRG 
684 (Renal Failure without CC/MCC), and MS-DRG 685 (Admit for Renal 
Dialysis) are excluded from the calculation of ESRD Medicare 
beneficiary discharges for purposes of determining a hospital's 
eligibility for these additional payments. We excluded these MS-DRGs 
because they include payment for the cost of inpatient dialysis 
treatments.
    The current Medicare cost reporting instructions in the Provider 
Reimbursement Manual, Part II (PRM-II), at section 3630.1, require 
hospitals to enter as the denominator of the calculation on Line 5 
``total Medicare discharges as reported on Worksheet S-3, Part I,'' 
excluding discharges for the dialysis MS-DRGs. As drafted, this 
instruction includes only discharges for beneficiaries enrolled in 
original fee-for-service Medicare in the denominator of the 
calculation. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25951), 
we proposed to clarify that our policy is that the term ``Medicare 
discharges'' used in Sec.  412.104(a) refers to discharges of all 
beneficiaries entitled to Medicare Part A. Discharges associated with 
individuals entitled to Medicare Part A include discharges of 
individuals receiving benefits under original Medicare, discharges of 
individuals whose inpatient benefits are exhausted or whose stay was 
not covered by Medicare, and discharges for individuals enrolled in 
Medicare Advantage Plans, cost contracts under section 1876 of the Act 
(health maintenance organizations (HMOs)) and competitive medical plans 
(CMPs). Consistent with this proposed clarification, these discharges 
would be included in the denominator of the calculation for the purpose 
of determining eligibility for the ESRD additional payment to 
hospitals. Similarly, for the numerator of this calculation, all 
discharges of ESRD beneficiaries who are entitled to Medicare Part A 
and who receive inpatient dialysis, subject to the exclusions of 
certain discharges classified into MS-DRGs 652, 682, 683, 684, and 685, 
would be included in the determination of eligibility for the 
additional payment to hospitals. We also stated that we intended to 
revise

[[Page 51693]]

section 3630.1 of the PRM-II to reflect this clarification.
    Comment: One commenter disagreed with our proposed clarification to 
include Medicare Advantage discharges in the denominator of the 
calculation for the purpose of determining eligibility for the ESRD 
additional payment to hospitals. The commenter believed that CMS is 
inconsistent in its policies regarding the treatment of Medicare 
Advantage days and asserted that legally these discharges should not be 
treated the same as discharges of patients who are enrolled in original 
Medicare Part A.
    Response: We do not agree with the assertion of the commenter. 
Beneficiaries who elect to receive their benefits through Medicare 
Advantage remain entitled to benefits under Medicare Part A while 
enrolled in Part C. For example, the hospice benefit is administered 
under Medicare Part A, regardless of whether an individual has elected 
to enroll in Part C. Thus, if a beneficiary enrolled in a Medicare 
Advantage plan elects to receive hospice care, that benefit is 
administered under the traditional fee-for-service model and not by the 
beneficiary's Medicare Advantage plan. If, while receiving hospice 
care, the beneficiary also needs hospital inpatient care unrelated to 
the condition that caused the beneficiary to elect hospice care, the 
cost of that care would still be administered by the beneficiary's 
Medicare Advantage plan. As a result, it is possible for a beneficiary 
enrolled in a Medicare Advantage plan to receive benefits administered 
under Part A and Part C simultaneously. Beneficiaries enrolled in 
Medicare Advantage plans are entitled to benefits under Part A, and we 
believe it is appropriate to include in the denominator all discharges 
of individuals entitled to Part A, regardless of whether their benefits 
are administered by a Medicare Advantage plan or by traditional fee-
for-service Medicare.
    Comment: One commenter indicated that including these days in both 
the numerator and denominator would limit a hospital's ability to 
qualify for the additional payment. The commenter disagreed with 
including the additional discharges in both the numerator and 
denominator and advocated that the additional discharges should be 
added to only the numerator.
    Response: We acknowledge the commenter's concerns. However, there 
is no policy or legal rationale to treat these days differently for the 
purpose of the numerator and denominator of this calculation. We 
recognize that this may make it somewhat more difficult for some 
hospitals to qualify for this add-on payment, but note that it may 
allow some hospitals more opportunity to qualify if a large proportion 
of their Medicare Advantage patient discharges are for Medicare 
beneficiaries with ESRD.
    Comment: Several commenters expressed concern that the instructions 
in section 3630.1 of the PRM-II currently do not include these days on 
the Medicare Cost Report Worksheet S-3. They also believed there are 
difficulties when identifying those discharges not associated with 
original Medicare Part A.
    Response: We intend to revise these instructions to reflect the 
clarification in this final rule.
    Comment: One commenter suggested that CMS define more clearly the 
effective date of the clarification.
    Response: As explained above, beneficiaries who elect to receive 
their benefits through Medicare Advantage remain entitled to benefits 
under Part A and must be included in the computation of ``Medicare 
discharges'' for purposes of determining whether a hospital qualifies 
for additional payments under Sec.  412.104(a). However, the PRM-II 
instructions currently do not provide for discharges associated with 
individuals enrolled in Medicare Advantage plans to be included in the 
calculation. Accordingly, this clarification is needed to ensure that 
hospitals understand that beneficiaries who have elected to receive 
their benefits through Medicare Advantage must be included in the ESRD 
add-on payment calculation. We intend to revise the PRM-II instructions 
to require that beneficiaries enrolled in MA plans be included in both 
the numerator and demoninator of this calculation. The revised 
instructions will be effective for cost reporting periods starting on 
or after October 1, 2011.
    After consideration of the public comments we received, we are 
finalizing our clarification that the term ``Medicare discharges'' used 
in Sec.  412.104(a) of the regulations refers to discharges of all 
beneficiaries entitled to Medicare Part A. Individuals entitled to 
Medicare Part A include individuals receiving benefits under original 
Medicare, individuals whose inpatient benefits are exhausted or whose 
stay was not covered by Medicare, and individuals enrolled in Medicare 
Advantage Plans, cost contracts under section 1876 of the Act (HMOs), 
and CMPs. Consistent with this clarification, these discharges, subject 
to the exclusions of certain discharges classified into MS-DRGs 652, 
682, 683, 684, and 685, must be included in the denominator of the 
calculation for the purpose of determining eligibility for the ESRD 
additional payment to hospitals. Similarly, for the numerator of this 
calculation, all discharges of ESRD beneficiaries who are entitled to 
Medicare Part A and who receive inpatient dialysis, excluding 
discharges for the dialysis MS-DRGs, must be included in the 
determination of eligibility for the ESRD additional payment to 
hospitals. We intend to revise the instructions under section 3630.1 of 
the PRM-II to reflect this clarification. The revised instructions will 
apply to cost reporting periods beginning on or after October 1, 2011.

M. Changes to the Reporting Requirements for Pension Costs for Medicare 
Cost-Finding Purposes

1. Background

    Currently, certain pension costs may be allowable costs under 
Medicare to the extent such costs are related to the reasonable and 
necessary cost of providing patient care and represent costs actually 
incurred. Reasonable cost reimbursement is addressed in section 
1861(v)(1)(A) of the Act. Section 1861(v)(1)(A) of the Act defines 
``reasonable cost,'' in part, as the cost actually incurred, excluding 
costs found to be unnecessary in the efficient delivery of needed 
health services. Section 1861(v)(1)(A) of the Act does not specifically 
address the determination of reasonable costs, but authorizes the 
Secretary to promulgate regulations and principles to be applied in 
determining reasonable costs.
    We have issued regulations implementing this provision of the Act, 
including 42 CFR 413.9(a), which provide that payments ``must be based 
on the reasonable cost of services covered under Medicare and related 
to the care of beneficiaries.'' In addition, Sec.  413.9(c)(2) states 
that ``The provision in Medicare for payment of reasonable cost of 
services is intended to meet the actual costs.'' Further, the 
regulations at 412.9(c)(3) state that ``Reasonable cost includes all 
necessary and proper expenses incurred in furnishing services * * *.'' 
Therefore, in accordance with the statute, the regulations include two 
principles that help guide the determination of which expenses may be 
considered allowable reasonable costs that can be paid under Medicare; 
that is, such costs must be ``related'' to the care of Medicare 
beneficiaries, and such costs must actually be ``incurred.''
    Consistent with these provisions, we have issued instructions in 
section 2142 of the Provider Reimbursement Manual, Part I (PRM-I) for 
determining and reporting qualified defined benefit

[[Page 51694]]

pension costs on the cost report for Medicare cost-finding purposes. 
For Medicare wage index purposes, the cost reporting instructions in 
section 3605.2 of the Provider Reimbursement Manual, Part II (PRM-II) 
for Worksheet S-3, Part II, Lines 13 through 20, require hospitals to 
comply with the requirements in section 2142 of the PRM-I.
    Specifically, section 2142.5 of the PRM-I defines the current 
period liability for pension cost (that is, the maximum allowable 
pension cost) based on the actuarial accrued liability, normal cost, 
and unfunded actuarial liability. Under section 2142.4(A) of PRM-I, 
these liability measurements are to be computed in accordance with the 
Employee Retirement Income Security Act of 1974 (ERISA), regardless of 
whether or not the pension plan is subject to ERISA. Also, section 
2142.6(A) of the PRM-I requires the current period liability for 
pension cost to be funded in order to be allowable. In addition, 
section 2142.6(C) of the PRM-I allows for funding in excess of the 
current period liability to be carried forward and recognized in future 
periods. We note that, on March 28, 2008, CMS published Revision 436, a 
technical clarification to section 2142 of the PRM-I.
    Under ERISA, the actuarial accrued liability and normal cost are 
typically determined on an ongoing plan basis using long-term, best-
estimate assumptions. The interest assumption reflects the average 
rates of return expected over the period during which benefits were 
payable, taking into account the investment mix of plan assets. Pension 
costs for plans not subject to ERISA (such as church plans and plans 
sponsored by public sector employers) also are typically based on the 
actuarial accrued liability and normal cost using long-term, best 
estimate assumptions.
    The Pension Protection Act (PPA) of 2006 (Pub. L. 109-280) amended 
ERISA. Under the PPA amendments to ERISA, the actuarial accrued 
liability and normal cost are no longer used as a basis for determining 
ERISA minimum required or maximum tax deductible contributions. ERISA 
contribution limits are now based on a ``funding target'' and ``target 
normal cost'' measured on a settlement basis using the current market 
interest rates for investment grade corporate bonds that match the 
duration of the benefit payouts. The Internal Revenue Service (IRS) 
publishes the applicable interest rate tables on a monthly basis. 
Because pension liabilities are very sensitive to changes in the 
interest rate used to discount future benefit payouts, pension costs 
based on the PPA ``funding target'' and ``target normal cost'' values 
are expected to be less stable than those based on the pre-PPA 
traditional long-term, best-estimate assumptions, which change 
infrequently. Furthermore, plans not subject to the ERISA requirements, 
as amended by the PPA, are not likely to use the new ``funding target'' 
and ``target normal cost'' basis for determining pension costs, and 
ERISA plans are not likely to continue to report costs developed using 
the actuarial accrued liability and normal cost based on long-term 
basis, best estimate assumptions. Accordingly, there is no longer a 
standard actuarial basis used by all plans.
    In response to the PPA amendments to ERISA, we began a review of 
the rules for determining pension costs for Medicare cost-finding and 
wage index purposes. As an interim measure, we issued a Joint Signature 
Memorandum (JSM) in November 2009 that contained instructions and a 
spreadsheet to assist hospitals and Medicare contractors in determining 
the annual allowable defined benefit pension cost for the FY 2011 wage 
index (JSM/TDL-10061, 11-20-09, December 3, 2009). Although these 
instructions were released for purposes of the wage index, they also 
serve as interim guidance for Medicare cost-finding purposes.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25951 through 
25953), we proposed to revise our policy for determining pension cost 
for Medicare purposes. As mentioned above, due to the ERISA rules, as 
amended by the PPA, there is no longer a standard actuarial cost basis 
used by all types of plans. Therefore, we proposed to no longer rely on 
actuarial computations to determine the maximum annual cost limitation 
for Medicare. Instead, the general parameters of our proposal would 
maintain the current requirement that pension costs must be funded to 
be reportable, and would require all hospitals to report the actual 
pension contributions funded during the reporting period, on a cash 
basis.
    In addition, under this cash basis approach, we proposed separate 
methodologies for measuring pension costs for Medicare cost-finding 
purposes (discussed below under section IV.M.2. of this preamble) and 
for purposes of updating the wage index (discussed in section III.D.2. 
of this preamble). It was necessary to have two distinct proposals in 
order to address the different goals of determining a hospital's 
payments and updating the average hourly wage to establish the 
geographic area wage index. The function of the wage index is to 
measure relative hospital labor costs across areas. This function is 
distinct from Medicare payment determinations, where the goal is to 
measure the actual costs incurred by individual hospitals. These two 
distinct proposals would require separate updated instructions to 
section 2142 of the PRM-I for Medicare cost-finding purposes and 
section 3605.2 of the PRM-II for purposes of the wage index. Below is a 
detailed discussion of the new methodology for reporting pension costs 
for Medicare cost-finding purposes. A full discussion of our policy for 
reporting pension costs under the wage index is discussed in section 
III.D.2. of this preamble, along with a summary of the public comments 
we received, our responses, and statements of our final policy.
    We note that we stated in the proposed rule that we ``would require 
all hospitals to report the actual pension contributions funded during 
the reporting period, on a cash basis.'' Our intent was for ``reporting 
period'' to refer to the hospital's Medicare ``cost reporting period'' 
rather than another defined reporting period since for cost-finding 
purposes pension costs are reported on a Medicare cost report basis. 
Similarly, below in the following discussions, the term ``reporting 
period'' refers to a Medicare cost reporting period.
    The final policy below reflects our commitment to the general 
principles of the President's Executive Order released January 18, 
2011, entitled ``Improving Regulation and Regulatory Review.''
2. Allowable Defined Benefit Pension Plan Cost for Medicare Cost-
Finding Purposes
    As mentioned above, the defined benefit pension plan costs 
(hereafter referred to as ``pension costs'') reported for Medicare 
payment purposes should reflect the actual costs incurred by an 
individual provider. In the FY 2012 IPPS/LTCH PPS proposed rule, we 
proposed to retain the policy in the current manual requiring pension 
costs to be funded in order to be reportable. We believe funding is an 
appropriate basis because it measures the actual expenditure towards 
the current period liability for pensions. We also proposed to continue 
to limit the current period liability for pension costs (that is, 
maximum annual allowable pension costs). However, we proposed to change 
the methodology for calculating the limit on the current period 
liability. We proposed that this methodology would be effective for 
cost reporting periods beginning on or after October 1, 2011.

[[Page 51695]]

    Specifically, we proposed a limit on the current period liability 
equal to 150 percent of the average contributions made during the three 
consecutive reporting periods out of the five most recent reporting 
periods which produce the highest average. We believe a threshold of 
150 percent is appropriate for the following reasons: First, the 
proposed threshold should be adequate to allow for typical fluctuations 
in contributions and for inflation. Second, we believe a threshold is 
necessary to limit the current period liability in order to ensure that 
reported pension costs are reasonable and do not reflect excessive or 
advance funding in any particular year. In addition, the proposed limit 
would help ensure that pension costs in the current year are reasonable 
because we expect the limit to capture pension costs which relate 
exclusively to patient care services furnished in the current cost 
reporting period.
    The proposed 150-percent limit was established based on an analysis 
of historical contribution data submitted by pension plans subject to 
ERISA and published by the U.S. Department of Labor (DOL). Based on our 
analysis of the DOL contribution data, we expect that pension costs in 
excess of the limit will only occur in a small number of cases. We 
believe the use of readily available historical contribution data to 
establish the limitation will avoid the complexity of a limitation 
based on technical actuarial measurements. A limit based on average 
contributions made during the three consecutive reporting periods out 
of the five most recent reporting periods which produce the highest 
average will help to ensure that periods when no contributions (or only 
minimal contributions) are made will not dramatically reduce the limit 
in subsequent periods.
    We believe use of a 5-year look-back period will minimize the 
administrative burden on providers that would be associated with a 
longer period. We also believe using the three consecutive reporting 
periods which produce the highest average contributions will better 
reflect a typical average pension cost while use of contributions for 
any three periods, even nonconsecutive periods, could introduce 
atypical results. Specifically, using the three highest nonconsecutive 
years of contributions in the 5-year look-back period may overstate the 
average contribution. However, because excessive contributions tend to 
reduce future funding requirements, we believe it would be unusual for 
excessive contributions to occur in three consecutive periods.
    While we proposed a limit, we recognized there may be situations 
when pension costs in excess of the 150-percent limit might be 
reasonable, such as a funding requirement imposed by a third party, 
that is, ERISA's minimum funding requirement, statute or collective 
bargaining agreement. Therefore, we proposed to allow hospitals with 
contributions in excess of the proposed limit to submit documentation 
demonstrating that all or a portion of the ``excess'' costs are 
reasonable and necessary for a particular cost reporting period. In 
addition, we believe that providers' pension costs in excess of the 
150-percent limit that are not considered reasonable for the current 
cost reporting period are likely to be prefunded pension costs 
attributable to the patient care services for a future cost reporting 
period. Therefore, similar to the current instruction in section 
2142.6(C) of the PRM-I, we proposed to continue to use a carry forward 
policy. Specifically, we proposed that current period contributions in 
excess of the 150-percent limit that are not considered reasonable for 
the current cost reporting period under the proposed review process be 
carried forward and reported in future period(s) as the applicable 
limit for the future period(s) will allow. In the proposed rule we 
inadvertently stated that ``Medicare contractors'' would be required to 
maintain historical data in order to determine the 150-percent limit 
and track any carry forward amounts. However, we intended to write that 
``providers'' would be required to maintain historical data in order to 
determine the 150-percent limit and track any carry forward amounts. We 
also indicated that we anticipate making a worksheet available for this 
purpose.
    We solicited public comments as to documentation or criteria that 
would be appropriate to make a determination as to whether excess costs 
are reasonable and necessary. We also invited public comments on the 
proposal and indicated special interest in receiving public comments 
related to our proposal to limit the reportable pension amount.
    Comment: A number of commenters suggested CMS convene a Medicare 
Technical Advisory Group (MTAG) before establishing a policy on pension 
costs.
    Response: An MTAG is not required by statute. Engaging in notice 
and comment rulemaking provides sufficient process for developing a 
policy on this issue. In addition, the actuarial terminology used in 
section 2142 of PRM-I is no longer used under ERISA as amended by the 
PPA. Accordingly, we believe it is important to address the pension 
cost issue as expeditiously as possible.
    Comment: Many commenters supporting an MTAG also stated that an 
MTAG might recommend adoption of Generally Accepted Accounting 
Principles (GAAP) (with no funding limit) for the wage index, leading 
CMS to also adopt GAAP as the basis for cost-finding purposes, provided 
those costs are funded either during the cost reporting period or 
within 12 months after the end of the cost reporting period. Commenters 
also suggested that CMS consider any needed modifiers (to GAAP) for 
either underfunded or overfunded plans. One commenter noted that a 
proposal to base pension expense for both the wage index and for cost-
finding purposes on a 3-year average of actual funding is inconsistent 
with the other principles of the cost report relying on GAAP and 
accrual versus cash-basis accounting. The commenters stated that 
pension funding should be treated the same as the liquidation of 
liabilities, to be paid within 1 year after the end of the cost 
reporting period, or with approval of an exception, within 3 years.
    Response: Pension costs determined in accordance with GAAP (as 
promulgated by the Financial Accounting Standards Board) are somewhat 
unique compared to other types of costs under GAAP because pension 
costs under GAAP are not dependent on the amount funded. Therefore, in 
order to ensure that this policy is consistent with CMS policy that 
costs must be funded in order to be reportable, it was necessary to 
diverge from GAAP principles in this instance. Furthermore, since GAAP 
with a funding requirement for Medicare cost-finding purposes would 
require the GAAP pension expense to be modified to account for any 
prepaid costs (overfunding) or accrued costs (underfunding), we believe 
this would create unnecessary complexity.
    Under the new policy, pension costs are based on the amount funded 
during the cost reporting period plus any carry forward amounts, 
subject to the 150-percent limitation. A provision to allow recognition 
of funding which occurs within 1 year after the end of the reporting 
period (or 3 years with approval) could result in confusion as to which 
period funding should be attributed. The period during which funding 
will be measured (and upon which costs determined) must be clearly and 
consistently defined.
    We do not believe that pension costs determined under the new 
policy will be materially different from those that

[[Page 51696]]

would result under GAAP with a funding requirement because in either 
case, pension costs would be limited to the amount funded (including 
any carry forward contributions). Furthermore, we believe our policy 
offers more flexibility for providers to establish and follow a funding 
strategy that meets their organizational objectives.
    Comment: A number of commenters supported the proposed limit on the 
current period liability equal to 150-percent of the average 
contributions made during the three consecutive cost reporting periods 
out of the five most recent cost reporting periods that produce the 
highest average. They particularly appreciated the additional provision 
allowing a hospital with pension contributions in excess of the 
proposed limit to submit documentation demonstrating that all or a 
portion of the ``excess'' costs are reasonable and necessary for a 
specific cost reporting period.
    Response: We appreciate the commmenters' support of our proposal. 
We recognize there may be situations when pension costs in excess of 
the 150-percent limit are reasonable and necessary and should be 
reportable as a current period cost. Therefore, as proposed, this final 
policy will allow a provider to submit documentation to show that 
``excess'' contributions are reasonable and necessary and should be 
recognized as current period costs.
    Comment: One commenter asked CMS to clarify how the limit would be 
determined if there was a plan or corporate merger, if a provider 
adopted a new plan or increased benefits under an existing plan, or 
became a new Medicare provider. The commenter expressed concern that, 
although the limit would be easy to administer, it would ignore real 
costs in these situations.
    Response: In a merger situation (either a plan merger or corporate 
merger), the contribution history should include all contributions made 
by a provider to a defined benefit plan (either a predecessor plan or 
the current plan) during the 5-year look-back period. Under a 
systemwide (multiple-employer) pension plan, the contribution history 
for each participating provider should reflect only the plan 
contributions attributed to that provider. For a provider who is new to 
the Medicare program, the contribution history used to determine the 
limit should include all pension contributions made during the 5-year 
look-back period (which is used to develop the 3 year average), 
including periods, before the provider was part of the Medicare 
program. In the case of a newly adopted plan, the 5-year look-back 
period and/or the 3-year averaging period will be limited to the number 
of cost reporting periods the provider sponsored a defined benefit 
pension plan. In the case of a benefit improvement, we believe the 150-
percent limit (which includes a 50-percent margin for cost increases) 
will be adequate since the cost of benefit improvements is typically 
spread over a period of years. In any of these situations, a provider 
may submit documentation to show that contributions in excess of the 
150 percent limit are reasonable and necessary and should be allowable 
as a current period cost.
    Comment: One commenter asked for clarification as to which cost 
reporting periods will be used to determine the limit on allowable 
pension costs. Specifically, the commenter asked if CMS will base the 
limit on the hospital's five most recent settled cost reports or as-
filed cost reports. Another commenter asked what timeframe constitutes 
``recent'' cost reporting periods.
    Response: The historical contribution data required to compute the 
limit are not currently reflected on the cost reports. Therefore, 
settled or as-filed cost reports are not used for the calculation. (We 
are exploring ways to modify the cost report to show the actual 
contributions made in each cost reporting period as well as the pension 
cost for the current period after application of the 150-percent 
limit.) Instead, the 150-percent limit will be based on the actual 
pension plan contributions made by a provider as shown on statements 
provided by the pension plan trustee or insurance carrier, or as 
reflected on Schedule B or SB of IRS Form 5500. In the case of a 
systemwide (multiple employer) pension plan, the home office will need 
to identify the contributions attributed to each participating 
provider. The limit will be based on the average contributions for the 
three highest consecutive cost reporting periods out of the five most 
recent cost reporting periods ending with the current cost reporting 
period.
    Comment: One commenter asked whether the hospital would be required 
to submit documentation regarding its pension contributions in excess 
of the limit to the Medicare contractor or to CMS. The commenter also 
inquired as to how the reasonableness and necessity of the excess 
contribution will be determined and how the determination of 
reasonableness will be reported to the provider.
    Response: We have not yet finalized the specific procedure to be 
used when requesting approval of excess contributions. Further details 
will be provided as soon as possible, after publication of this final 
rule. Each request will be reviewed on a facts and circumstances basis. 
We are not setting forth specific criteria for determining whether a 
pension cost is reasonable and necessary for the current reporting 
period because that may prevent us from responding to circumstances 
that we may not have anticipated and recognizing costs that are 
reasonable for the current period. However, examples of when approval 
will be likely be granted include excess contributions required to 
satisfy a funding requirement imposed by law or under a collective 
bargaining agreement, or to avoid ERISA funding restrictions.
    Comment: There were a number of technical questions and requests 
for clarification on specific aspects of the proposed policy. One 
commenter requested that CMS clarify whether allowable pension costs 
for cost-finding will be based on cash contributions, subject to the 
150 percent limit, regardless of whether the pension plan shows a 
current period liability under ERISA or another method. Another 
commenter observed ``the funding limit is based on 150 percent of three 
consecutive cost reporting periods out of recent reporting with the 
highest average and noted that this is similar in nature to the GME/IME 
three year rolling average in its complexities.'' This commenter asked 
if the data would be actual contributions from prior years, or would it 
be the contributions that were limited by a previous 150-percent limit.
    Response: Under the revised policy, pension contributions up to the 
150-percent limit will not be subject to actuarial requirements under 
ERISA, GAAP or otherwise. However, a provider with costs in excess of 
the limit will have the option to submit actuarial data to demonstrate 
that those costs are reasonable and necessary for the current cost 
reporting period and should therefore be included as current period 
pension costs.
    The historical contributions used to determine the 150-percent 
limit would be the actual cash contributions made by the provider to 
the pension plan, without regard to the 150-percent limit applicable to 
any prior period.
    The following example is provided to show the calculation of the FY 
2012 pension cost for a provider with a September 30 fiscal year (FY) 
cost reporting end date:

[[Page 51697]]

     Contributions made in the five most recent cost reporting 
periods:

 October 1, 2011--September 30, 2012: $2,000,000
 October 1, 2010--September 30, 2011: 5,000,000
 October 1, 2009--September 30, 2010: 4,000,000
 October 1, 2008--September 30, 2009: 5,000,000
 October 1, 2007-September 30, 2008: 6,000,000

 October 1, 2011 Carry Forward Balance: $1,000,000
    The 150-percent limit for FY 2012 will be based on contributions 
for FYs 2008 through 2010 because these represent the highest three 
consecutive years of contributions out of the 5 most recent years. The 
average contribution for those 3 highest consecutive years is 
($4,000,000 + $5,000,000 + $6,000,000)/3 = $5,000,000. The limit equals 
$7,500,000 (150 percent of $5,000,000).
    The provider's cash funding in the current cost reporting period 
(FY 2012) is $2,000,000 (none of which was reported as a pension cost 
in a prior period). The provider has also documented a carry forward 
balance of $1,000,000, which represents the cash basis contributions 
made prior to the effective date of the new policy which were not 
recognized as costs in a prior cost reporting period. For FY 2012, the 
provider may claim the full $3,000,000 ($2,000,000 in current period 
contributions plus $1,000,000 in carry forward contributions) because 
the amount does not exceed the $7,500,000 limit. If the provider's 
carry forward balance had been $8,000,000, only $7,500,000 would be 
reportable as a current period cost due to the 150 percent limit. In 
that case, the remaining $2,500,000 ($2,000,000 current period 
contributions + $8,000,000 carry forward balance -$7,500,000 current 
period 150 percent limit) should be reflected as a carry forward 
balance for the following year.
    Comment: One commenter asked if current period pension expense 
would be calculated similar to previous years and would still be 
subject to the liquidation of liability requirements (that is, funded 
within 1 year of accrual). The same commenter speculated that there may 
be confusion on how to determine the allowable pension expense, given 
the various terms used between GAAP, PRM, IRS, and ERISA. The commenter 
asked for examples of how to compute allowable pension expense and to 
provide a crosswalk or revise the terms from the CMS manuals to GAAP 
and/or IRS terminology.
    Response: Generally, Pension costs for cost-finding purposes will 
no longer be based on actuarially determined measurements. We are aware 
that there may be confusion due to differences in actuarial terminology 
and cost methodology applicable for various purposes. This is a key 
reason why we are no longer requiring actuarial cost measurements to 
determine pension costs. Accordingly, no crosswalk is needed to 
reconcile differences in terminology. Furthermore, under the new 
policy, pension costs will be determined on a cash basis rather than an 
accrual basis. Funding which occurs after the end of a cost reporting 
period will be considered as a pension funding for the subsequent cost 
reporting period, subject to the 150-percent limit in that year. Under 
the new policy, the liquidation of liability provision will no longer 
apply. However, the liquidation of liability provision would still be 
in effect for the cost reporting period immediately prior to the 
effective date of this new policy. An example of the calculation of the 
allowable pension cost under the new policy was included in our 
response to a previous comment.
    Comment: One commenter recommended that there should be specific 
statements in the cost report that pension costs for cost-finding will 
be treated differently from pension costs for the wage index. The 
commenter also suggested separate PRM cost reporting instructions for 
the Medicare cost report versus the Medicare wage index, given that 
there will be separate methodologies for determining pension costs.
    Response: We are implementing different pension cost policies for 
wage index and cost-finding purposes. Accordingly, the PRM will be 
revised to include separate and distinct pension cost provisions for 
wage index and cost finding purposes.
    We would like to thank the provider community for their public 
comments regarding our proposed policy for reporting pension costs for 
Medicare cost-finding purposes. After considering their concerns and 
suggestions, we are finalizing our proposal for reporting pension costs 
for Medicare cost-finding purposes for the reasons set forth in the 
proposed rule (76 FR 25951 through 25953) and as explained in this 
final rule. This new policy is effective for cost reporting periods 
beginning on and after October 1, 2011.
    Under this final policy, a provider's pension cost for cost-finding 
purposes will equal the cash basis contribution deposits (made within 
the current cost reporting period and not reflected as a pension cost 
for a prior cost reporting period) plus any carry forward 
contributions, subject to a limitation. The limitation is equal to 150 
percent of the average pension contributions made by the provider 
during the highest 3 consecutive cost reporting periods out of the 5 
most recent cost reporting periods (ending with the current cost 
reporting period). In the case of a newly adopted plan, the 5-year 
look-back period and/or the 3-year averaging period will be limited to 
the number of cost reporting periods the provider sponsored a qualified 
defined benefit pension plan.
    This final policy allows a provider with current period 
contributions and carry forward contributions in excess of the 150-
percent limit to submit documentation to show that all or a portion of 
the excess contributions are reasonable and necessary and should 
therefore be reportable as current period pension costs. Pension 
contributions in excess of the reportable amount can be carried forward 
and reported in a subsequent cost reporting period, subject to the 150-
percent limitation. As of the effective date of this new policy, 
providers should establish a carry forward balance to account for any 
contributions made prior to the effective date of the new policy (on a 
cash basis) that were not reflected as pension costs in a prior period. 
The carry forward balance must then be updated annually to reflect any 
increases (current period contributions in excess of the reportable 
amount) or decreases (carry forward balances which are recognized as a 
current period pension cost). The provider must ensure that there is no 
duplication of recognized contributions in accounting for carry forward 
contributions. In addition, providers must document, and maintain for 
audit, the data used to establish the carry forward balance and any 
subsequent updates.
    Under this revised policy, contributions are to be determined on a 
cash basis. Section 2305 of the PRM-I (liquidation of liabilities 
provision) will be amended, effective for cost reporting periods 
subject to this new policy, to exclude qualified defined benefit 
pension plan costs. The liquidation of liabilities provision will 
continue to apply to contributions made to liquidate pension costs for 
cost reporting periods prior to the effective date of this revised 
policy. We plan to make future amendments to conform existing 
regulations and PRM-I provisions with this final policy.

[[Page 51698]]

N. Rural Community Hospital Demonstration Program

1. Background
    Section 410A(a) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Public Law 108-173, required the 
Secretary to establish a demonstration program to test the feasibility 
and advisability of establishing ``rural community hospitals'' to 
furnish covered inpatient hospital services to Medicare beneficiaries. 
The demonstration program pays rural community hospitals for such 
services under a cost-based methodology for Medicare payment purposes 
for covered inpatient hospital services furnished to Medicare 
beneficiaries. A rural community hospital, as defined in section 
410A(f)(1) of MMA, is a hospital that--
     Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
     Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
     Provides 24-hour emergency care services; and
     Is not designated or eligible for designation as a CAH 
under section 1820 of the Act.
    Section 410A(a)(4) of Public Law 108-173, in conjunction with 
paragraphs (2) and (3) of section 410A(a), provided that the Secretary 
was to select for participation no more than 15 rural community 
hospitals in rural areas of States that the Secretary identified as 
having low population densities. Using 2002 data from the U.S. Census 
Bureau, we identified the 10 States with the lowest population density 
in which rural community hospitals were to be located in order to 
participate in the demonstration program: Alaska, Idaho, Montana, 
Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and 
Wyoming. (Source: U.S. Census Bureau, Statistical Abstract of the 
United States: 2003.)
    We originally solicited applicants for the demonstration program in 
May 2004; 13 hospitals began participation with cost reporting years 
beginning on or after October 1, 2004. In 2005, 4 of these 13 hospitals 
withdrew from the program and became CAHs. In a notice published in the 
Federal Register on February 6, 2008 (73 FR 6971), we announced a 
solicitation for up to 6 additional hospitals to participate in the 
demonstration program. Four additional hospitals were selected to 
participate under this solicitation. These four additional hospitals 
began under the demonstration program payment methodology with the 
hospital's first cost reporting period starting on or after July 1, 
2008. At that time, there were 13 hospitals participating in the 
demonstration program.
    Five hospitals (3 of the hospitals were among the 13 hospitals that 
were original participants in the demonstration program and 2 of the 
hospitals were among the 4 hospitals that began the demonstration 
program in 2008) withdrew from the demonstration program during CYs 
2009 and 2010. (Three of these hospitals indicated that they would be 
paid more for Medicare inpatient services under the rebasing option 
allowed under the SCH methodology provided for under section 122 of the 
Medicare Improvements for Patients and Providers Act of 2008 (Pub. L. 
110-275). One hospital restructured to become a CAH, and one hospital 
closed.) So far in CY 2011 one hospital has withdrawn from the 
demonstration, saying that a large number of managed care patients has 
made the demonstration methodology unfavorable. These actions left 7 of 
the pre-expansion participating hospitals (that is, hospitals that were 
selected to participate in either 2004 or 2008), participating in the 
demonstration program as of June 1, 2011.
    In addition, section 410A(c)(2) of Public Law 108-173 required 
that, ``[i]n conducting the demonstration program under this section, 
the Secretary shall ensure that the aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have paid 
if the demonstration program under this section was not implemented.'' 
This requirement is commonly referred to as ``budget neutrality.'' 
Generally, when we implement a demonstration program on a budget 
neutral basis, the demonstration program is budget neutral in its own 
terms; in other words, the aggregate payments to the participating 
hospitals do not exceed the amount that would be paid to those same 
hospitals in the absence of the demonstration program. Typically, this 
form of budget neutrality is viable when, by changing payments or 
aligning incentives to improve overall efficiency, or both, a 
demonstration program may reduce the use of some services or eliminate 
the need for others, resulting in reduced expenditures for the 
demonstration program's participants. These reduced expenditures offset 
increased payments elsewhere under the demonstration program, thus 
ensuring that the demonstration program as a whole is budget neutral or 
yields savings. However, the small scale of this demonstration program, 
in conjunction with the payment methodology, makes it extremely 
unlikely that this demonstration program could be viable under the 
usual form of budget neutrality. Specifically, cost-based payments to 
participating small rural hospitals are likely to increase Medicare 
outlays without producing any offsetting reduction in Medicare 
expenditures elsewhere. Therefore, a rural community hospital's 
participation in this demonstration program is unlikely to yield 
benefits to the participant if budget neutrality were to be implemented 
by reducing other payments for these same hospitals.
    In the past seven IPPS final regulations, spanning the period for 
which the demonstration program has been implemented, we have adjusted 
the national inpatient PPS rates by an amount sufficient to account for 
the added costs of this demonstration program, thus applying budget 
neutrality across the payment system as a whole rather than merely 
across the participants in the demonstration program. As we discussed 
in the FY 2005, FY 2006, FY 2007, FY 2008, FY 2009, FY 2010, FY 2011 
IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; 
73 FR 48670; 74 FR 43922, and 75 FR 50343 respectively), we believe 
that the language of the statutory budget neutrality requirements 
permits the agency to implement the budget neutrality provision in this 
manner. In light of the statute's budget neutrality requirement, we are 
finalizing a methodology to calculate a budget neutrality adjustment 
factor to the FY 2012 national IPPS rates.
2. Changes to the Demonstration Program Made by the Affordable Care Act
    Sections 3123 and 10313 of the Affordable Care Act (Pub. L. 111-
148) amended section 410A of Public Law 108-173, which established the 
rural community hospital demonstration program. Sections 3123 and 10313 
of the Affordable Care Act changed the rural community hospital 
demonstration program in several ways. First, the Secretary is required 
to conduct the demonstration program for an additional 5-year period 
that begins on the date immediately following the last day of the 
initial 5-year period under section 410A(a)(5) of Public Law 108-173, 
as amended (section 410A(g)(1) of Pub. L. 108-173, as added by section 
3123(a) of the Affordable Care Act and further amended by section 10313 
of that Act). Further, the

[[Page 51699]]

Affordable Care Act requires that, in the case of a rural community 
hospital that is participating in the demonstration program as of the 
last day of the initial 5-year period, the Secretary shall provide for 
the continued participation of such rural hospital in the demonstration 
program during the 5-year extension, unless the hospital makes an 
election, in such form and manner as the Secretary may specify, to 
discontinue participation (section 410A(g)(4)(A) of Pub. L. 108-173, as 
added by section 3123(a) of the Affordable Care Act and further amended 
by section 10313 of such Act). In addition, the Affordable Care Act 
provides that during the 5-year extension period, the Secretary shall 
expand the number of States with low population densities determined by 
the Secretary to 20 (section 410A(g)(2) of Pub. L. 108-173, as added by 
section 3123(a) and amended by section 10313 of the Affordable Care 
Act). Further, the Secretary is required to use the same criteria and 
data that the Secretary used to determine the States under section 
410A(a)(2) of Public Law 108-173 for purposes of the initial 5-year 
period. The Affordable Care Act also allows not more than 30 rural 
community hospitals in such States to participate in the demonstration 
program during the 5-year extension period (section 410A(g)(3) of Pub. 
L. 108-173, as added by section 3123(a) of the Affordable Care Act and 
as further amended by section 10313 of such Act). Additionally, we note 
that we indicated in the FY 2011 IPPS final rule (75 FR 50343) that 
section 410A(g)(4)(b) of Public Law 108-173 as added by section 3123(a) 
of the Affordable Care Act and as further amended by section 10313 of 
that Act provides that the amount of payment under the demonstration 
program for covered inpatient hospital services furnished in a rural 
community hospital [other than services furnished in a psychiatric or 
rehabilitation unit of the hospital that is a distinct part] is the 
reasonable costs of providing such services for discharges occurring in 
the first cost reporting period beginning on or after the first day of 
the 5-year extension period. We want to clarify that we believe that 
section 410A(g)(4)(B) of Public Law 108-173, as added by section 
3123(a) of the Affordable Care Act and as further amended by section 
10313 of such Act, provides this with respect to a rural community 
hospital that is participating in the demonstration program under 
section 410A as of the last day of the initial 5-year period. 
Specifically, the Affordable Care Act requires that in the case of a 
rural community hospital that is participating in the demonstration as 
of the last day of the initial 5-year period, the Secretary in 
calculating payments under subsection (b) shall substitute under 
paragraph (1)(A) the phrase ``the reasonable costs of providing such 
services for discharges occurring in the first cost reporting period 
beginning on or after the first day of the 5-year extension period'' 
for the phrase ``the reasonable costs of providing such services for 
discharges occurring in the first cost reporting period beginning on or 
after the implementation of the demonstration.'' The phrase ``the 
reasonable costs of providing such services for discharges occurring in 
the first cost reporting period beginning on or after the 
implementation of the demonstration'' does not precisely track the 
language in section 410A(b)(1)(A) of Public Law 108-173. Therefore, we 
cannot delete and replace it as described in the Affordable Care Act. 
However, we believe the language of section 410A(g)(4)(B)(i) of Public 
Law 108-173, as amended, is clear. Namely, a rural community hospital 
that is participating in the demonstration as of the last day of the 
initial 5-year period shall be paid for its covered inpatient hospital 
services ``the reasonable costs of providing such services for 
discharges occurring in the first cost reporting period beginning on or 
after the first day of the 5-year extension period.'' (This methodology 
does not apply to services furnished in a psychiatric or rehabilitation 
unit of the hospital which is a distinct part.) For discharges 
occurring in a subsequent cost reporting period during the 
demonstration, the formula in section 410A(b)(1)(B) of Public Law 108-
173, as amended, would apply to such hospitals. That is, the payment 
will be the lesser of reasonable cost or the target amount. We 
calculate the target amount in the second cost reporting period by 
taking the reasonable costs of providing covered inpatient hospital 
services in the first cost reporting period beginning on or after the 
first day of the 5-year extension and increasing it by the IPPS market 
basket percentage increase (as defined in section 1886(b)(3)(B)(iii) of 
the Act) for that particular cost reporting period. We calculate the 
target amount in subsequent cost reporting periods by taking the 
preceding cost reporting period's target amount and increasing it by 
the IPPS market basket percentage increase (as defined in section 
1886(b)(3)(B)(iii) of the Act) for that particular cost reporting 
period. (We note that, in calculating target amounts, we utilize the 
IPPS market basket percentage increase as defined in section 
1886(b)(3)(B)(iii) of the Act, as opposed to the applicable percentage 
increase as defined in section 1886(b)(3)(B)(i) of the Act. We note 
that section 410A(b)(2)(B) of Public Law 108-173, in pertinent part, 
provides that target amounts are ``increased by the applicable 
percentage increase (under clause (i) of section 1886(b)(3)(B) of the 
Social Security Act * * *) in the market basket percentage increase (as 
defined in clause (iii) of such section) for that particular cost 
reporting period.'' The phrase ``applicable percentage increase (under 
clause (i) of section 1886(b)(3)(B) of the Social Security Act * * *) 
in the market basket percentage increase * * *'' is ambiguous, as there 
is no applicable percentage increase in the market basket percentage 
increase. Because the focus of the provision is the amount of the IPPS 
market basket percentage increase, we believe the provision is 
addressing the IPPS market basket percentage increase, and not the 
applicable percentage increase, which includes other adjustments to the 
market basket percentage increase. Further, because section 
410A(b)(2)(B) of Public Law 108-173 is addressing target amounts under 
the demonstration, we believed it was logical to read the statute as 
providing for an update structure mimicking the update structure for 
target amounts of reasonable cost-based providers like children's and 
cancer hospitals, as well as RNCHIs. This rationale applies any time we 
use the IPPS market basket percentage increase to update target amounts 
in the demonstration. With respect to hospitals that are newly joining 
the demonstration, they are paid the reasonable costs of providing 
covered inpatient hospital services, other than services furnished in a 
psychiatric or rehabilitation unit of the hospital which is a distinct 
part, for discharges occurring in the hospital's first cost reporting 
period beginning on or after the implementation of the demonstration 
program (section 410A(b)(1)(A) of Public Law 108-173). We have 
determined that each of these new hospitals will begin participating in 
the demonstration with its first cost reporting period beginning on or 
after April 1, 2011. We chose this date because it follows immediately 
upon the notification of the hospitals of their acceptance to the 
demonstration and it will allow the hospitals to begin participation in 
the demonstration as soon as possible. With respect to rural community 
hospitals newly joining the demonstration, for discharges occurring

[[Page 51700]]

in a subsequent cost reporting period under the demonstration program, 
the formula in section 410A(b)(1)(B) of Public Law 108-173, as amended, 
would apply. That is, payments will be the lesser amount of reasonable 
costs or the target amount. We calculate the target amount in the 
second cost reporting period by taking the reasonable costs of 
providing covered inpatient hospital services in the first cost 
reporting period and increasing it by the IPPS market basket percentage 
increase for that particular cost reporting period. We calculate the 
target amount in subsequent cost reporting periods by taking the 
preceding cost reporting period's target amount and increasing it by 
the IPPS market basket percentage increase for that particular cost 
reporting period. In addition, various other technical and conforming 
changes were made to section 410A of Public Law 108-173 by section 
3123(a) of the Affordable Care Act and as further amended by section 
10313 of that Act.
    We published a solicitation for applications for additional 
participants in the Rural Community Hospital Demonstration Program in 
the Federal Register on August 30, 2010 (75 FR 52960). Applications 
were due on October 14, 2010. The 20 States with the lowest population 
density, which are eligible for the demonstration program are: Alaska, 
Arizona, Arkansas, Colorado, Idaho, Iowa, Kansas, Maine, Minnesota, 
Mississippi, Montana, Nebraska, Nevada, New Mexico, North Dakota, 
Oklahoma, Oregon, South Dakota, Utah, and Wyoming (Source: U.S. Census 
Bureau, Statistical Abstract of the United States: 2003). We approved 
19 new hospitals for participation in the demonstration program. We 
reported in the proposed rule that we were waiting for these hospitals 
to respond as to whether they accept the terms and conditions 
stipulated for their participation in the demonstration; and, 
therefore, we based cost estimates for the demonstration for this new 
set of hospitals based on the assumption that all 19 hospitals would 
elect to participate. We proposed that if fewer were actually to make 
this election, we would accordingly adjust the demonstration cost 
estimates in this final rule. At the end of the response period, 18 of 
the 19 selected hospitals accepted the terms of conditions of the 
demonstration and agreed to participate; one hospital declined 
participation. Therefore, we are basing the cost estimates for this 
final rule on the assumption that 18 of these newly participating 
hospitals will participate in the demonstration during FY 2012.
3. FY 2012 Budget Neutrality Adjustment
    In order to ensure that the demonstration is budget neutral as is 
required by the statute, in the FY 2012 IPPS/LTCH PPS proposed rule (76 
FR 25955 through 25960), we proposed to adjust the national IPPS rates 
to account for any added costs attributable to the demonstration 
program. Specifically, we proposed that the budget neutrality 
adjustment would account for: (1) The estimated costs of the 
demonstration program in FY 2012 for the 8 currently participating 
hospitals (``pre-expansion participating hospitals''); (2) the 
estimated costs of the demonstration in FY 2012 for the 19 hospitals 
newly selected to begin participation in the demonstration program; and 
(3) the amount by which the costs of the demonstration program, as 
indicated by settled cost reports for cost reporting periods beginning 
in FYs 2007 and 2008 for hospitals participating in the demonstration 
program during FYs 2007 and 2008, exceeded the amount that was 
identified in the FY 2007 and FY 2008 IPPS final rules as the budget 
neutrality offsets for FYs 2007 and 2008.
    We are finalizing our proposed methodology except where specified 
below. We note that we proposed that if updated data became available 
for the final rule, we would use them to estimate the costs of the 
demonstration program in FY 2012. For this final rule, we have updated 
data which resulted in various components of the methodology being 
updated. We explain in more detail below in sections IV.N.3. a. and b. 
the specific changes.
a. Component of the FY 2012 Budget Neutrality Adjustment That Accounts 
for Estimated FY 2012 Demonstration Program Costs of the ``Pre-
Expansion Participating Hospitals''
    In the proposed rule, we noted that eight hospitals that were 
selected for participation in either 2004 or 2008 are currently 
continuing to participate in the extension period mandated by the 
Affordable Care Act. (We refer to these hospitals as ``pre-expansion 
participating hospitals'' in this preamble discussion of the rural 
community hospital demonstration program.) (In the proposed rule, we 
said that hospitals were selected in 2005; this was a mistake. 
Hospitals were selected for the demonstration only in 2004 and in 
2008.) In the proposed rule, the component of the FY 2012 budget 
neutrality adjustment to the national IPPS rates that accounts for the 
estimated demonstration program costs in FY 2012 for the eight ``pre-
expansion participating hospitals'' was calculated by utilizing three 
separate methodologies: one methodology for the six hospitals that had 
participated in the demonstration program since its inception and that 
we indicated were continuing to participate in the demonstration 
program (``originally participating hospitals''); a second methodology 
for one hospital that is currently participating in the demonstration 
program and that was among the four hospitals that joined the 
demonstration program in 2008; and a third methodology for the other 
hospital that is currently participating in the demonstration program 
that was among the four hospitals that joined the demonstration program 
in 2008. Different methods were used for these three sets of hospitals 
because the data available to us to estimate the demonstration program 
costs for each was different. We are finalizing the above methodology, 
except as explained previously, certain aspects of the methodology have 
been updated in this final rule based on updated data. We also note 
that the number of hospitals that were selected for participation in 
either 2004 or 2008 and that are currently continuing to participate in 
the extension period decreased by one for this final rule since one of 
the ``originally participating'' hospitals left the demonstration. In 
order to account for this decrease, we adjusted the methodology 
described above and explained in detail below by reducing the number of 
pre-expansion participating hospitals used in the calculation from 
eight to seven and reducing the number of originally participating 
hospitals used in the calculation from six to five. We have updated 
cost report data available for this final rule, consistent with our 
proposal to use updated data in the final rule to the extent they are 
available. Specifically, in the following description, we are 
identifying for one of the pre-expansion participating hospitals that 
there is a more recently finalized cost report available (as compared 
to the ``as submitted cost report'' used in the proposed rule). We are 
updating various components of the payment methodology to reflect the 
newly available finalized cost report for this hospital. In the 
following description, we are identifying which cost reports are the 
same as those identified in the proposed rule, and we also identify the 
one that has changed.
    (1) Consistent with the proposed rule, and for this final rule, for 
the five (six in the proposed rule) ``originally participating 
hospitals,'' that is,

[[Page 51701]]

hospitals that have participated in the project since its inception and 
that are continuing to participate, the estimate of the portion of the 
budget neutrality adjustment that accounts for the estimated FY 2012 
demonstration program costs is based on data from their settled cost 
reports applicable to the second year of the demonstration--that is, 
for cost reporting periods ending in FY 2007. We are using these cost 
reports because they are the most recent finalized cost reports and, 
thus, we believe their accounting of costs is the most accurate 
indicator available to us at this time to estimate FY 2012 
demonstration costs.
    (2) For one of the two hospitals that joined the demonstration 
program in 2008, and that is still participating, we proposed to 
estimate the FY 2012 demonstration program costs under section 410A of 
Public Law 108-173 as amended based on data from its as submitted cost 
report beginning January 1, 2008. For this final rule, because we have 
received a finalized cost report for the cost report period beginning 
January 1, 2009, we are using updated cost report data for this 
hospital.
    (3) The remaining hospital of the seven (eight in the proposed 
rule) ``pre-expansion participating hospitals'' which began 
participation in FY 2008 is an Indian Health Service provider. 
Historically, the hospital has not filed standard Medicare cost 
reports. Under the proposed rule, and for this final rule, we used its 
full ``as submitted'' cost report filed for the period beginning 
October 1, 2008 to estimate its FY 2012 costs. We used this ``as 
submitted'' cost report because as the most recent cost report we 
believe it allows us to estimate FY 2012 costs accurately.
    As we proposed, for this final rule, we are using the same general 
methodology used for the FY 2011 IPPS/LTCH PPS final rule, but 
providing more detail. The methodology for calculating the estimated FY 
2012 demonstration cost for the seven (eight in the proposed rule) 
``pre-expansion participating hospitals'' is as follows:
    Step 1: As proposed, in this final rule, in order to calculate 
demonstration costs for each of the five (six in the proposed rule) 
``originally participating hospitals'' for the cost reporting period 
ending in FY 2007, we subtracted the amount it would have otherwise 
been paid under the applicable payment system(s) for covered inpatient 
hospital services without the demonstration during such period (as 
indicated on the settled cost report for this period) from the amount 
paid to it for such services under the reasonable cost methodology in 
section 410A(b) of Public Law 108-173 (as indicated on the settled cost 
report for this period). Steps 1(a) through (c) below are performed to 
calculate FY 2007 demonstration costs for these five hospitals. (As 
proposed, for this final rule, we are using final settled cost reports 
ending in FY 2007 to represent FY 2007 demonstration costs for each of 
these hospitals because a substantial portion of the months included 
within these cost report years (respective to each hospital) fall 
within FY 2007, and, therefore we believe that for purposes of this 
analysis it is appropriate to consider data from these cost reports to 
represent FY 2007 inpatient costs for the demonstration during that 
period.) In addition, we note that throughout the remainder of the 
preamble discussion on the budget neutrality adjustment for the rural 
community hospital demonstration we refer to ``covered inpatient 
hospital services'' as that term is defined in section 410A(f)(2) of 
Public Law 108-173 as amended as ``inpatient hospital services.'' We 
also note that the phrase ``the reasonable cost methodology'' means the 
reasonable cost methodology in section 410A(b) of Public Law 108-173 or 
the reasonable cost methodology in section 410A(b) of Public Law 108-
173, as amended, as applicable in the particular situation.
     Step 1(a): As proposed, for this final rule, first, for 
each hospital, we subtracted the amount that would otherwise be paid 
under the IPPS for the hospital's inpatient hospital services 
(excluding those associated with swing beds) for the cost reporting 
period ending in FY 2007 (as indicated on the settled cost report for 
this period) from the amount paid for such services under the 
reasonable cost methodology (as indicated on the settled cost report 
for this period). The result of this difference is each hospital's 
demonstration costs for its inpatient hospital services (excluding 
those associated with swing beds) for the cost reporting period ending 
in FY 2007. (We used the amount the hospital would otherwise be paid 
under the IPPS as indicated above because this is the payment 
methodology under which the hospital's beds (excluding swing beds) 
would be paid in the absence of the demonstration. This rationale 
applies throughout the preamble discussion on the rural community 
hospital demonstration budget neutrality adjustment whenever this is a 
component of the methodology.)
     Step 1(b): As proposed, for this final rule, next, with 
respect to the hospitals that have swing beds, we subtracted the amount 
the hospital would otherwise be paid under section 1888(e)(7) of the 
Act for the inpatient hospital services associated with the swing beds 
for the cost reporting period ending in FY 2007 (as indicated in the 
settled cost report for this period) from the amount paid for such 
services under the reasonable cost methodology (as indicated in the 
settled cost report for such period). The result of this difference is 
each hospital's demonstration costs associated with its swing beds for 
the cost reporting period ending in FY 2007. (We used the amount the 
hospital would otherwise be paid under section 1888(e)(7) of the Act as 
indicated above because this is the payment methodology under which the 
hospital's swing beds would be paid in the absence of the 
demonstration. This rationale applies throughout the preamble 
discussion on the rural community hospital demonstration budget 
neutrality adjustment whenever this is a component of the proposed 
methodology.)
     Step 1(c): Next, under the proposed rule, in order to 
calculate total estimated FY 2010 demonstration costs for all six (five 
in this final rule) hospitals, we added together the differences 
calculated above in Step 1(a) and Step 1(b) as applicable for each of 
the six hospitals and then multiplied this sum by the IPPS market 
basket percentage increases for FYs 2008 through 2010, which were 
adopted in the respective IPPS final rules and a 2-percent annual 
volume adjustment for the years 2008 through 2010.
    We note that, for this final rule, for purposes of Step 1(c), in 
order to calculate total estimated FY 2010 demonstration costs for all 
five hospitals, we added together the differences calculated above in 
Step 1(a) and Step 1(b) as applicable for each of the five hospitals 
and then multiplied this sum by the IPPS market basket percentage 
increases for FYs 2008 through 2010, which were adopted in the 
respective IPPS final rules and a 3-percent annual volume adjustment 
for the years 2008 through 2010. For this final rule, we are using a 3-
percent volume adjustment. In the proposed rule, we proposed to include 
a volume adjustment in the methodology for calculating demonstration 
costs recognizing that the volume of services provided in small rural 
hospitals tend to fluctuate. In this final rule, we have revised the 
volume adjustment from the 2-percent amount stated in the proposed 
rule, which was based on an assessment at the inception of the 
demonstration as to the growth in volume of services, to 3 percent 
based on updated data. Three percent per year is the current estimate 
nationwide as to the rate of increase in

[[Page 51702]]

the number of Medicare fee-for-service discharges.
    As we proposed, for this final rule, we are applying the applicable 
IPPS market basket percentage increases described above to model 
estimated FY 2010 demonstration costs because we believe that this 
update factor appropriately indicates the trend of increase in hospital 
operating costs. Further, this approach is consistent with the agency's 
use of the IPPS market basket percentage increase to update the rate-
of-increase limits (which is a reasonable cost-based methodology) for 
children's and cancer hospitals as well as RNCHIs. Therefore, we 
believe it enables us to estimate appropriately demonstration costs 
that are tied to a reasonable cost-based methodology. Also, this 
approach is consistent with how we update target amounts under the 
demonstration under section 410A(b)(2)(B) of Public Law 108-173. We 
note that the rationale provided herein for utilizing an IPPS market 
basket percentage increase and a 3-percent annual volume adjustment to 
estimate demonstration costs is applicable throughout the preamble 
discussion on the rural community hospital budget neutrality adjustment 
whenever these factors are used to model the trend of increase and 
volume increases in the budget neutrality adjustment methodology 
finalized in this final rule.
    As a side note, as a special feature of the demonstration, we added 
a supplemental worksheet to the standard hospital cost report which is 
completed by the fiscal intermediary in the final settlement for these 
five ``originally participating hospitals.'' This supplemental 
worksheet includes the calculation of the hospital's first year 
reasonable costs of inpatient hospital services (excluding those 
associated with swing beds) as set forth in section 410A of Public Law 
108-173, and, in addition, for the hospital's second year cost reports 
(those cost reports ending in FY 2007), the target amount (that is, the 
previous year's Medicare reasonable cost amount for inpatient hospital 
services updated by the IPPS market basket percentage increase as 
provided in section 410A(b)(2)(B) of Pub. L. 108-173). (This 
supplemental worksheet also includes a calculation of the amount that 
would otherwise be paid for the hospital's inpatient hospital services 
under the IPPS, as is ordinarily presented on the standard hospital 
cost report. For hospitals that have swing beds, this supplemental 
worksheet also includes the following: the estimated amount the 
hospital would otherwise be paid under section 1888(e)(7) of the Act 
for the inpatient hospital services associated with the hospital's 
swing beds; the estimated amount the hospital would be paid under the 
reasonable cost methodology for the inpatient hospital services 
provided in its swing beds, and the hospital's target amount for its 
swing beds.
    Step 2: In the proposed rule, in order to calculate estimated FY 
2008 demonstration costs for the non-Indian Health Service hospital 
that began the demonstration program in 2008, we subtracted the 
estimated amount it would have otherwise been paid for inpatient 
hospital services without the demonstration under the applicable 
payment system(s) (as indicated on its ``as submitted'' cost report 
beginning January 1, 2008) from the estimated costs of such services 
under the reasonable cost methodology (as indicated on the ``as 
submitted'' cost report for this period). We proposed that Steps 2(a) 
through (c) below would be performed to calculate this amount.
    Step 2(a): Specifically, we subtracted the estimated amount that 
would otherwise be paid under the IPPS for the hospital's inpatient 
hospital services (excluding swing beds) for the cost reporting period 
beginning January 1, 2008 (as indicated on the ``as submitted'' cost 
report) from the estimated amount to be paid for such services under 
the reasonable cost methodology (as indicated on the ``as submitted'' 
cost report for such period).
     Step 2(b): Next, we subtracted the estimated amount that 
would otherwise be paid under section 1888(e)(7) of the Act for the 
inpatient hospital services associated with the swing beds during the 
cost reporting period beginning January 1, 2008 (as indicated on the 
``as submitted'' cost report) from the estimated amount to be paid for 
such services under the reasonable cost methodology as indicated on the 
``as submitted'' cost report for such period.
     Step 2(c): We added together the differences calculated in 
Steps 2(a) and (b) above to obtain the hospital's total estimated FY 
2008 demonstration cost.
     Step 2(d): Then, in order to calculate the hospital's 
estimated FY 2010 demonstration costs, we took the amount calculated in 
Step 2(c) above and multiplied it by the IPPS market basket percentage 
increases for FYs 2009 and 2010 as adopted in the respective IPPS final 
rules and a 2-percent annual volume adjustment for FY 2010.
    For this final rule, we have updated data available for this non-
Indian service hospital, which began the demonstration in 2008; 
specifically, we have a finalized cost report for the cost reporting 
period beginning January 1, 2009. This cost report has calculations for 
the reasonable cost of inpatient services, determined in accordance 
with the principles of section 410A of Pub. L 108-173, as well as what 
the cost amounts would be for the hospital absent the demonstration. 
Therefore, in this final rule, with respect to Step 2, in order to 
calculate estimated FY 2009 demonstration costs for the non-Indian 
Health Service hospital that began the demonstration program in 2008, 
we subtracted the estimated amount it would have otherwise been paid 
for inpatient hospital services without the demonstration under the 
applicable payment system(s) (as indicated on the final settled cost 
report beginning January 1, 2009) from the estimated costs of such 
services under the reasonable cost methodology (as indicated on the 
final settled cost report for this period). Steps 2(a) through (c) 
below are performed to calculate this estimated amount for the final 
rule. We note that we are using the cost report beginning January 1, 
2009 to represent FY 2009 demonstration costs for this hospital because 
it corresponds most precisely to FY 2009 and, therefore, we believe 
correctly represents FY 2009 inpatient costs for the demonstration for 
that period.
     Step 2(a): Specifically, we subtracted the estimated 
amount that would otherwise be paid under the IPPS for the hospital's 
inpatient hospital services (excluding swing beds) for the cost 
reporting period beginning January 1, 2009 (as indicated on the 
finalized settled cost report) from the estimated amount to be paid for 
such services under the reasonable cost methodology (as indicated on 
the finalized settled cost report for such period).
     Step 2(b): Next, we subtracted the estimated amount that 
would otherwise be paid under section 1888(e)(7) of the Act for the 
inpatient hospital services associated with the swing beds during the 
cost reporting period beginning January 1, 2009 (as indicated on the 
finalized settled cost report) from the estimated amount to be paid for 
such services under the reasonable cost methodology as indicated on the 
finalized settled cost report for such period.
     Step 2(c): We added together the differences calculated in 
Steps 2(a) and (b) above to obtain the hospital's total estimated FY 
2009 demonstration cost.
     Step 2(d): Then, in order to calculate the hospital's 
estimated FY 2010 demonstration costs, we took the amount calculated in 
Step 2(c) above and multiplied it by the IPPS market basket percentage 
increase for FY 2010 as adopted in the respective IPPS final

[[Page 51703]]

rule and a 3-percent annual volume adjustment for FY 2010 since the 
volume adjustment has been updated in this final rule. Whereas we 
proposed updates for FYs 2009 and 2010 in the proposed rule, we are 
only using an update for the latter year in this final rule because we 
are using more recent cost and payment data, which are obtained from 
the cost report for cost report period beginning January 1, 2009.
    Step 3: Under the proposed rule, and for this final rule, in order 
to calculate the estimated FY 2009 demonstration costs for the Indian 
Health Service provider, we subtracted the estimated amount the 
hospital would have otherwise been paid for inpatient hospital services 
without the demonstration under the applicable payment system (as 
indicated on the ``as submitted'' cost report beginning October 1, 
2008) from the estimated costs for such services under the reasonable 
cost methodology (as indicated in the ``as submitted'' cost report for 
such period). As proposed, for this final rule, Step 3(a) below is 
performed to calculate this amount. (As proposed, for this final rule, 
we are using the cost report beginning October 1, 2008 to represent FY 
2009 demonstration costs for this hospital because it corresponds most 
precisely to FY 2009 and, therefore, we believe correctly represents FY 
2009 inpatient costs for the demonstration for that period.)
     Step 3(a): Specifically, we subtracted the estimated 
amount the hospital would have otherwise been paid for inpatient 
hospital services under the IPPS in the cost reporting period beginning 
October 1, 2008 without the demonstration (as indicated on the ``as 
submitted'' cost report for this period) from the estimated amount to 
be paid under the reasonable cost methodology for such services (as 
indicated in the ``as submitted'' cost report for such period). We note 
that this provider had no swing beds, therefore, we did not estimate 
any portion of the costs under section 1888(e)(7) of the Act.
     Step 3(b): Next, under the proposed rule, in order to 
calculate the Indian Health Service provider's estimated FY 2010 
demonstration costs, we multiplied the difference calculated in Step 
3(a) above by the IPPS market basket percentage increase for FY 2010 
adopted in the FY 2010 IPPS/LTCH PPS final rule and the 2-percent 
annual volume adjustment.
    For this final rule, for purposes of step 3(b), in order to 
calculate the Indian Health Service provider's estimated FY 2010 
demonstration costs, we multiplied the difference calculated in Step 
3(a) above by the IPPS market basket percentage increase for FY 2010 
adopted in the FY 2010 IPPS/LTCH PPS final rule and a 3-percent annual 
volume adjustment.
    Step 4: In the proposed rule, in order to calculate total estimated 
FY 2010 demonstration costs for all eight ``pre-expansion participating 
hospitals'', we then added the estimated FY 2010 demonstration costs 
calculated with proposed rule data in Steps 1(c), 2(d), and 3(b) above.
    For purposes of this final rule, with respect to Step 4, in order 
to calculate total estimated FY 2010 demonstration costs for all seven 
``pre-expansion participating hospitals'', we then added the estimated 
FY 2010 demonstration costs calculated with the final rule data in 
Steps 1(c), 2(d), and 3(b) above.
    Step 5: Next, under the proposed rule, in order to calculate total 
estimated FY 2012 demonstration costs for all eight (seven in this 
final rule) ``pre-expansion hospitals,'' we multiplied the amount 
calculated with proposed rule data in Step 4 above by the FY 2011 IPPS 
market basket percentage increase adopted in the FY 2011 IPPS/LTCH PPS 
final rule and the proposed FY 2012 IPPS market basket percentage 
increase contained elsewhere in the FY 2012 IPPS/LTCH PPS proposed rule 
and a 2-percent annual volume adjustment for FYs 2011 and 2012.
    Under this final rule, for purposes of Step 5, in order to 
calculate total estimated FY 2012 demonstration costs for all seven 
``pre-expansion hospitals,'' we multiplied the amount calculated in 
Step 4 above with the final rule data by the FY 2011 IPPS market basket 
percentage increase adopted in the FY 2011 IPPS/LTCH PPS final rule and 
the FY 2012 IPPS market basket percentage increase contained elsewhere 
in the final rule and a 3-percent annual volume adjustment for FYs 2011 
and 2012. We used the FY 2012 IPPS market basket percentage increase 
adopted in this final rule because it is the most current estimate 
available at the time of this rule. (The FY 2012 IPPS market basket 
percentage increase adopted in this final rule is used when the FY 2012 
IPPS market basket percentage is used to model the trend of increase 
which is used in the final budget neutrality adjustment methodology for 
the reason set forth previously.) Thus, for this final rule, we arrived 
at the total estimated FY 2012 demonstration costs for all seven 
currently participating hospitals which must be offset, which is 
$20,255,315.
b. Portion of the FY 2012 Budget Neutrality Adjustment That Accounts 
for Estimated FY 2012 Demonstration Program Costs for Hospitals Newly 
Selected to Participate in the Demonstration Program
    Section 410A(g)(3) of Public Law 108-173, as added by section 3123 
of the Affordable Care Act and as further amended by section 10313 of 
such Act, provides that ``[n]otwithstanding subsection (a)(4), during 
the 5-year extension period, not more than 30 rural community hospitals 
may participate in the demonstration program under this section.'' In 
the proposed rule, we indicated that 19 hospitals were newly selected 
to join the demonstration and, therefore, our proposed budget 
neutrality adjustment was based on data for Medicare inpatient costs 
and payments from recently submitted cost reports for these 19 
hospitals. As indicated in section IV.N.2. of this preamble, 18 
hospitals accepted the terms of conditions of the demonstration and 
agreed to participate. Based on this updated data, for this final rule, 
we had to adjust our budget neutrality adjustment to account for the 
estimated costs associated with the 18 hospitals, as opposed to 19 
hospitals, that have agreed to participate. As proposed, in order to 
ensure budget neutrality for the newly selected hospitals, we are 
including a component in the budget neutrality adjustment factor to the 
FY 2012 national IPPS rates to account for the estimated FY 2012 costs 
of those new hospitals. As we proposed, for this final rule, we are 
generally using ``as submitted'' cost reports to estimate demonstration 
costs because they are the most recent cost reports and, therefore, we 
believe most accurately reflect the hospital's cost and payment for 
Medicare inpatient services in the respective year. We note that 
hospitals were required to submit pages from their most recent cost 
reports with their applications. For 13 of these hospitals, these cost 
reports had end dates in FY 2009; for the 5 remaining hospitals, they 
had end dates in FY 2010. Therefore, in various steps in the 
methodology below, we begin various estimates with FY 2009 if the 
hospital submitted a cost report ending in FY 2009, and FY 2010 if the 
hospital submitted a cost report ending in FY 2010.
    As we proposed, for this final rule, we are using the following 
methodology in order to estimate FY 2012 demonstration program costs 
for the 18 newly selected hospitals. This methodology differs from that 
in the FY 2011 IPPS/LTCH PPS final rule,

[[Page 51704]]

because, at that time, hospitals had not been selected for 
participation, and thus we had no data specific to those hospitals that 
would enter the demonstration as a result of its expansion mandated by 
the Affordable Care Act.
    Step 1(a): For each hospital that submitted a cost report ending in 
FY 2009, we subtracted the estimated amount that would be paid for its 
inpatient hospital services (excluding those associated with swing 
beds) under the IPPS for such period (as indicated on the ``as 
submitted'' cost report for such period) from the estimated amount for 
reasonable costs for such services (as indicated on the ``as 
submitted'' cost report for such period) in order to calculate the 
difference between the hospital's estimated cost and payment for its 
inpatient hospital services (excluding those associated with swing 
beds) during the cost reporting period ending in FY 2009.
    Step 1 (b): For each hospital that submitted a cost report ending 
in FY 2010, we subtracted the estimated amount that would be paid for 
its inpatient hospital services (excluding those associated with swing 
beds) under the IPPS (as indicated on the ``as submitted'' cost report 
for such period) from the estimated amount for the reasonable cost for 
such services (as indicated on the ``as submitted'' cost report for 
such period) in order to calculate the difference between the 
hospital's estimated costs and payment for its inpatient hospital 
services (excluding those associated with swing beds) during such 
period.
    Step 1(c): While a portion of the 18 newly selected hospitals that 
have swing beds reported estimated costs for those beds, some hospitals 
did not, namely a portion of the hospitals that submitted cost reports 
ending in FY 2009. Therefore, we needed to gap-fill in order to account 
for this issue. For each of the hospitals with swing beds that 
submitted cost reports ending in FY 2009, but that did not submit with 
its application estimated costs associated with those swing beds, we 
assigned an estimated cost for its swing beds based on an average of 
the estimated cost-payment difference associated with the swing beds of 
the newly participating hospitals that reported such data on their 
applications. We are assigning estimated costs based on the average of 
the cost-payment difference for those hospitals that submitted these 
data, because these hospitals represent a sample of hospitals chosen 
for the demonstration, which we believe can accurately reflect costs 
and payment. We believe that these amounts, derived from the 
applications of the hospitals that submitted these data, accurately 
reflect this sample because they are hospitals of similar size and 
circumstances. Furthermore, these hospitals, which submitted the data, 
were chosen from the same set of States as the overall set of the newly 
selected hospitals. As proposed, for this final rule, we utilized the 
methodology in Steps 1(c)(i) through (c)(iii) below to calculate this 
amount, except we note that, as explained previously, the annual volume 
adjustment and FY 2012 IPPS market basket percentage increase have 
changed from the proposed to this final rule based on updated data:
     Step 1(c)(i): For each of the hospitals with swing beds 
that submitted with its application both a cost report ending in FY 
2009 and estimated costs of those swing beds during such period, we 
calculated its estimated cost-payment difference for those swing beds 
(that is, we subtracted the amount that the hospital estimates will be 
paid under section 1888(e)(7) of the Act for the inpatient hospital 
services associated with its swing beds for such period from the amount 
that the hospital estimates it would be paid for the reasonable costs 
for such services during such period as those amounts are reported on 
the hospital's application) by simply taking this amount from the 
hospital's application.
     Step 1(c)(ii): Then, for each of the hospitals with swing 
beds that submitted with its application both a cost report ending in 
FY 2010 and the estimated costs of those swing beds during such period, 
we calculated the difference between the estimated costs and payment 
for those swing beds for such period by simply taking this amount from 
the hospital's application. (We note that all hospitals that had swing 
beds and that submitted cost reports ending in FY 2010 with their 
application supplied data on the estimated cost and payment for swing 
bed services on these cost reports.)
     Step 1(c)(iii): Next, we totaled all of the individual 
amounts calculated under Steps 1(c)(i) and (c)(ii) above and then 
divided this amount by the total number of hospitals that provided data 
on estimated costs on swing beds in their applications. We used the 
result of this computation as the estimated cost for the swing beds for 
each of the hospitals that failed to submit estimated costs for those 
beds with their applications.
     Step 1(d): Then, in order to calculate the total costs 
during the cost reporting period ending in FY 2009 for each hospital 
that submitted a cost report ending in FY 2009, we did the following: 
(a) If the hospital had no swing beds, its total estimated costs for 
such period is the difference calculated under Step 1(a); (b) If the 
hospital had swing beds, we added the difference calculated under Step 
1(a) with the difference calculated under Step 1(c)(i) or Step 
1(c)(iii) as applicable.
     Step 1(e): Next, in order to calculate total estimated FY 
2009 costs for all of the hospitals that submitted cost reports ending 
in FY 2009 with their applications, we added together all of the total 
estimated costs that were calculated for each such hospital under Step 
1(d) above. We note that we believe that using cost reports ending in 
FYs 2009 and 2010 best reflect costs and payment in FYs 2009 and 2010 
because these cost reports most closely respond to those fiscal years.
     Step 1(f): Then, in order to calculate the total estimated 
FY 2011 costs for the newly selected hospitals that submitted cost 
reports ending in FY 2009 with their applications, we multiplied the 
amount calculated in Step 1(e) above by the FYs 2010 and 2011 IPPS 
market basket percentage increases adopted in the respective IPPS/LTCH 
PPS final rules as well as a 3-percent (2-percent in the proposed rule) 
annual volume adjustment for each of FYs 2010 and 2011.
     Step 1(g): Then, in order to calculate the total estimated 
FY 2010 costs for each hospital that submitted a cost report ending in 
FY 2010, we did the following: (a) If the hospital had no swing beds, 
its total estimated costs is the difference calculated under Step 1(b); 
(b) If the hospital had swing beds, we added the difference calculated 
under Step 1(b) with the difference calculated under Step 1(c)(ii).
     Step 1(h): Next, in order to calculate the total FY 2010 
costs for all of the hospitals that submitted FY 2010 cost reports with 
their applications, we added together all of the total estimated FY 
2010 costs calculated for each such hospital under Step 1(g) above.
     Step (1)(i): Then, we calculated the total estimated FY 
2011 costs for all of the newly selected hospitals that submitted cost 
reports ending in FY 2010 by multiplying the amount calculated in Step 
1(h) above by the FY 2011 IPPS market basket percentage increase 
adopted in the respective IPPS/LTCH PPS final rule as well as a 3-
percent (2-percent in the proposed rule) annual volume adjustment for 
FY 2011.
     Step (1)(j): Next, in order to calculate total estimated 
FY 2012 demonstration costs for all of the 18 newly selected hospitals, 
we added together the amounts calculated in Steps 1(f) and 1(i) above 
and then multiplied

[[Page 51705]]

this sum by the IPPS FY 2012 market basket percentage increase 
contained elsewhere in this final rule and a 3-percent annual volume 
adjustment for FY 2012. (We note that, for the proposed rule, we 
multiplied the amounts calculated in Steps 1(f) and 1(i) by the 
proposed FY 2012 IPPS market basket percentage increase contained 
elsewhere in the proposed FY 2012 IPPS\LTCH PPS proposed rule and a 2-
percent annual volume adjustment. As explained previously, these 
factors have changed in this final rule based on updated data.) The 
amount of the estimated FY 2012 demonstration costs for the 18 newly 
selected hospitals, which must be offset, is $32,196,745.
c. Portion of the FY 2012 Budget Neutrality Adjustment to Offset the 
Amount by Which the Costs of the Demonstration Program in FYs 2007 and 
2008 Exceeded the Amount That was Identified in the FYs 2007 and 2008 
IPPS Final Rules as the Budget Neutrality Offset for FYs 2007 and 2008
    In addition, we proposed that, in order to ensure that the 
demonstration program in FYs 2007 and 2008 was budget neutral, we would 
incorporate a component into the budget neutrality adjustment factor to 
the FY 2012 national IPPS rates, which would offset the amount by which 
the demonstration program costs as indicated by settled cost reports 
beginning in FYs 2007 and 2008 for hospitals participating in the 
demonstration program during FYs 2007 and 2008 exceeded the amount that 
was identified in the FYs 2007 and 2008 IPPS final rules as the budget 
neutrality offset for FYs 2007 and 2008. Specifically, we proposed the 
following methodology (this is the same methodology as used in the FY 
2011 IPPS/LTCH PPS final rule, but we added detail):
     Step One: Calculate the costs of the demonstration program 
for each of FYs 2007 and 2008 according to the settled cost reports 
that began in FYs 2007 or 2008 for the then participating hospitals 
(which represent the third and fourth years of the demonstration 
program for each of the then participating hospitals) and then add 
these two sums together. The costs of the demonstration program for 
each of FYs 2007 and 2008 is the difference resulting from subtracting 
the total amount that would otherwise be paid to the then participating 
hospitals under the applicable payment system(s) (that is, under the 
IPPS and under section 1888(e)(7) of the Act to the extent the 
participating hospital had swing beds) without the demonstration from 
the amount paid to those hospitals under the demonstration payment 
methodology in section 410A(b) of Public Law 108-173. (We proposed to 
use these settled cost reports, which represent the third and fourth 
years of the demonstration program for each of the then participating 
hospitals, because we believed they correctly represent inpatient costs 
for the demonstration program during each of those 2 years. These 
settled cost reports represent the third and fourth years of the 
demonstration, because the demonstration started with cost report start 
dates on or after October 1, 2004. Therefore, the first year of the 
demonstration program would be represented by cost reports with a start 
date between October 1, 2004 and September 30, 2005 (that is, FY 2005; 
the second year of the demonstration program is represented by cost 
reports with start date between October 1, 2005 and September 30, 2006 
(FY 2006); the third year of the demonstration program is represented 
by cost reports with start date between October 1, 2006 and September 
30, 2007 (FY 2007); the fourth year of the demonstration program is 
represented by cost reports with start date between October 1, 2007 and 
September 30, 2008 (FY 2008).
     Step Two: Subtract the amount that was offset by the 
budget neutrality adjustment for FYs 2007 and 2008 ($9,197,870 for FY 
2007 and $9,681,893 for FY 2008) from the combined costs of the 
demonstration program in FYs 2007 and 2008 as calculated in Step one.
     Step Three: The result of Step two is a dollar amount, for 
which we would calculate a factor that would offset such amounts and 
would be incorporated into the overall proposed budget neutrality 
adjustment to the proposed national IPPS rates for FY 2012. This 
specific component to the overall budget neutrality adjustment for FY 
2012 would account for the difference between the combined costs of the 
demonstration program in FYs 2007 and 2008 and the amount of the budget 
neutrality adjustment published in the FYs 2007 and 2008 IPPS final 
rules and, therefore, would ensure that the demonstration program is 
budget neutral for FYs 2007 and 2008.
    Because of delays in the settlement process for the demonstration 
hospitals' third and fourth year cost reports, that is, for cost 
reporting periods starting in each FYs 2007 and 2008 respectively, we 
were unable in the proposed rule to state the costs of the 
demonstration program corresponding to FYs 2007 and 2008 for purposes 
of determining the amount by which the costs corresponding to FYs 2007 
and 2008 exceeded the amount offset by the budget neutrality adjustment 
for FYs 2007 and 2008. Similarly, for this final rule, we are unable to 
identify the specific numeric amount representing this offsetting 
process that can be incorporated into the budget neutrality adjustment 
applied to the national IPPS rates due to delays in the settlement 
process for the demonstration hospitals' third and fourth year cost 
reports. We note that we anticipate that they may be available for the 
FY 2013 IPPS/LTCH PPS proposed and final rules. Therefore, the 
estimated adjustment to the national IPPS rates in this final rule 
cannot include a component to account for these costs.
    For this FY 2012 IPPS/LTCH PPS final rule, the estimated amount for 
which an adjustment to the national IPPS rates is being calculated is 
the sum of the amounts specified in sections IV.N.3.a. and IV N.3.b. of 
this final rule, which is $52,452,060 (this estimate does not account 
for the numeric result of the method in IV.N.3.c.). Sections IV.N.3.a. 
and IV.N.3.b. of this final rule state dollar amounts, which represent 
estimated costs attributable to the demonstration program for the 
respective component of the overall estimated calculation of the final 
budget neutrality factor for FY 2012. This estimated amount is based on 
the specific assumptions identified, as well as from data sources that 
are used because they represent either the most recently finalized, 
(that is, settled) or, if ``as submitted,'' recently available cost 
reports.
    Comment: One commenter pointed out that if the newly participating 
hospitals' cost reports for the preceding year are not settled, or the 
hospital is appealing certain determinations made by the fiscal 
intermediary or MAC, the target amount for any year under the 
demonstration program may be subject to change. The commenter asked 
whether cost reports would have to be reopened to reflect the final 
settlement of the years in which the respective target amount is 
developed.
    Response: We will approach this issue consistent with standard cost 
report review.

O. Bundling of Payments for Services Provided to Outpatients Who Later 
Are Admitted as Inpatients: 3-Day Payment Window

1. Background
    Section 1886(a)(4) of the Act includes in the definition of 
``operating costs of inpatient hospital services'' the cost of 
diagnostic services (including clinical diagnostic laboratory tests) 
``or other services related to the admission'' (as defined by the 
Secretary) furnished by

[[Page 51706]]

the hospital (or by an entity that is wholly owned or operated by the 
hospital) to the patient during the 3 days preceding the date of the 
patient's admission to a subsection (d) hospital subject to the IPPS. 
For a non-subsection (d) hospital (psychiatric hospitals and units, 
inpatient rehabilitation hospitals and units, long-term care hospitals, 
children's hospitals, and cancer hospitals), the statutory payment 
window is 1 day preceding the date of the patient's admission.
    Section 102(a)(1) of the Preservation of Access to Care for 
Medicare Beneficiaries and Pension Relief Act of 2010 (Pub. L. 111-192, 
enacted on June 25, 2010) specifies that the term in section 1886(a)(4) 
of the Act, ``other services related to the admission'', includes ``all 
services that are not diagnostic services (other than ambulance and 
maintenance renal dialysis services) for which payment may be made 
under this title [Title XVIII] that are provided by a hospital (or an 
entity wholly owned or wholly operated by the hospital) to a patient--
(A) on the date of the patient's inpatient admission; or (B) during the 
3 days (or, in the case of a hospital that is not a subsection (d) 
hospital, during the 1 day) immediately preceding the date of admission 
unless the hospital demonstrates (in a form and manner, and at a time, 
specified by the Secretary) that such services are not related (as 
determined by the Secretary) to such admission.'' Public Law 111-192 
makes no changes to the existing policy regarding billing for 
diagnostic services.
    Under the 3-day (or 1-day) payment window policy, all outpatient 
diagnostic services furnished to a Medicare beneficiary by a hospital 
(or an entity wholly owned or operated by the hospital), on the date of 
a beneficiary's admission or during the 3 days (1 day for a non-
subsection (d) hospital) immediately preceding the date of a 
beneficiary's inpatient hospital admission, must be included on the 
Part A bill for the beneficiary's inpatient stay at the hospital. All 
outpatient nondiagnostic services provided by the hospital (or an 
entity wholly owned or wholly operated) on the date of the inpatient 
admission or during the 3 days (1 day for a non-subsection (d) 
hospital) immediately preceding the date of a beneficiary's inpatient 
hospital admission are deemed related to the admission and must be 
billed with the inpatient stay unless the hospital attests that 
specific nondiagnostic services are unrelated to the hospital claim.
    Further, section 102(c) of Public Law 111-192 prohibits the 
reopening of a claim, adjusting a claim, or making payments pursuant to 
any request for payment under Title XVIII, submitted by an entity 
(including a hospital or an entity wholly owned or operated by the 
hospital), for services (as described in section 102(c)(2) of Pub. L. 
111-192), for purposes of treating, as unrelated to a patient's 
inpatient admission, services provided during the 3 days (or, in the 
case of a hospital that is not a subsection (d) hospital, during the 1 
day) immediately preceding the date of the patient's inpatient 
admission. Services described in section 102(c)(2) of Public Law 111-
192 are other services related to the admission which were previously 
included on a claim or request for payment submitted under Part A of 
Title XVIII for which a reopening, adjustment, or request for payment 
under Part B of Title XVIII, was not submitted prior to June 25, 2010 
for purposes of treating, as unrelated to a patient's inpatient 
admission.
    In an interim final rule with comment period issued in the Federal 
Register on August 16, 2010 (75 FR 50346 through 50349), we discussed 
and made changes to the Medicare regulations pertaining to the 3-day 
payment (or, if applicable, 1-day) window policy in order to comport 
with the requirements of section 102 of Pub. L. 111-192. We refer 
readers to that interim final rule with comment period for further 
information about the 3-day (or, if applicable, 1-day) payment window 
policy. We had received public comments on the August 16, 2010 interim 
final rule with comment period, and we indicated in the FY 2012 IPPS/
LTCH PPS proposed rule that we planned to address these public comments 
as well as any public comments we may receive on the proposals in the 
proposed rule in this FY 2012 IPPS/LTCH PPS final rule.
    Comment: One commenter supported the statutory and regulatory 
changes made to the 3-day payment window provision. One commenter asked 
for clarification of the timeframe for submitting claims based on the 
requirements of section 102(c) of Public Law 111-192. The commenter's 
understanding is that a hospital must have identified any unrelated 
nondiagnostic services for which it wished to bill separately on an 
outpatient claim for services provided prior to June 25, 2010, and 
cannot file an adjustment claim now to unbundle any such services from 
the inpatient admission if it did not originally do so prior to June 
25, 2010. The commenter's assumption is that providers can file an 
adjustment claim for services that have been billed since June 25, 
2010. The commenter suggested that CMS make a simple statement to that 
effect so it is unambiguous to providers that this statutory provision 
only applies to services provided prior to June 25, 2010.
    Response: Section 102(c) of Public Law 111-192 prohibits us from 
reopening a claim, adjusting a claim, or making payment pursuant to any 
request for payment, submitted for other services related to the 
admission, which were previously included on a claim or request for 
payment for which a reopening, adjustment, or request for payment under 
Part B was not submitted prior to June 25, 2010. Hospitals may bill 
Medicare separately for outpatient nondiagnostic services furnished 
prior to June 25, 2010, provided that: (1) The services are not related 
to an inpatient stay (the determination of ``related'' for services 
furnished prior to June 25, 2010 is based on guidance published in the 
Federal Register on February 11, 1998 (63 FR 6866)); (2) such services 
were not previously included on a Medicare claim; and (3) the claim 
meets all applicable filing deadlines.
    Section 102(c) of Public Law 111-192 does not preclude a provider 
from submitting a new Medicare Part B claim and a Part A adjustment 
claim for the purpose of unbundling outpatient services that the 
provider believes were improperly bundled with an inpatient claim, in 
circumstances where all of the following conditions are met: (a) The 
outpatient services were furnished to a beneficiary on or after June 
25, 2010; (b) the outpatient services were not provided on the same 
calendar day as a beneficiary's inpatient admission; (c) the outpatient 
services were nondiagnostic; (d) the provider attests that the 
outpatient services were clinically unrelated to the beneficiary's 
inpatient admission and such claim is supported by documentation in the 
patient's medical record; and (e) the claim meets all applicable filing 
deadlines.
    Comment: Some commenters urged CMS to consider providing guidance 
as to how providers may establish policies and procedures for 
identifying nondiagnostic services that are unrelated to the admission, 
and what those policies and procedures should consider in making this 
determination. One of the commenters recognized that CMS looks to 
hospitals to make this determination, but given the volume of questions 
about the payment window policy for Medicare both prior to and since 
the statutory change, the commenter stated that it seems many hospitals 
remain confused about how to make that determination.
    Some commenters requested that CMS clearly define ``clinically

[[Page 51707]]

associated'' outpatient nondiagnostic services in the Medicare Claims 
Processing Manual to avoid further confusion in the hospital community 
regarding what constitutes unrelated outpatient nondiagnostic services. 
According to one of the commenters, lack of a clear definition of 
clinically associated services could cause confusion and more 
complications under post-review audits.
    One commenter supported the continued use of an exact match (for 
all digits) between the ICD-9-CM principal diagnosis code assigned for 
both the preadmission services and the inpatient stay to identify 
services that are clinically associated with the admission. Another 
commenter did not support using ICD-9-CM codes to define what is 
related and what is not related and suggested that all continuous 
services are by definition related services.
    According to one of the commenters, it will be substantially 
difficult for billing systems to present an opportunity for the 
hospital to determine when to unbundle such services in any reasonable 
way short of holding claims from being generated and submitted for what 
may amount to a very large number of inpatient claims, and this may 
serve to slow down the billing process for those claims. The commenter 
contended that most billing systems for hospital services have 
capabilities to define bundling rules for diagnostic services that 
should always be bundled into the inpatient admission for billing 
purposes. However, for bundling of nondiagnostic services (or for 
unbundling), the commenter believed that a manual process was necessary 
so that hospitals would not make perfunctory decisions regarding when 
to bundle or not bundle. The commenter was concerned that this could 
lead to hospitals always making the determination to bundle to save the 
administrative time, effort, and cost to unbundle or to define rules to 
always unbundle particular nondiagnostic services without assuring that 
they should truly be unbundled.
    Response: In accordance with section 1886(a)(4) of the Act, 
outpatient nondiagnostic services furnished within the 3-day (or, if 
applicable, 1-day) window that are related to an inpatient admission 
must be bundled with the billing of the inpatient stay. An outpatient 
nondiagnostic service is related to the admission if it is clinically 
associated with the reason for a patient's inpatient admission. As we 
discussed above and in the interim final rule with comment period 
issued in the Federal Register on August 16, 2010 (75 FR 50346 through 
50349), section 102 of Public Law 111-192 broadened the definition of 
related outpatient nondiagnostic services. Adopting the definition that 
CMS had prior to June 25, 2010, for related nondiagnostic services, as 
suggested by one of the commenters (that is, there would need to be an 
exact match (all 5 digits) between the principal diagnosis code 
assigned for both the preadmission services and the inpatient stay) 
would be too narrow and would impermissibly limit the number and scope 
of outpatient nondiagnostic services that are clinically related to the 
admission and should be bundled with the inpatient stay payment.
    In response to the commenter who requested that all continuous 
services (for example, inpatient admission through the emergency 
department, hospitalization for complications after outpatient surgery, 
among others) be considered related services and be included in the 
inpatient stay, we believe that may result in services being bundled in 
the inpatient stay that are not related to the admission. However, we 
will take these comments into consideration as we develop updates to 
the Medicare instructions in the future.
    Comment: One commenter urged CMS to delay the effective date of 
this policy to April 1, 2011, because--
    (1) Hospitals did not have a policy in place on June 25, 2010, and 
have not programmed their billing systems to accommodate this policy 
retroactively. According to the commenter, to ask hospitals to 
retroactively implement this policy presents a major burden with regard 
to system changes, as well as claims rebilling and/or adjusting; and
    (2) The creation of the condition code or modifier is administered 
through the National Uniform Billing Committee and should follow that 
body's guidelines that state approved changes are usually effective 
April 1, October 1, or about 90 days after approval, as appropriate.
    Response: Section 102(a) of Public Law 111-192 pertains to the 3-
day (or 1-day) payment window and was effective for services furnished 
on or after the date of enactment, June 25, 2010. CMS does not have the 
authority to delay the enactment of this law.
    Comment: Some commenters were concerned that hospitals have not 
historically included the diagnosis and procedures codes from the 
outpatient services on the inpatient claim, only the charges. The 
commenters were concerned that inclusion of the diagnosis codes from 
the outpatient claim could impact the MS-DRG assignment as well as have 
health statistic and quality reporting implications.
    The commenters also were concerned with the administrative burden 
of having to recode the outpatient procedures from CPT-4 codes, which 
are reported in the outpatient setting, to ICD-9-CM codes, which are 
reported in the inpatient setting. The commenters also raised questions 
regarding the type of documentation that will be required to support 
adding the code to an inpatient claim.
    Response: As we specified in a memorandum to hospitals explaining 
the policy changes pertaining to nondiagnostic services subject to the 
payment window (dated August 9, 2010 and distributed to hospitals 
through the fiscal intermediaries/MACs), hospitals must include on a 
Medicare claim for a beneficiary's inpatient stay the diagnoses, 
procedures, and charges for all preadmission outpatient diagnostic 
services and all admission-related preadmission outpatient 
nondiagnostic services. We note that, in combining on the inpatient 
bill the diagnoses, procedures, and charges for the outpatient 
services, a hospital must convert CPT-4 codes to ICD-9-CM codes and 
include outpatient diagnostic and admission-related nondiagnostic 
services that span the period of the payment window. We are aware that 
the inclusion of some diagnosis codes reported on the outpatient claim 
that are bundled into the inpatient stay may affect the MS-DRG 
assignment. Also, the inclusion of an outpatient surgical procedure 
that is converted from CPT-4 coding to ICD-9-CM coding for inpatient 
reporting may affect the MS-DRG assignment of the inpatient claim. The 
law requires that preadmission diagnostic services and related 
nondiagnostic services be included on the claim for the inpatient 
admission. Therefore, in some cases, including such services on the 
inpatient claim may affect the MS-DRG assignment and, when 
appropriately included, is permissible.
    The process of bundling claims has remained unchanged. That is, the 
bundling of claims incorporates transferring all the information 
reported in the outpatient encounter, such as the diagnosis and 
procedure codes as well as the charges, to the inpatient setting. We 
are aware that there are separate ICD-9-CM Coding Guidelines for the 
inpatient setting and the outpatient setting. Appropriate guidelines 
should be followed at the time of coding based on the setting of the 
encounter. We note that the bundling rules for the 3-day (1-day) 
payment window policy do not affect the Coding Guidelines for

[[Page 51708]]

inpatient and outpatient settings. In response to the commenter's 
request for guidance on the type of documentation that would be 
required to support adding the code to an inpatient claim, the guidance 
would be the same for reporting any diagnosis on a claim. If there is 
documentation in the patient's medical record that confirms that the 
condition or diagnosis is present, that diagnosis should be reported.
2. Condition Code 51 (Attestation of Unrelated Outpatient Nondiagnostic 
Services)
    As we stated in the August 16, 2010 interim final rule with comment 
period (75 FR 50348), we intend to establish a process for hospitals to 
attest to nondiagnostic services as being unrelated to the hospital 
claim when a hospital submits an outpatient claim. As part of the 
process, hospitals would be required to maintain documentation in the 
beneficiary's medical record to support their claim that the outpatient 
nondiagnostic services are unrelated to the beneficiary's inpatient 
admission.
    The National Uniform Billing Committee (NUBC) is a committee 
established by the American Hospital Association and includes the 
participation of all the major national provider and payer 
organizations. The NUBC was formed to develop a single billing form and 
standard data set that could be used nationwide by institutional 
providers and payers for handling health care claims. The NUBC has 
provided a mechanism through the establishment of a condition code for 
a hospital to attest directly on the outpatient claim to specific 
nondiagnostic services as being clinically unrelated to an inpatient 
hospital claim (that is, the preadmission diagnostic services are 
clinically distinct or independent from the reason for the 
beneficiary's inpatient admission). As of April 1, 2011, a hospital 
must add condition code 51 on claims for separately billed outpatient 
nondiagnostic services furnished on or after June 25, 2010 (the date of 
enactment of Public Law 111-192) if the hospital wishes to attest to 
nondiagnostic services as being unrelated to the inpatient hospital 
claim. We issued a manual system revision through Change Request 
7142, Transmittal 796, on October 29, 2010, instructing CMS 
contractors to accept condition code 51 on outpatient claims.
    Comment: One commenter supported the use of a condition code but 
believed that the use of a condition code alone should be sufficient to 
signify that unrelated outpatient services billed on a separate 
outpatient claim are distinct from the inpatient services. The 
commenter discouraged CMS from requiring hospitals to maintain 
documentation in the beneficiary's medical record to support their 
claim that the outpatient services are related.
    Another commenter disagreed with the proposal to implement an 
attestation process. The commenters stated that it would require 
additional administrative effort by hospital staff that does not seem 
necessary, as claims are required to be filed correctly under the law. 
According to the commenter, if an attestation is required, the 
attestation process should be easy to follow and clearly defined.
    One commenter was concerned about the ease with which hospitals 
could apply a condition code and that unwarranted unbundling could 
still occur, depending on how the standard is defined for nondiagnostic 
related services.
    Response: The implementation of condition code 51, effective April 
1, 2011, provides a process for hospitals to attest to nondiagnostic 
services as being unrelated to the inpatient hospital claim when a 
hospital submits an outpatient claim. However, upon review, the 
hospital must be able to document that the services are unrelated based 
on information in the patient's medical record. As we stated in the 
interim final rule with comment period issued in the Federal Register 
on August 16, 2010 (75 FR 50348), hospitals have experience with making 
similar attestations on the outpatient or inpatient claim.
3. Applicability of the Payment Window Policy to Services Furnished at 
Physicians' Practices
    We have received several inquiries regarding the applicability of 
the payment window to preadmission services furnished at hospital-owned 
or hospital-operated physicians' clinics or practices. The statutory 
language under section 1886(a)(4) of the Act is clear that the 3-day 
(or, where applicable, 1-day) payment window policy applies not only to 
diagnostic and related nondiagnostic services furnished to patients at 
hospitals, but also to those services furnished at entities that are 
wholly owned or operated by the admitting hospital. In a 1998 final 
rule on payment for preadmission services (63 FR 6866), we stated, ``A 
hospital-owned or hospital-operated physician clinic or practice is 
subject to the payment window provision. The technical portion of 
preadmission diagnostic services performed by the physician clinic or 
practice must be included on the inpatient bill and may not be billed 
separately. A physician's professional service is not subject to the 
window.'' Thus, we made clear that the term ``entities'' under this 
section of the statute includes physicians' clinics or practices. 
Although the 1998 rule provides specific guidance regarding billing for 
preadmission diagnostic services furnished at hospital-owned or 
hospital-operated physician's practices, we had issued no guidelines 
regarding billing for preadmission nondiagnostic services provided by a 
hospital-owned or hospital-operated physician's practice.
    Prior to the June 25, 2010 enactment of section 102(a)(1) of Public 
Law 111-192, the payment window policy for preadmission nondiagnostic 
services was rarely applicable because the policy required an exact 
match between the principal ICD-9 CM diagnosis codes for the outpatient 
services and the inpatient admission. Because of the exact match 
policy, very few services furnished in a physician's office or clinic 
that is wholly owned or operated by the hospital would have been be 
subject to the policy. However, the change to the payment window policy 
made by Public Law 111-192 broadened the definition of nondiagnostic 
services that are subject to the payment window to include any 
nondiagnostic service that is clinically related to the inpatient 
admission, regardless of whether the inpatient and outpatient diagnoses 
are the same. As a result, this statutory change broadens the 
applicability of the payment window policy in hospital-owned or 
hospital-operated physician offices or clinics (that is, clinics that 
are not provider-based but are wholly owned or operated by the 
hospital). We note that, under the amended statute, in order to be able 
to bill separately for nondiagnostic preadmission services that fall 
within the payment window, hospitals and hospital-owned or hospital-
operated entities must now attest that the services are not related to 
an admission by using condition code 51 (Attestation of Unrelated 
Outpatient Nondiagnostic Services) when billing for the services.
    In response to ongoing requests to clarify the applicability of the 
payment window policy to preadmission nondiagnostic services provided 
in hospital-owned or hospital-operated physicians' offices or clinics, 
as we did in the proposed rule, we are clarifying that the 3-day (or, 
where applicable, 1-day) payment window policy applies to both 
preadmission diagnostic and nondiagnostic services furnished to a 
patient at physician's practices that are wholly owned or wholly 
operated by the admitting hospital. For purposes of the payment window, 
``wholly owned

[[Page 51709]]

or operated'' means that the admitting hospital must be the sole owner 
or the sole operator of the entity providing the preadmission services. 
A hospital is considered the sole operator of an entity if the hospital 
has exclusive responsibility for conducting or overseeing the entity's 
routine operations, regardless of whether the hospital also has 
policymaking authority over the entity (we refer readers to the 
regulations at 42 CFR 412.2(c)(5)(i) and to discussions and examples of 
wholly owned or operated scenarios in rules issued in the Federal 
Register on January 12, 1994 (59 FR 1656) and February 11, 1998 (63 FR 
6865 through 6867)).
    In the circumstance in which a clinic or a physician office that is 
not provider-based meets the definition of being wholly owned or wholly 
operated by the hospital and the 3-day (or, if applicable, 1-day) 
payment window applies to related nondiagnostic preadmission services, 
the overhead costs associated with those services would be considered 
operating costs of inpatient hospital services and, as such, included 
in the hospital's bill for the inpatient service. As explained more 
fully in the CY 2012 Medicare Physician Fee Schedule proposed rule (76 
FR 42915), we have proposed that Medicare's payment to the physician 
for the physician fee schedule service would be at the lower facility 
rate, which does not include overhead, staff, equipment, and supplies 
required to perform the service in the physician's office (rather than 
the higher nonfacility rate that does include those overhead costs) in 
order to avoid duplicate payment for the services under both the IPPS 
and the Medicare Physician Fee Schedule.
    Under 42 CFR 414.22(b)(5)(i), Medicare pays physicians using the 
nonfacility relative value units when services are provided in a 
physician's office and bases physician payment on the facility relative 
value units when the physician provides services in a facility, 
including hospitals, skilled nursing facilities, community mental 
health centers, and ambulatory surgical centers. Because a hospital-
owned or hospital-operated physician practice or clinic that is not 
provider-based is a nonfacility setting, we have proposed in the CY 
2012 Medicare Physician Fee Schedule proposed rule (76 FR 42915) to 
change the regulation to reflect the proposal to pay for a service 
provided in a nonfacility setting at the facility rate in order to 
comply with section 102(a) of Public Law 111-192. We indicated in the 
IPPS proposed rule that we intended to discuss such a proposal in more 
detail in a future physician fee schedule proposed rule and address how 
this statutory provision will be implemented in physicians' offices 
that are wholly owned or wholly operated by the hospital. In all 
circumstances, we would expect that, in the case of a physician 
practice that is wholly owned or wholly operated by the hospital, the 
hospital would inform the physician offices and clinics when an 
inpatient admission occurs.
    Comment: One commenter stated that it may be difficult to track 
activity between hospital-owned practices and the hospital that owns 
the practices.
    Response: Due to the fact that the hospital owns the facility, it 
is our expectation that the hospital will be able to coordinate and 
track the patient activity of the facilities it owns. The full adoption 
of electronic medical record should help facilitate coordination and 
tracking of patients within and among hospital systems.
    We received a few public comments regarding the applicability of 
the payment window policy to services furnished at physicians' 
practices that are wholly owned or wholly operated by the hospital. We 
stated in the FY 2012 IPPS/LTCH PPS proposed rule that CMS would 
address the payment window policy as it impacts physician billing in 
the CY 2012 Medicare Physician Fee Schedule proposed rule. Therefore, 
those comments are not within the scope of this IPPS/LTCH final rule. 
The CY 2012 Medicare Physician Fee Schedule proposed rule (CMS-1524-P) 
appeared in the Federal Register on July 19, 2011. The deadline for 
submitting public comments on that proposed rule is August 30, 2011. 
Instructions for submitting public comments on that proposed rule are 
included in the proposed rule (76 FR 42772).

P. Changes to MS-DRGs Subject to the Postacute Care Transfer Policy

1. Background
    Existing regulations at Sec.  412.4(a) define discharges under the 
IPPS as situations in which a patient is formally released from an 
acute care hospital or dies in the hospital. Section 412.4(b) defines 
acute care transfers, and Sec.  412.4(c) defines postacute care 
transfers. Our policy, set forth in Sec.  412.4(f), provides that when 
a patient is transferred and his or her length of stay is less than the 
geometric mean length of stay for the MS-DRG to which the case is 
assigned, the transferring hospital is generally paid based on a 
graduated per diem rate for each day of stay, not to exceed the full 
MS-DRG payment that would have been made if the patient had been 
discharged without being transferred.
    The per diem rate paid to a transferring hospital is calculated by 
dividing the full DRG payment by the geometric mean length of stay for 
the MS-DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 45804), our policy 
generally provides for payment that is double the per diem amount for 
the first day, with each subsequent day paid at the per diem amount up 
to the full MS-DRG payment (Sec.  412.4(f)(1)). Transfer cases are also 
eligible for outlier payments. In general, the outlier threshold for 
transfer cases, as described in Sec.  412.80(b), is equal to the fixed-
loss outlier threshold for nontransfer cases (adjusted for geographic 
variations in costs), divided by the geometric mean length of stay for 
the MS-DRG, and multiplied by the length of stay for the case, plus one 
day.
    We established the criteria set forth in Sec.  412.4 for 
determining which DRGs qualify for postacute care transfer payments in 
the FY 2006 IPPS final rule (70 FR 47419 through 47420). The 
determination of whether a DRG is subject to the postacute care 
transfer policy was initially based on the Medicare Version 23.0 
GROUPER (FY 2006) and data from the FY 2004 MedPAR file. However, if a 
DRG did not exist in Version 23.0 or a DRG included in Version 23.0 is 
revised, we use the current version of the Medicare GROUPER and the 
most recent complete year of MedPAR data to determine if the DRG is 
subject to the postacute care transfer policy. Specifically, if the 
DRG's total number of discharges and proportion of short-stay 
discharges to postacute care exceed the 55th percentile for all DRGs, 
CMS will apply the postacute care transfer policy to that DRG and to 
any other MS-DRG that shares the same base DRG. In the preamble to the 
FY 2006 final rule (70 FR 47419), we stated that ``we will not revise 
the list of DRGs subject to the postacute care transfer policy annually 
unless we are making a change to a specific DRG.''
    To account for MS-DRGs subject to the postacute care policy that 
exhibit exceptionally higher shares of costs very early in the hospital 
stay, Sec.  412.4(f) also includes special payment methodology. For 
these MS-DRGs, hospitals receive 50 percent of the full MS-DRG payment, 
plus the single per diem payment, for the first day of the stay, as 
well as a reduced per diem payment for subsequent days (up to the full 
MS-DRG payment (Sec.  412.4(f)(6)). For an MS-DRG to qualify for the 
special payment methodology, the geometric mean

[[Page 51710]]

length of stay must be greater than 4 days, and the average charges of 
1-day discharge cases in the MS-DRG must be at least 50 percent of the 
average charges for all cases within the MS-DRG. DRGs that are part of 
an MS-DRG group must meet DRG special payment policy if any one of the 
MS-DRGs that share that same base MS-DRG qualifies (Sec.  412.4(f)(6)).
2. Changes to the Postacute Care Transfer MS-DRGs
    Based on our annual review of MS-DRGs, we have identified a number 
of MS-DRGs that should be included on the list of MS-DRGs subject to 
the postacute care transfer policy. As we discussed in section III.G. 
of the proposed rule, in response to public comments and based on our 
analysis of FY 2010 MedPAR claims data, in the FY 2012 IPPS/LTCH PPS 
proposed rule, we proposed to make several changes to MS-DRGs to better 
capture certain severity of illness levels, to be effective for FY 
2012. Specifically, we proposed to modify the assignment of the 
autologous bone marrow transplants now assigned to MS-DRG 015 
(Autologous Bone Marrow Transplant) to capture the severity levels of 
``with CC/MCC'' and ``without CC/MCC.'' We proposed to establish two 
new MS-DRGs (proposed MS-DRGs 016 and 017 (Autologous Bone Marrow 
Transplant with MCC/CC and without MCC/CC, respectively) to replace MS-
DRG 015. We also proposed to establish three new MS-DRGs to capture 
three severity of illness levels for skin debridement--proposed MS-DRG 
570 (Skin Debridement with MCC); proposed MS-DRG 571 (Skin Debridement 
with CC); and proposed MS-DRG 572 (Skin Debridement without CC/MCC). In 
addition, we proposed to move the codes for rechargeable dual array 
deep brain stimulation (codes 02.93 and 86.98) to MS-DRGs 023 and 024 
(Craniotomy with Major Device Implant/Acute Complex CNS PDX, with MCC 
and without MCC, respectively) where similar devices are currently 
assigned. We proposed to move two procedure codes that either repair a 
thoracic aneurysm or place a stent graft (codes 38.45 and 39.73) out of 
MS-DRG 237 and 238 (Major Cardiovascular Procedures with MCC or 
Thoracic Aortic Aneurysm Repair, and Major Cardiovascular Procedures 
with MCC and without MCC, respectively). We proposed to assign these 
two codes to MS-DRGs 219, 220, and 221 (Cardiac Valve & Other Major 
Cardiothoracic Procedure without Cardiac Catheterization with MCC, with 
CC, and without CC, respectively). We proposed to add a procedure code 
for partial gastrectomy (43.89) to MS-DRGs 619, 620, and 621 (O.R. 
Procedure for Obesity with MCC, with CC, and without CC/MCC, 
respectively). A discussion of these proposed changes and our final 
changes can be found in section II.G. of the preamble of the final 
rule.
    In light of the proposed changes to the MS-DRGs, according to the 
regulations under Sec.  412.4(c), we evaluated these proposed FY 2012 
MS-DRGs against the general postacute care transfer policy criteria 
using the FY 2010 MedPAR data. If an MS-DRG qualified for the postacute 
care transfer policy, we also evaluated that MS-DRG under the special 
payment methodology criteria according to regulations at Sec.  
412.4(f)(6). As a result of our review, we proposed to update the list 
of MS-DRGs that are subject to the postacute care transfer policy to 
include the proposed new MS-DRGs 570, 571, and 572 for FY 2012. (These 
MS-DRGs were reflected in Table 5, which was listed in section VI. of 
the Addendum to the proposed rule and available via the Internet, and 
were also listed in the tables at the end of this section.)
    In addition, based on our evaluation of the proposed FY 2012 MS-
DRGs using the FY 2010 Med PAR data, we identified the following two 
existing MS-DRGs that meet the criteria to be subject to the postacute 
care transfer policy for FY 2012: MS-DRGs 023 (Craniotomy with Major 
Device Implant or Acute Complex CNS PDX with MCC) and MS-DRG 024 
(Craniotomy with Major Device Implant or Acute Complex CNS PDX without 
MCC). We proposed to add these two MS-DRGs to the list of MS-DRGs that 
are subject to the postacute care transfer policy for FY 2012. The 
following table lists the respective criteria for each MS-DRG that we 
proposed to add to the postacute care transfer policy list.
    Further, based on our evaluation of the proposed FY 2012 MS-DRGs 
using the FY 2010 Med PAR data, we determined that MS-DRGs 228 (Other 
Cardiothoracic Procedures with MCC), 229 (Other Cardiothoracic 
Procedures with CC), 230 (Other Cardiothoracic Procedures without CC/
MCC), 640 (Miscellaneous Disorders of Nutrition, Metabolism, Fluids/
Electrolytes with MCC), and 641 (Miscellaneous Disorders of Nutrition, 
Metabolism, Fluids/Electrolytes without MCC) no longer meet the 
postacute care transfer criteria. Therefore, we proposed that they be 
removed from the list of DRGs subjected to the postacute care transfer 
policy, effective FY 2012.
    Finally, we determined that MS-DRGs 216 (Cardiac Valve & Other 
Major Cardiothoracic Procedure with Cardiac Catheterization with MCC), 
217 (Cardiac Valve & Other Major Cardiothoracic Procedure with Cardiac 
Catheterization with CC), and 218 (Cardiac Valve & Other Major 
Cardiothoracic Procedure without CC/MCC) meet the criteria for the 
special payment methodology. Therefore, we proposed that they would be 
subject to the DRG special payment methodology, effective FY 2012.
    Comment: Several commenters supported the proposed changes to the 
lists of MS-DRGs subject to the postacute care transfer and special 
payment policy. Commenters also requested that CMS expand its analysis 
to remove additional MS-DRGs that no longer meet the postacute care 
transfer policy criteria and to add MS-DRGs that currently meet special 
payment policy criteria.
    Response: As stated in the FY 2006 final rule (70 FR 47419), CMS 
determined that an annual review of all DRGs ``would likely lead to 
great volatility in the payment methodology of certain DRGs''. 
Therefore, it is our policy to not conduct an annual review of MS-DRGs 
unless we have proposed to make changes to specific MS-DRGs. We note 
that, during this rulemaking process, we reviewed additional MS-DRGs 
for which we were proposing changes to determine whether they meet the 
postacute care transfer or special payment policy criteria (MS-DRGs 
(16, 17, 219, 220, 221, 237, 238, 250, 251, 573, 574, 575, 576, 577, 
578, 619, 620, and 621). However, in the proposed rule, we only 
discussed the MS-DRGs that were proposed to be newly added to, or 
removed from, the postacute care transfer or special payment policy, as 
listed on Table 5. Following issuance of the proposed rule, we 
conducted an additional review of MS-DRGs for purposes of finalizing 
the postacute care transfer and special payment status policy 
modifications, and that review confirmed that these previously reviewed 
MS-DRGs do not require any further changes in postacute care transfer 
or special payment status.
    During this review, we determined that MS-DRGs 640 (Miscellaneous 
Disorders of Nutrition, Metabolism, Fluids/Electrolytes with MCC) and 
641 (Miscellaneous Disorders of Nutrition, Metabolism, Fluids/
Electrolytes without MCC) were inadvertently listed as MS-DRGs for 
which significant GROUPER logic changes were being proposed. The 
changes to these MS-DRGs were determined to be descriptive title 
changes only and not material logic changes. Therefore, considering 
whether

[[Page 51711]]

to change the postacute care transfer and special payment policy status 
for these MS-DRGs was a technical error. Therefore, we are not 
finalizing our proposed changes for these two MS-DRGs. The remaining 
proposed changes to the postacute care transfer and special payment 
policy lists are being finalized as proposed and are summarized in the 
following tables. We refer readers to the bolded text in the first 
table to see which criteria were not met in our analysis for each MS-
DRG removed from the postacute care transfer policy list. Table 5, 
which is listed in section VI. of the Addendum to this final rule and 
available through the Internet on the CMS Web site, lists all MS-DRGs 
for FY 2012 and specifies whether or not they are subject to the 
postacute care transfer policy and the special payment policy. For FY 
2012, there are a total of 275 MS-DRGs subject to the postacute care 
transfer policy, and 30 MS-DRGs meet the special payment policy 
criterion.

                    List of MS-DRGs Changing Postacute Care Transfer Policy Status in FY 2012
----------------------------------------------------------------------------------------------------------------
                                                                                  Percent of
                                                                                  short-stay
                                                       Postacute                   postacute
                                                         care       Short-stay       care        Postacute care
      MS-DRG           MS-DRG Title     Total cases    transfers     postacute   transfers to   transfer policy
                                                         (55th         care        all cases         status
                                                      percentile:    transfers       (55th
                                                        1,596)                    percentile:
                                                                                   8.0037%)
----------------------------------------------------------------------------------------------------------------
023...............  CRANIO W MAJOR            4,631         2,225           373          8.05  YES
                     DEV IMPL/ACUTE
                     COMPLEX CNS PDX
                     W MCC OR CHEMO
                     IMPLANT.
024...............  CRANIO W MAJOR            1,745        *1,000           161          9.23  YES**
                     DEV IMPL/ACUTE
                     COMPLEX CNS PDX
                     W/O MCC.
228...............  OTHER                     1,936        *1,223           456         23.55  NO
                     CARDIOTHORACIC
                     PROCEDURES W MCC.
229...............  OTHER                     2,395        *1,322           421         17.58  NO
                     CARDIOTHORACIC
                     PROCEDURES W CC.
230...............  OTHER                       640          *228            11         *1.72  NO
                     CARDIOTHORACIC
                     PROCEDURES W/O
                     CC/MCC.
570...............  SKIN DEBRIDEMENT          5,189         3,968         1,558         30.03  YES
                     W MCC.
571...............  SKIN DEBRIDEMENT          5,538         3,832         1,087         19.63  YES
                     W CC.
572...............  SKIN DEBRIDEMENT          2,539        *1,378           226          8.90  YES**
                     W/O CC/MCC.
----------------------------------------------------------------------------------------------------------------
* Indicates a current postacute care transfer policy criterion that the MS-DRG did not meet.
** As described in the policy at 42 CFR 412.4(d)(3)(ii)(D), MS-DRGs that share the same base MS-DRG shall all
  meet postacute care transfer policy if any one of the MS-DRGs that share that same base MS-DRG qualifies.

                      List of MS-DRGs Changing DRG Special Payment Policy Status in FY 2012
----------------------------------------------------------------------------------------------------------------
                                                                               50% of
                                                                 Average       average
                                                  Geometric    charges of    charges for  Special payment policy
         MS-DRG               MS-DRG Title       mean length      1-day       all cases           status
                                                   of stay     discharges    within MS-
                                                                                 DRG
----------------------------------------------------------------------------------------------------------------
216....................  CARDIAC VALVE & OTH      14.2497327      $164,838       125,398  YES
                          MAJ CARDIOTHORACIC
                          PROC W CARD CATH W
                          MCC.
217....................  CARDIAC VALVE & OTH     9.518336312       126,655        84,669  YES
                          MAJ CARDIOTHORACIC
                          PROC W CARD CATH W
                          CC.
218....................  CARDIAC VALVE & OTH     7.102572558             0             0  YES
                          MAJ CARDIOTHORACIC
                          PROC W CARD CATH W/O
                          CC/MCC.
----------------------------------------------------------------------------------------------------------------

Q. Hospital Services Furnished Under Arrangements

    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25964 and 25965), 
we stated that, for purposes of Medicare payment, section 1861(b) of 
the Act defines ``inpatient hospital services'' in part as ``* * * the 
following items and services furnished to an inpatient of a hospital 
and (except as provided in paragraph (3)) by the hospital: (1) Bed and 
board; (2) such nursing services and other related services, such use 
of hospital facilities, and such medical social services as are 
ordinarily furnished by the hospital for the care and treatment of 
inpatients * * *; and (3) such other diagnostic or therapeutic items or 
services, furnished by the hospital or by others under arrangements 
with them made by the hospital, as are ordinarily furnished to 
inpatients either by such hospital or by others under such 
arrangements.''
    We noted that the statute specifies that ``routine services,'' for 
example, bed, board, nursing and other related services, except those 
specified at paragraph (3) of section 1861(b) of the Act are to be 
provided by ``the hospital,'' and not just ``a hospital.'' Similarly, 
we noted that our implementing regulations at 42 CFR 409.12 indicate 
that Medicare pays for ``nursing and related services, use of hospital 
* * * facilities, and medical social services as * * * inpatient 
hospital services or inpatient CAH services . . . only if those 
services are ordinarily furnished by the hospital or CAH.'' We pointed 
out that, consistent with the statute, only with regard to other 
diagnostic or therapeutic services do the regulations at 42 CFR 409.16 
state that Medicare will also pay for these services if furnished ``by 
others under arrangements made by the hospital or CAH.''.
    Instructions at section 2118 (Cost of Services Furnished under 
Arrangement) of the Provider Reimbursement Manual, Part I (PRM-I), 
relating to payment for routine services, allow additional

[[Page 51712]]

services to be provided under arrangements. It had come to our 
attention that some providers in the hospital community have 
interpreted the provision relating to services provided ``under 
arrangement'' under section 2118 of the PRM-I to mean that even routine 
services described in sections 1861(b)(1) and (b)(2) of the Act, which 
are normally provided to hospital inpatients by the hospital, can be 
provided outside the hospital by an outside entity under arrangement.
    To the extent that our manual provisions could be read to allow 
hospitals to furnish such ``routine services'' ``under arrangement,'' 
we proposed a change to limit the services a hospital may provide under 
arrangement to reflect the statutory definition of ``inpatient hospital 
services'' and the implementing regulations. Under our proposed policy, 
if routine services, that is, services described in sections 1861(b)(1) 
and (b)(2) of the Act, are provided in the hospital, they are 
considered as being provided ``by the hospital .'' We stated that we 
believe that this proposal is consistent with the statute because the 
statutory language specifying that the routine services described in 
sections 1861(b)(1) and (b)(2) of the Act be provided ``by the 
hospital'' suggests that the hospital is required to exercise 
professional responsibility over the services, including quality 
controls. In situations in which certain routine services are provided 
through arrangement ``in the hospital,'' for example, contracted 
nursing services, we believe the arrangement generally results in the 
hospital exercising the same level of control over those services as 
the hospital does in situations in which the services are provided by 
the hospital's salaried employees.
    Therefore, if routine services are provided in the hospital to its 
inpatients, we consider the service as being provided by the hospital. 
However, if these services are provided to its patients outside the 
hospital, the services are considered as being provided under 
arrangement, and not by the hospital. Therefore, consistent with the 
statute, only therapeutic and diagnostic services can be provided under 
arrangement outside the hospital. We indicated that if we finalized 
this policy, we would change the provisions of section 2118 of the PRM-
I accordingly.
    We received numerous comments from the hospital provider community 
as well as several provider organizations. A few commenters had 
singular, limited comments; the majority of commenters presented 
arguments, similar in content, against adopting our proposed change to 
limit the services a hospital could provide under arrangement.
    Comment: Commenters argued that our proposal to limit the services 
a hospital may provide under arrangements is not required by the 
statute or regulations. Commenters also believed that CMS' proposed 
reading of the statutory definition of inpatient hospital services is 
only one possible interpretation of the statute. Furthermore, 
commenters stated that CMS' ``use of the definition of inpatient 
hospital services as the basis for its proposal may not be 
appropriate'' and concluded that, under our proposal, ``routine 
services, including ICU services, would not be considered to be 
inpatient hospital services,'' but that we did not state ``what such 
services would be if not inpatient hospital services * * *.''
    Response: In the proposed rule, we focused our discussion on 
section 1861(b) of the Act because it provides the statutory basis for 
our policy to limit the services that may be furnished under 
arrangement. As we noted in the proposed rule, the reference to 
diagnostic or therapeutic items or services in section 1861(b)(3) of 
the Act includes the language, ``[furnished by] * * * or by others 
under arrangements.'' Therefore, we believe it is consistent with the 
statutory language to limit the services that may be furnished outside 
of a hospital under arrangement to only diagnostic and therapeutic 
services.
    Our policy does not alter the definition of inpatient hospital 
services, but instead limits the services a hospital may provide under 
arrangements outside the hospital. Under our proposal, if a patient of 
Hospital A is in Hospital B receiving routine services, the patient 
will still be an ``inpatient,'' but the services will not be considered 
``inpatient hospital services'' furnished by the hospital for purposes 
of payment for services defined under section 1861(b) of the Act. If 
the patient is admitted to Hospital B, then the patient would be an 
``inpatient'' of Hospital B and the routine services furnished to that 
individual would meet the definition of ``inpatient routine services'' 
under section 1861(b) of the Act.
    Comment: Commenters wrote that there are ``specific statutory 
provisions * * * that would allow hospitals to use the type of 
arrangements CMS is proposing to prohibit,'' and argued that, ``CMS's 
reliance on the tangentially-related hospital inpatient services 
definition as the basis for its proposal seems to be an end-run around 
them.'' Section 1862(a)(14) of the Act was cited as specific statutory 
authority that allows hospitals to furnish all categories of inpatient 
hospital services under arrangement. Commenters noted that this 
provision does not limit the type of entity that may furnish services 
under arrangement nor specify what services may be provided under 
arrangement.
    Response: We disagree with this position. Section 1862(a)(14) of 
the Act states, in part, that payment under Part A or Part B may not be 
made for certain services ``furnished to an individual who is a patient 
of a hospital or critical access hospital by an entity other than the 
hospital or critical access hospital, unless the services are furnished 
under arrangements * * * with the entity made by the hospital or CAH.'' 
Although we agree with the commenters that the language of section 
1862(a)(14) of the Act does not place restrictions on what services may 
be provided under arrangement, it does not specifically authorize the 
furnishing of routine services to be provided under arrangement, nor 
does it conflict with the interpretation of section 1861(b) of the Act 
set forth in the proposed rule. Instead, when read in conjunction with 
section 1861(b) of the Act, as interpreted in our proposal, the 
language ``furnished under arrangements'' in section 1862(a)(14) of the 
Act is limited to only those services that may be furnished under 
arrangement consistent with our proposed policy.
    Comment: Commenters discussed a decision of the Provider 
Reimbursement Review Board (PRRB) in which pulmonary intensive care 
services were furnished under arrangements to patients of one hospital 
by another hospital located across the street (University of Missouri 
Med. Ctr. v. BCBSA, PRRB Dec. No. 79-D82, Medicare & Medicaid Guide 
(CCH) 30, 317 (Nov. 28, 1979)). The PRRB found that ``routine inpatient 
services provided under arrangement * * * are allowable costs and are 
incorporated in the provider's costs of routine services.'' The PRRB 
also found that the services were properly furnished under 
arrangements. Commenters noted that the CMS Administrator did not 
modify or reverse this decision, and thereby, it was the final decision 
of the Secretary.
    Response: We recognize that certain routine services have 
previously been provided under arrangements, and we are now changing 
this policy to preclude a hospital from furnishing routine services 
under arrangements with another entity unless the services are provided 
in the hospital in which the patient has been admitted as an

[[Page 51713]]

inpatient. We note that the date of this PRRB decision was November 28, 
1979. This was 3 years prior to the statutory payment provisions 
included in the Tax Equity and Fiscal Responsibility Act (TEFRA) of 
1982, which sets Medicare payment based on reasonable costs subject to 
a ceiling, and 4 years prior to implementation of the IPPS. We point 
out that both hospitals involved in the PRRB case were paid under the 
same Medicare payment provisions at that time, that is, routine cost 
limits.
    As discussed in greater detail below, we have decided to change 
this policy because we are concerned that similar arrangements between 
entities that are not paid under the same Medicare payment provisions--
for example, arrangements between IPPS hospitals and hospitals excluded 
from the IPPS--have resulted in hospitals receiving payments for 
services based on payment provisions that do not ordinarily apply to 
that facility.
    Comment: One commenter cautioned that CMS should recognize that 
there are regulations that allow hospitals-within-hospitals (HwHs) to 
obtain other services through contract or other agreements. The 
commenter specifically cites the requirement that a HwH ``performs the 
basic functions of [a hospital] through the use of employees or under 
contracts or other agreements with entities other than the hospital 
occupying space in the same building or on the same campus * * *'' This 
requirement further states that food and dietetic services, 
housekeeping, maintenance, among others, could be obtained under 
contracts or agreements with the co-located hospital. The commenter 
urged CMS to clarify that the proposed change will not impact a HwH's 
ability to obtain the necessary services that are allowed under the HwH 
requirements at 42 CFR 412.22.
    Response: We developed the HwH regulations to ensure, to the extent 
possible, that co-located hospitals (two hospitals occupying space in 
the same building or in one or more separate buildings located on the 
same campus) function as two separate entities, each having its own 
governing body, medical staff, chief medical officer, and chief 
executive officer. In addition, the HwH has to meet other criteria, 
including at least one of the criteria specified in Sec.  
412.22(e)(1)(v), regarding performance of basic hospital functions. 
Under the changes to our policy governing services furnished under 
arrangements that we are finalizing in this final rule, the services 
that can be furnished to the HwH under Sec.  412.22(e)(1)(v)(A) (food 
and dietetic services, housekeeping and maintenance, and other services 
necessary to maintain a clean and safe physical environment) by the 
host hospital or an entity that controls both hospitals could still be 
furnished at the hospital (the HwH) to that hospital's patients. 
Likewise, the provision at Sec.  412.22(e)(1)(v)(A) allowing specified 
basic functions to be performed at a HwH through the use of employees 
or under contracts or other arrangements with entities other than the 
co-located hospital, or through a third entity that controls both 
hospitals, would only apply where those routine services are furnished 
at the HwH. If, however, the HwH was moving its patients to another 
hospital to receive routine services under arrangements with that 
hospital, and maintaining that patient in hospital records as its own 
inpatient, it would not be allowed under the changes to the ``hospital 
services provided under arrangement'' that we are finalizing in this 
final rule.
    Comment: One commenter was concerned with what it characterized as 
CMS' lack of clarity about why it proposed this change. The commenter 
recommended that CMS not finalize the proposal until it provides a 
sufficient policy rationale for the proposal, or explains the 
circumstances that are causing CMS to be concerned.
    Response: As noted above, we became aware that some hospitals were 
furnishing certain routine services, including ICU services, under 
arrangement. For example, under certain arrangements, if an inpatient 
of an IPPS-excluded hospital (``hospital A'') required ICU services, 
and the IPPS-excluded hospital could not provide these services, the 
patient was moved to an IPPS hospital (``hospital B'') that could 
furnish the ICU services. In these situations, the patient was not 
transferred to hospital B but was moved from an inpatient bed of 
hospital A to an inpatient bed of hospital B. However, the IPPS-
excluded hospital treated these services as being provided under 
arrangement and included the cost of those services on its cost report. 
We find it problematic that the patient was, at all times, considered 
an inpatient of hospital A even though the patient occupied an 
inpatient bed at hospital B.
    Because the two hospitals in the example above are under two 
different payment systems, we believe this arrangement can result in 
inappropriate and potentially excessive Medicare payments. The IPPS-
excluded hospital, hospital A, is paid on a reasonable cost basis, 
subject to a ceiling. In most cases, this payment is greater than if 
the hospital were paid under the IPPS for the same patient. 
Furthermore, although there is a ceiling on the amount of Medicare 
payment for hospital A, there are also provisions that allow hospital A 
to receive adjustments to its ceiling in certain circumstances, which 
could allow payment to hospital A above those allowed by its ceiling. 
Therefore, these current arrangements could allow hospital A to request 
an adjustment to its ceiling because its ICU costs have increased 
beyond what is allowed. In that case, hospital A would receive 
additional payments beyond its ceiling. We believe that by limiting the 
furnishing of routine services under arrangements to situations in 
which the services are furnished in hospital A, we will reduce the 
opportunity for gaming. In these more limited situations, hospital A 
will exercise sufficient control over the use of hospital resources 
when furnishing these services such that the services are appropriately 
included in hospital A's cost report.
    Under our proposal, if hospital A did not have the resources to 
treat a patient, it would transfer the patient to hospital B for ICU 
services, and hospital B would bill Medicare consistent with the IPPS 
provisions. Hospital A would be paid for an inpatient discharge.
    Comment: Numerous commenters believed that CMS' primary goal in 
proposing to limit the kinds of services that can be provided under 
arrangement was to ensure that the hospital will exercise professional 
responsibility over the ``arranged for'' services. Commenters claimed 
that CMS had provided no evidence that the hospital furnishing the 
routine or ICU services cannot exercise the same responsibility. 
Therefore, the commenters claimed that CMS had not provided a 
sufficient policy rationale in support of the proposal.
    Response: Section 207 of the Hospital Manual (Pub. No. 10) states 
with respect to furnishing services under arrangements, that such 
arrangements were ``not intended that [the hospital] merely serve as a 
billing mechanism for the other party * * *.The hospital's professional 
supervision * * * requires many of the same quality controls as are 
applied to the services furnished by salaried employees.'' As discussed 
in more detail above, the current policy may also result in 
inappropriate and excessive Medicare payments, as well as present an 
opportunity for gaming, and we believe it is appropriate to limit the 
inclusion of costs on a cost report to those situations in which the 
hospital has exercised sufficient control and responsibility over the 
use of hospital resources in treating patients.
    Comment: One commenter cited two recent Medicare initiatives that 
involve ACOs, the Pioneer ACO Program under

[[Page 51714]]

the Innovation Center and the Medicare Shared Savings Program under 
section 1899 of the Affordable Care Act, as evidence of the Secretary's 
commitment to high-level efficiency, provider collaboration, and 
innovative service models which will preserve or enhance quality of 
care for beneficiaries while promoting greater efficiencies throughout 
the Medicare program. The commenter noted that the present policy that 
CMS has proposed to disallow, where a hospital furnishing ICU services 
``under arrangements'' to inpatients of another hospital is an existing 
example of efficient use of medical resources as well as successful 
provider collaboration that also enhances the level of beneficiary care 
and therefore, allowing such an arrangement to continue is fully 
consistent with CMS' stated objectives.
    Response: We understand that inter-facility cooperation and 
collaboration can indeed result in savings for the Medicare program, 
and we are committed to the specific goals of the CMMI and the Shared 
Savings Program. However, we do not agree that such positive objectives 
are applicable to the existing arrangements under which inpatients at 
one hospital effectively become inpatients at another hospital for as 
long a time as necessary, without having been discharged from the first 
hospital and admitted to the second.
    Comment: Most commenters requested that CMS, if it finalizes the 
proposed policy, adopt a grandfathering provision to allow hospitals 
that have been furnishing routine services under arrangements outside 
of the hospital to continue furnishing these services in this manner. 
Commenters stated that this policy would place significant 
administrative burdens on these hospitals, would be more expensive to 
the Medicare program, would be inconvenient and disruptive to patients, 
and would inappropriately inflate readmission rates under the Hospital 
Readmissions Reduction Program.
    Response: We do not believe it is appropriate to adopt a 
grandfathering provision. As noted above, we are concerned that, 
without this policy change, Medicare will continue to pay 
inappropriately for these services. That is, payment to IPPS hospitals 
should be based on the DRG payment amount, and payment to excluded 
hospitals should not be based in part on the costs of routine services 
that the hospital has not furnished directly to its patients.
    We do not believe that our proposal would be disruptive or 
inconvenient to patients; it does not prevent hospitals from 
transferring patients to another facility to receive necessary services 
that the transferring hospital cannot provide.
    We recognize that, for a few providers, this policy will require 
the hospital to discharge its patients to the other hospital that will 
provide the routine/ICU services. However, this is necessary in order 
to be consistent with our current reading of section 1861(b) of the 
Act.
    We do not believe that a hospital's readmission rates under the 
Hospital Readmissions Reduction Program would be affected by this 
policy because transfers to other providers are not included in the 
calculations of excess readmissions. Each of the measures of 
readmissions used in the Hospital Readmissions Reduction Program has 
exclusions for transfers to other hospitals. We discuss these 
exclusions in section IV.C. of this preamble.
    After consideration of the public comments and for the reasons set 
forth above, we are finalizing our proposal. Therefore, effective for 
services provided on or after October 1, 2011, if routine services are 
provided in the hospital to its inpatients, these services are 
considered as being provided by the hospital. However, if services are 
provided outside the hospital, the services are considered as being 
provided under arrangement. Only therapeutic and diagnostic items and 
services may be furnished under arrangement outside of the hospital.

R. Finalization of Interim Final Rule With Comment Period on Revisions 
to the Reduction and Increases to Hospitals FTE Resident Caps for 
Graduate Medical Education Payment Purposes

    On March 14, 2011, we issued in the Federal Register (76 FR 13515) 
an interim final rule with comment period that implemented section 203 
of the Medicare and Medicaid Extenders Act of 2010 relating to the 
treatment of teaching hospitals that are members of the same Medicare 
graduate medical education affiliated groups for the purpose of 
determining possible full-time equivalent (FTE) resident cap 
reductions. In this final rule, we are restating a majority of the 
provisions of the interim final rule with comment period, responding to 
the public comments we received, and stating our final policy.
1. Background and Provisions of the Interim Final Rule With Comment 
Period
a. Statutory Authority
    Section 1886(h) of the Act, as added by section 9202 of the 
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L. 
99-272) and as currently implemented in the regulations at 42 CFR 
413.75 through 413.83, establishes a methodology for determining 
payments to hospitals for the direct costs of approved graduate medical 
education (GME) programs. Section 1886(h)(2) of the Act sets forth a 
methodology for the determination of a hospital-specific base-period 
per resident amount (PRA) that is calculated by dividing a hospital's 
allowable direct costs of GME in a base period by its number of 
residents in the base period. The base period is, for most hospitals, 
the hospital's cost reporting period beginning in FY 1984 (that is, 
October 1, 1983 through September 30, 1984). The base year PRA is 
updated annually for inflation. In general, Medicare direct GME 
payments are calculated by multiplying the hospital's updated PRA by 
the weighted number of full-time equivalent (FTE) residents working in 
all areas of the hospital complex (and at nonprovider sites, when 
applicable), and the hospital's Medicare share of total inpatient days.
    Section 1886(d)(5)(B) of the Act provides for an additional payment 
amount under the hospital inpatient prospective payment system (IPPS) 
for hospitals that have residents in an approved GME program in order 
to account for the higher indirect patient care costs of teaching 
hospitals relative to nonteaching hospitals. The regulations regarding 
the calculation of this additional payment, known as the indirect 
medical education (IME) adjustment, are located at 42 CFR 412.105. The 
hospital's IME adjustment applied to the DRG payments is calculated 
based on the ratio of the hospital's number of FTE residents training 
in either the inpatient or outpatient departments of the IPPS hospital 
to the number of inpatient hospital beds.
    The Balanced Budget Act of 1997 (Pub. L. 105-33) established a 
limit on the number of allopathic and osteopathic residents that a 
hospital may include in its FTE resident count for direct GME and IME 
payment purposes. Under section 1886(h)(4)(F) of the Act, for cost 
reporting periods beginning on or after October 1, 1997, a hospital's 
unweighted FTE count of residents for purposes of direct GME may not 
exceed the hospital's unweighted FTE count for its most recent cost 
reporting period ending on or before December 31, 1996. Under section 
1886(d)(5)(B)(v) of the Act, a similar limit on the FTE resident count 
for IME purposes is effective for

[[Page 51715]]

discharges occurring on or after October 1, 1997.
    The Affordable Care Act made a number of statutory changes relating 
to the determination of a hospital's FTE resident count for direct GME 
and IME payment purposes and the manner in which FTE resident limits 
are calculated and applied to hospitals under certain circumstances. 
Section 5503 of the Affordable Care Act added a new section 1886(h)(8) 
to the Act to provide for the reduction in FTE resident caps for direct 
GME under Medicare for certain hospitals, and to authorize the 
``redistribution'' of the estimated number of FTE resident slots to 
other qualified hospitals. In addition, section 5503 amended section 
1886(d)(5)(B)(v) of the Act to require the application of section 
1886(h)(8) of the Act provisions ``in the same manner'' as the FTE 
resident caps for IME. The regulations implementing section 5503 of the 
Affordable Care Act were included in the Hospital Outpatient 
Prospective Payment System final rule with comment period, published on 
November 24, 2010 in the Federal Register (75 FR 72147). Section 
IV.R.1.b. of this final rule summarizes the provisions of section 5503 
of the Affordable Care Act as implemented in the November 24, 2010 
Federal Register.
b. Reductions and Increases to Hospitals' FTE Resident Caps for GME 
Payment Purposes Under Section 5503 of the Affordable Care Act
    As previously discussed, the calculation of both direct GME and IME 
payments is affected by the number of FTE residents that a hospital is 
allowed to count; generally, the greater the number of FTE residents a 
hospital counts, the greater the amount of Medicare direct GME and IME 
payments the hospital will receive. In an attempt to end the implicit 
incentive for hospitals to increase the number of FTE residents, 
Congress instituted a cap on the number of allopathic and osteopathic 
residents a hospital is allowed to count for direct GME and IME 
purposes. Dental and podiatric residents are not included in this 
statutorily mandated cap. Some hospitals have trained a number of 
allopathic and osteopathic residents in excess of their FTE resident 
caps, while other hospitals have reduced their FTE resident counts to 
some level below their FTE resident caps. Section 5503 of the 
Affordable Care Act added a new section 1886(h)(8) to the Act to 
provide for reductions in the statutory FTE resident caps for direct 
GME under Medicare for certain hospitals, and authorizes a 
``redistribution'' to hospitals of the estimated number of FTE resident 
slots resulting from the reductions. Section 5503 of the Affordable 
Care Act also amended section 1886(d)(5)(B)(v) of the Act to require 
application of the provisions of section 1886(h)(8) of the Act ``in the 
same manner'' to the FTE resident caps for IME.
    Section 1886(h)(8)(A) of the Act provides that, effective for 
portions of cost reporting periods occurring on or after July 1, 2011, 
a hospital's FTE resident cap will be reduced if its ``reference 
resident level'' is less than its ``otherwise applicable resident 
limit,'' as these terms are described below. Section 1886(h)(8)(A)(ii) 
of the Act and the November 24, 2010 Federal Register (75 FR 72147) 
describes which hospitals are exempt from a cap reduction under section 
5503 of the Affordable Care Act. Included in that group are rural 
hospitals with fewer than 250 acute care inpatient beds. For other 
hospitals, any such reduction will be equal to 65 percent of the 
difference between the hospital's ``otherwise applicable resident 
limit'' and its ``reference resident level.''
    Under section 1886(h)(8)(B) of the Act, the Secretary is authorized 
to increase the FTE resident caps for certain categories of hospitals 
for portions of cost reporting periods occurring on or after July 1, 
2011, by an aggregate number that does not exceed the estimated overall 
reduction in FTE resident caps for all hospitals under section 
1886(h)(8)(A) of the Act. A single hospital may receive an increase in 
its FTE resident cap of no more than 75 additional FTEs. That is, a 
hospital is allowed to receive up to 75 additional slots for direct GME 
and up to 75 additional slots for IME. In determining which hospitals 
will receive an increase in their FTE resident caps, sections 
1886(h)(8)(C) through 1886(h)(8)(E) of the Act directs us to do all of 
the following:
     Take into account the demonstrated likelihood of the 
hospital filling the additional positions within the first three cost 
reporting periods beginning on or after July 1, 2011.
     Take into account whether the hospital has an accredited 
rural training track program.
     Distribute 70 percent of the resident slots to hospitals 
located in States with resident-to-population ratios in the lowest 
quartile.
     Distribute 30 percent of the resident slots to hospitals 
located in a State, a territory of the United States, or the District 
of Columbia that are among the top 10 States, territories, or the 
District in terms of the ratio of the total population living in an 
area designated as a health professional shortage area (HSPA), as of 
March 23, 2010, to the total population, and/or to hospitals located in 
rural areas.
    A comprehensive description of the rules implementing the cap slot 
redistribution under section 1886(h)(8) of the Act can be found in the 
November 24, 2010 Federal Register (75 FR 72168).
c. Treatment of Affiliated Groups Under Section 5503 of the Affordable 
Care Act
    A previous redistribution of ``unused'' FTE resident slots was 
performed in 2005 under section 422 of the Medicare Prescription Drug, 
Improvement and Modernization Act of 2003 (MMA) (Pub. L. 108-173). 
Section 422 of the MMA provided for the redistribution of unused 
residency positions effective for portions of cost reporting periods 
beginning on or after July 1, 2005. While the redistribution under 
section 5503 of the Affordable Care Act as initially enacted is similar 
to the previous redistribution under section 422 of MMA, there are 
substantive differences between the two provisions. One of those 
differences involves the treatment of hospitals that were members of 
the same Medicare GME affiliated groups for purposes of determining 
whether a hospital should receive a cap reduction. The regulations 
governing Medicare GME affiliated groups and Medicare GME affiliation 
agreements are at 42 CFR 413.75(b) and 413.79(f), respectively. 
Medicare GME affiliation agreements allow teaching hospitals to 
temporarily transfer cap slots to other hospitals in order to 
facilitate the cross-training of residents. The duration of the 
temporary cap slots transfer is a minimum of 1 year beginning on July 1 
of a year, per the Medicare GME affiliation agreement.
    Under section 422 of MMA, the statute explicitly directed the 
Secretary to apply the provisions to hospitals that were members of the 
same Medicare GME affiliated group as of July 1, 2003. Specifically, 
section 1886(h)(7)(A)(iii) of the Act states ``The provisions of clause 
(i) shall be applied to hospitals which are members of the same 
Medicare GME affiliated group (as defined by the Secretary under 
paragraph (4)(H)(ii)) as of July 1, 2003.'' Therefore, in implementing 
section 422 of MMA, we based the FTE resident cap reductions for 
hospitals that were participating in a Medicare GME affiliated group on 
the aggregate cap and count data from all hospitals participating in 
the same Medicare GME affiliated group(s). If a hospital was training a 
number of

[[Page 51716]]

residents below its FTE resident cap for the reference cost reporting 
period but the hospital was part of a Medicare GME affiliated group for 
some or all of that reference cost reporting period, the Medicare 
contractor determined if the aggregate affiliated count for all 
hospitals in the Medicare GME affiliated group was greater than the 
aggregate affiliated cap. If the aggregate affiliated count was greater 
than the aggregate cap, then there was no reduction made to the FTE 
caps of any hospital in the Medicare GME affiliated group (even for the 
hospital that was part of the Medicare GME affiliated group, but was 
training below its cap).
    However, as we noted in the November 24, 2010 Federal Register (75 
FR 72161), in contrast to section 422 of MMA, section 5503 of the 
Affordable Care Act as initially enacted did not include language 
specific to Medicare GME affiliated groups as was included in section 
422 of MMA under section 1886(h)(7)(A)(iii) of the Act. Thus, section 
5503 of the Affordable Care Act as initially enacted did not provide 
for determinations based on the aggregate experience of a Medicare GME 
affiliated group. Therefore, we stated in the November 24, 2010 Federal 
Register (75 FR 72161), that the determination of whether a hospital 
would receive a cap reduction based on that individual hospital's 
experience and not the aggregate experience of the Medicare GME 
affiliated group.
d. Section 203 of the Medicare and Medicaid Extenders Act of 2010 (Pub. 
L. 111-309)
    Section 203 of the Medicare and Medicaid Extenders Act of 2010 
(MMEA) further amended section 1886(h)(8) of the Act by adding a new 
subparagraph (I) which reads: ``(I) Affiliation.--The provisions of 
this paragraph shall be applied to hospitals which are members of the 
same affiliated group (as defined by the Secretary under paragraph 
(4)(H)(ii)) and the reference resident level for each such hospital 
shall be the reference resident level with respect to the cost 
reporting period that results in the smallest difference between the 
reference resident level and the otherwise applicable resident limit.'' 
This subparagraph refers to the treatment of hospitals that are members 
of the same Medicare GME affiliated groups, as described in section 
IV.R.1.c. of this final rule for purposes of determining a hospital's 
possible cap reductions under section 1886(h)(8)(A) of the Act. Similar 
to section 422 of MMA, this amendment to the language at section 
1886(h)(8) of the Act allows us to consider hospitals that are members 
of the same Medicare GME affiliated group in the aggregate, rather than 
only on an individual basis, for the purposes of determining a GME FTE 
cap reduction.
    Although this amendment allows us to implement section 5503 of the 
Affordable Care Act in a manner similar to section 422 of MMA, a key 
difference in implementation remains. One point of note is that section 
422 of MMA (section 1886(h)(7)(A)(ii)(I) of the Act) refers to the most 
recent cost reporting period ending on or before September 30, 2002, as 
the reference cost reporting period. However, as stated in the August 
11, 2004 Federal Register (69 FR 49125), if a hospital was a member of 
a Medicare GME affiliated group for the academic year beginning July 1, 
2003, its reference cost reporting period was the cost reporting period 
that included July 1, 2003. This differs from section 5503 of the 
Affordable Care Act, which instructs the Secretary to choose the 
reference cost reporting period out of the hospital's three most recent 
cost reporting periods ending before March 23, 2010, for which a cost 
report has been settled or has been submitted to the Medicare 
contractor by March 23, 2010, that has the highest FTE resident count 
(section 1886(h)(8)(H)(i) of the Act).
    For hospitals that were members of the same Medicare GME affiliated 
groups, the MMEA now allows us to determine the reference cost 
reporting period as the cost reporting period out of the hospitals 
three most recent cost reporting periods ending before March 23, 2010, 
for which a cost report has been settled or has been submitted to the 
Medicare contractor by March 23, 2010, with the smallest difference 
between the reference resident level and the otherwise applicable 
resident limit (section 1886)(h)(8)(I) of the Act). Therefore, based on 
the amendment made to section 1886(h)(8) of the Act by section 203 of 
the MMEA of adding subparagraph (I), in the interim final rule with 
comment period, we established a methodology to determine whether a 
hospital is subject to a cap reduction under section 5503 of the 
Affordable Care Act based on that hospital's participation in a 
Medicare GME affiliated group(s) or an emergency Medicare GME 
affiliated group under 42 CFR 413.79(f). Although the MMEA provision 
applies to both regular Medicare GME affiliation agreements and 
emergency Medicare GME affiliation agreements, for ease of reference, 
we refer in this discussion to both with the phrase ``Medicare GME 
affiliation agreements.'' We believe that the purpose of section 203 of 
MMEA is to amend section 1886(h)(8) of the Act in order to implement 
section 5503 of the Affordable Care Act in a manner that is similar to 
section 422 of MMA with regard to treatment of hospitals that are 
members of the same Medicare GME affiliated group. Accordingly, we are 
implementing section 203 of the MMEA in a manner similar to the way in 
which section 422 of MMA was implemented. The methodology used to 
determine a cap reduction for hospitals that are members of the same 
affiliated group is as follows:
Part 1: Determine the ``Reference Cost Reporting Period''
    The Medicare contractor will assess each hospital on an individual 
basis. First, the Medicare contractor will determine whether a hospital 
was a member of a Medicare GME affiliated group at any point during any 
of the hospital's three most recent cost reporting periods ending 
before March 23, 2010, for which a cost report has been settled or has 
been submitted to the Medicare contractor by March 23, 2010. That is, 
the Medicare contractor will determine whether the caps during any of 
those three cost reporting periods were revised because the hospital 
was a member of a Medicare affiliation agreement. If a hospital was not 
a member of a Medicare GME affiliated group during any of those three 
cost reporting periods, the Medicare contractor will determine if and 
by how much that hospital's FTE resident caps should be reduced in 
accordance with the policy established in the November 24, 2010 final 
rule (75 FR 72155 through 72168).
    If the Medicare contractor determines that a hospital was a member 
of a Medicare GME affiliated group at any point during any of the three 
most recent cost reporting periods ending before March 23, 2010 for 
which a cost report has been settled or has been submitted to the 
Medicare contractor by March 23, 2010, subparagraph (I) of section 
1886(h)(8) of the Act applies, and the Medicare contractor will 
determine a hospital's reference cost reporting period by determining 
the cost reporting period from the three most recent cost reporting 
periods ending before March 23, 2010, for which a cost report has been 
settled or has been submitted to the Medicare contractor by March 23, 
2010, that results in the smallest difference between the reference 
resident level and the otherwise applicable resident limit. For 
example, a hospital with a FYE of December 31 may not be a member of a 
Medicare GME affiliated group for the

[[Page 51717]]

academic years beginning July 1, 2006, 2007, or 2008, but it may be a 
member of a Medicare GME affiliated group for the academic year 
beginning July 1, 2005. In the cost reporting period ending December 
31, 2006, the months of January through June 2006 would be affected by 
the July 1, 2005 Medicare GME affiliation agreement. Therefore, in this 
example, the hospital is indeed a member of a Medicare GME affiliated 
group at some point, albeit for only a portion of a cost reporting 
period, during its three most recent cost reporting periods ending 
before March 23, 2010, for which a cost report has been settled or has 
been submitted to the Medicare contractor by March 23, 2010 (in this 
case, these cost reporting periods would include FYE December 31, 2008, 
FYE December 31, 2007, and FYE December 31, 2006), and as such its 
reference cost reporting period would be determined as the cost 
reporting period that results in the smallest difference between the 
reference resident level and the otherwise applicable resident limit. 
As previously discussed, section 422 of the MMA specified a single time 
period that would be used for all hospitals that were members of a 
Medicare GME affiliated group; that is as of July 1, 2003. However, 
section 5503 of the Affordable Care Act does not specify one cost 
reporting period, but rather it specifies that the reference cost 
reporting period is one out of three possible cost reporting periods. 
For a hospital that was a member of a Medicare GME affiliated group at 
any point during any of the three applicable cost reporting periods, 
after determining the cost report that is a hospital's reference cost 
reporting period based on the cost report that results in the smallest 
difference between the reference resident level and the otherwise 
applicable resident limit, to determine whether there are any excess 
slots we believe it is appropriate to consider whether a hospital was a 
member of a Medicare GME affiliated group as of July 1 of that 
reference cost reporting period. The hospital may or may not have been 
a member of a Medicare GME affiliated group during that reference cost 
reporting period. We do not believe that section 1886(h)(8)(I) of the 
Act, as added by section 203 of the MMEA, requires that a hospital must 
be a member of a Medicare GME affiliated group during all 3 cost 
reporting periods, nor during the year determined to be the reference 
cost reporting period. Rather, being a member of a Medicare GME 
affiliated group at some point in only one of the three cost reporting 
periods warrants that a hospital's reference cost reporting period be 
determined based on which cost report has the smallest difference 
between the reference resident level and the otherwise applicable 
resident limit. To determine if an FTE resident cap reduction is 
appropriate, if the hospital was a member of a Medicare GME affiliated 
group as of July 1 in the reference cost reporting period, we will look 
at the Medicare GME affiliated group in the aggregate, when we 
determine if the subject hospital has excess capacity for purposes of a 
reduction under sections 5503 and 203. If the hospital was not a member 
of a Medicare GME affiliated group as of July 1 in the reference cost 
reporting period, excess FTEs training at other members of the 
affiliated group will not be considered for the purposes of a reduction 
under sections 5503 and 203 and that hospital's FTE resident caps 
should be reduced in accordance with the policy established for 
hospitals that are not members of Medicare GME affiliated groups in the 
November 24, 2010 final rule (75 FR 72155 through 72168). The nature of 
this determination underscores the fact that reductions to the FTE 
resident caps of hospitals that are members of Medicare GME affiliated 
groups must still be made on an individual hospital basis. The 
following is an example of a reference cost reporting period 
determination. (For ease of illustration, this example focuses on 
reductions to the IME FTE resident caps only, but the methodology is 
the same for reductions to the direct GME FTE resident caps):
    Hospital A has a FTE resident cap of 10 FTE residents. Hospital A's 
three most recent cost reports that have been settled or submitted to 
the Medicare contractor by March 23, 2010 include cost reporting 
periods with FYE 12/31/2006, 12/31/2007, and 12/31/2008. During these 
three cost reporting periods, Hospital A trained 8, 9, and 9 FTE 
residents, respectively. For the academic years beginning July 1, 2006 
and July 1, 2007, Hospital A was not a member of a Medicare GME 
affiliated group. However, for the academic year beginning July 1, 
2008, Hospital A is affiliated with Hospital B and Hospital C. As a 
result of its Medicare GME affiliation agreement with Hospitals B and 
C, Hospital A's adjusted cap or otherwise applicable resident limit is 
12 for the academic year beginning July 1, 2008. Thus, when determining 
the reference cost reporting period for Hospital A, the Medicare 
contractor would compare the resident level for Hospital A with its 
otherwise applicable resident limit for each of the cost reporting 
period as indicated below:

 Cost Reporting Period 1 (01/01/2006-12/31/2006): 10 (FTE 
Resident Cap)--8 (FTE Resident Count) = 2
 Cost Reporting Period 2 (01/01/2007-12/31/2007): 10 (FTE 
Resident Cap)--9 (FTE Resident Count) = 1
 Cost Reporting Period 3 (01/01/2008-12/31/2008): 11 (Adjusted 
FTE Resident Cap)--9 (FTE Resident Count) = 2

(Note that although Hospital A received an increase of 2 FTEs, from 10 
to 12, under the Medicare GME affiliation agreement for the academic 
year beginning July 1, 2008, since Hospital A has a 12/31 fiscal year 
end, the actual cap adjustment is prorated to half of 2, for an 
increase to its FTE resident cap of 1, equaling 11). In this example, 
the smallest difference between the reference resident level and the 
otherwise applicable resident limit for Hospital A is 1, which occurs 
in the cost reporting period with FYE 12/31/2007. Thus, Hospital A's 
reference cost reporting period is 01/01/2007-12/31/2007. Note that 
Hospital A is not a member of a Medicare GME affiliated group during 
FYE 12/31/07. The implications of this are discussed below.
Part 2: Determine the Applicable Reductions
    For a hospital that was a member of a Medicare GME affiliated group 
at any point during any of its three most recent cost reporting periods 
ending before March 23, 2010, for which a cost report has been settled 
or has been submitted to the Medicare contractor by March 23, 2010, 
once the Medicare contractor determines that hospital's reference cost 
reporting period (that is, the cost report with the smallest difference 
between the hospital's FTE resident cap and FTE resident count), the 
Medicare contractor must then determine if the hospital was a member of 
a Medicare GME affiliated group as of the July 1 that occurs during 
that reference cost reporting period. If not, and the hospital's FTE 
resident count was equal to or exceeded its FTE resident cap in that 
reference cost report, no reduction to its FTE resident cap is made and 
no further steps are necessary. If that hospital's FTE resident count 
was less than its FTE resident cap during that reference cost report, 
then the Medicare contractor would reduce the FTE resident cap by 65 
percent of the difference between the FTE resident cap and the FTE 
resident count.
    If the hospital was a member of a Medicare GME affiliated group as 
of the July 1 that occurs during that reference

[[Page 51718]]

cost reporting period, the Medicare contractor will look at the members 
of the Medicare GME affiliated group for that period in the aggregate, 
for the purpose of determining a reduction to the particular hospital's 
FTE resident cap. In other words, assuming the Medicare contractor is 
assessing Hospital X, once it is determined that Hospital X was 
training residents below its adjusted FTE resident cap as part of a 
Medicare GME affiliation agreement occurring during Hospital X's 
reference cost reporting period, the Medicare contractor will treat the 
hospitals in the Medicare GME affiliated group in the aggregate, but 
only for the purpose of determining the reduction to Hospital X's FTE 
resident cap. The Medicare contractor will not actually reduce the FTE 
resident caps of the other hospitals that were affiliated with Hospital 
X in that year because each hospital is evaluated separately, and it 
may be that the reference cost reporting periods for the other 
hospitals may not be the same as Hospital X's reference cost reporting 
period. (It may be that the reference cost reporting period for another 
hospital is one in which that hospital was not part of a Medicare GME 
affiliated group, in which case, treatment as a group is not warranted 
when determining that hospital's FTE cap reduction).
    For the hospital that was a member of a Medicare GME affiliated 
group as of the July 1 that occurs during that reference cost report, 
the Medicare contractor will determine for each hospital in the 
Medicare GME affiliated group respectively its FTE resident cap and FTE 
resident count (IME and direct GME separately). The Medicare contractor 
will add each hospital's FTE resident caps (IME and direct GME 
separately) to determine the aggregate affiliated FTE resident cap. The 
contractor will then add each hospital's FTE resident count (IME and 
direct GME separately) to determine the aggregate affiliated FTE 
resident count. If the aggregate FTE resident counts are equal to or 
exceed the aggregate FTE resident caps, no reductions would be made to 
that particular hospital's FTE resident cap under section 5503 of 
Affordable Care Act, and no further steps are necessary for that 
hospital. We emphasize that at this point, the contractor has only 
determined that the particular hospital will not be subject to an FTE 
resident cap reduction--as the FTE resident cap reduction determination 
is ultimately one that is done on an individual hospital basis, at this 
point the contractor has not made any determinations regarding the 
status of the other hospitals that are in the same Medicare GME 
affiliated group as the particular hospital under review.
    However, where the aggregate FTE resident count is below the 
aggregate FTE resident cap (IME and direct GME separately), a reduction 
to the particular hospital's FTE resident cap would be necessary. In 
these cases, for each hospital that is a member of the same Medicare 
GME affiliated group, the Medicare contractor will determine the 
following FTE information from the cost report that includes July 1 of 
the particular hospital's reference cost reporting period:
    (1) The ``1996'' FTE resident cap (as adjusted by new programs, if 
applicable) for the hospital under review--For IME, from Worksheet E, 
Part A of the Medicare cost report, the sum of lines 3.04 and 3.05. If 
the hospital's IME FTE resident cap was reduced under section 422 of 
the MMA, subtract from this sum the amount reported on Worksheet E-3, 
Part VI, line 13. For direct GME from Worksheet E-3, Part IV of the 
Medicare cost report, the sum of lines 3.01 and 3.02. If the hospital's 
direct GME FTE resident cap was reduced under section 422 of the MMA, 
subtract from this sum the amount reported on Worksheet E-3, Part VI, 
line 2.
    (2) The ``affiliated'' FTE resident cap for the hospital under 
review assessed--For IME, line 3.07; and for direct GME, line 3.04.
    (3) The total number of allopathic and osteopathic FTE residents 
for the hospital under review--For IME, line 3.08; for direct GME, line 
3.05.
    (4) The difference between the aggregate ``affiliated'' FTE 
resident cap and the total FTE resident counts for all of the 
affiliated hospitals--For IME, [sum] line 3.08 minus [sum] (lines 3.04 
+ 3.05--applicable section 422 reduction amount); and for direct GME, 
[sum] line 3.05 minus [sum] (lines 3.01 + 3.02-- applicable section 422 
reduction amount).
    (5) For IME, for those hospitals whose FTE resident count from line 
3.08 is greater than the ``affiliated'' FTE resident cap on line 3.07, 
indicate ``zero.'' For direct GME, for those hospitals whose FTE 
resident count from line 3.05 is greater than the ``affiliated'' FTE 
resident cap on line 3.04, indicate ``zero.'' For IME, for those 
hospitals whose FTE resident count from line 3.08 is less than the 
``affiliated'' FTE resident cap on line 3.07, determine the difference 
between the hospital's ``affiliated'' FTE resident cap and the 
hospital's FTE resident count, line 3.08 minus line 3.07. For direct 
GME, for those hospitals whose FTE resident count from line 3.05 is 
less than the ``affiliated'' FTE resident cap on line 3.04, determine 
the difference between the hospital's ``affiliated'' FTE resident cap 
and the hospital's FTE resident count, line 3.05 minus line 3.04.
    (6) For IME and direct GME separately, to determine the total 
amount by which the FTE resident counts are below the ``affiliated'' 
FTE resident caps, add the amounts determined under step 5 for all 
hospitals that trained fewer residents than its ``affiliated'' FTE 
resident caps.
    (7) For IME and direct GME separately, determine a pro rata cap 
reduction for the hospital under review by dividing the hospital's 
specific amount in step 5 by the total amount for all of those 
hospitals in step 6, and multiply by the amount in step 4 (that is, 
(step 5/step 6) x step 4).
    (8) For IME and direct GME separately, determine the actual cap 
reduction for the hospital under review by multiplying the pro rata cap 
reduction from step 7 by 0.65.
    (9) For IME and direct GME separately, determine the reduced FTE 
resident cap for the hospital under review by subtracting the actual 
cap reduction from step 8 from the ``1996'' FTE resident cap from step 
1. This is the hospital's FTE resident cap effective July 1, 2011.
    The following is an example of how the reductions to the FTE 
resident caps will be determined where the FTE resident counts in the 
aggregate for hospitals that were affiliated as of July 1 of the 
reference cost reporting period for a particular hospital are below the 
hospitals' FTE resident caps in the aggregate. For ease of 
illustration, this example focuses on reductions to the IME caps only, 
but the methodology is the same for reductions to the direct GME caps.
    In this example, the Medicare contractor has determined, using the 
methodology from Step 1, that the reference cost reporting period (the 
period with smallest difference between the reference resident level 
and the otherwise applicable resident limit) for Hospital D is January 
1, 2007 to December 31, 2007. The academic year that occurs in this 
reference cost reporting period begins July 1, 2007. Hospitals D, E, 
and F are members of a Medicare GME affiliated group for the academic 
year that begins July 1, 2007. Hospital D is also separately affiliated 
with Hospitals G and H for the academic year that begins July 1, 2007. 
Thus, the affiliated group for GME payment purposes, and for purposes 
of determining possible FTE cap reductions for Hospital D under 
subparagraph (I) consists of Hospitals D, E, F, G, and H. Hospital E's 
cost report

[[Page 51719]]

that includes July 1, 2007 is FYE June 30, 2008. Hospital D's, F's, and 
G's cost report that includes July 1, 2007 is their FYE December 31, 
2007, and Hospital H's cost report that includes July 1, 2007 is its 
FYE September 30, 2007. Using steps 1 through 9 above, the reduction to 
the FTE resident caps for Hospital D is determined in the table below.
[GRAPHIC] [TIFF OMITTED] TR18AU11.018

    In this example, Hospital D's FTE resident count of 75 was 15 less 
than its ``affiliated'' FTE resident cap of 90, and Hospital H's FTE 
resident count of 65 was 60 less than its ``affiliated'' FTE resident 
cap of 125 (as determined under step 5). Hospital F's ``affiliated'' 
FTE resident cap equaled its FTE resident count. Under this 
methodology, the fact that Hospitals E and G exceeded their respective 
``affiliated'' FTE resident caps minimizes the reductions to Hospital 
D's ``1996'' FTE resident caps through the calculation of a pro rata 
reduction under step 7.
    We note that although Hospital H is also under its cap; its cap is 
not reduced in this exercise. Under section 5503, the cap reduction 
determination is calculated individually for each hospital based on its 
individual reference cost reporting period, so each hospital would be 
evaluated for a possible reduction separately. Hospital H will be 
evaluated separately, and it may be that Hospital H's reference cost 
report may not be its FYE September 30, 2007 cost report, and 
ultimately, Hospital H may or may not be subject to an FTE resident cap 
reduction. Thus, under step 8, the actual cap reduction of 5.2 FTEs for 
Hospital D is determined by taking 65 percent of 8 (rather than 65 
percent of 15). As a result, under step 9, Hospital D's final FTE 
resident cap effective on July 1, 2011 is determined to be 109.8 FTEs.
    We also note that the reduction to Hospital D's ``1996'' FTE 
resident caps was minimized only because Hospitals E and G exceeded 
their ``affiliated'' FTE resident caps. If all hospitals in the 
Medicare GME affiliated group had trained residents below their 
``affiliated'' FTE resident caps, a pro rata reduction would not 
benefit Hospital D. In that case, the ``1996'' FTE resident caps of 
Hospital D in the Medicare GME affiliated group would be reduced by 65 
percent of the difference between its ``affiliated'' FTE resident cap 
and FTE resident count.
    We believe this final policy is similar to the method used to 
implement section 422 of the MMA with regard to hospitals that were 
members of the same Medicare GME affiliated group in that, as under 
section 422 of the MMA, we are only treating a hospital as part of a 
group if the hospital was a member of a Medicare GME affiliation 
agreement during its reference cost reporting period under section 
1886(h)(8) of the Act. In implementing section 203 of the MMEA in this 
manner, we believe we have addressed the concerns raised by commenters 
in response to the August 3, 2010 proposed rule (75 FR 46395) in that 
this policy could protect hospitals from a loss of slots if the 
aggregate counts equal to or exceed the ``affiliated''' FTE resident 
caps, and could limit the loss of slots in the instance where a 
hospital is a member of a Medicare GME affiliated group and the 
aggregate counts are below the ``affiliated'' FTE resident caps.
2. Summary of the Provisions of the Interim Final Rule With Comment 
Period
    As stated earlier, in the final rule published in the November 24, 
2010 Federal Register (75 FR 71800), we implemented section 5503 of the 
Affordable Care Act, which added a new section 1886(h)(8) to the Act. 
Section 5503 of the Affordable Care Act provides for reductions in the 
statutory FTE resident caps for direct GME under Medicare for certain 
hospitals, and authorizes a ``redistribution'' to hospitals of the 
estimated number of FTE resident slots resulting from the reductions. 
Section 5503 of the Affordable Care Act also amended section 
1886(d)(5)(B)(v) of the Act to require application of the provisions of 
section 1886(h)(8) of the Act ``in the same manner'' to the FTE 
resident caps for IME. Section 1886(h)(8) of the Act requires that any 
such reduction to the FTE resident caps will be equal to 65 percent of 
the difference between the hospital's ``otherwise applicable resident 
limit'' and its ``reference resident level.'' Section 5503 of the 
Affordable Care Act as initially enacted did not include language 
specific to Medicare GME affiliated groups and did not provide for FTE 
resident cap reduction determinations based on the aggregate experience 
of a Medicare GME affiliated group. Accordingly, section 203 of the 
MMEA further amended section 1886(h)(8) of the Act to specify that the 
provisions of section 1886(h)(8) of the Act shall be applied to 
hospitals which are members of the same Medicare GME affiliated group, 
and the ``reference resident level'' for each such hospital is the FTE 
resident count from the cost reporting period that results in the 
smallest difference between the FTE resident count and the FTE resident 
cap. In the March 14, 2011 interim final rule with comment period, we 
implemented section 203 of the MMEA relating to the treatment of 
teaching hospitals that are members of the same Medicare graduate 
medical education affiliated groups for the purpose of determining 
possible full-time equivalent resident cap reductions. We also revised 
Sec.  413.79(m)(7) of our regulations to

[[Page 51720]]

reflect the changes made by section 203 of the MMEA.
3. Summary of Public Comments, Departmental Responses, and Statements 
of Final Policies
a. Summary of Public Comments and Departmental Responses
    Comment: Several commenters supported CMS' interpretation and 
implementation of section 203 of the MMEA. One commenter believed that 
CMS has ``very reasonably'' addressed a complex issue, considering that 
the Affordable Care Act requires that multiple cost reporting periods 
be referenced to determine possible cap reductions, and the MMEA's 
intent that CMS consider affiliated group participation in deciding the 
appropriate level of cap reductions. Commenters stated that they 
recognized the challenges and complexities of the implementation of 
section 203 of the MMEA, but that CMS' methodology is reasonable. Given 
the complexities of implementation, commenters urged CMS to review 
public comments received on the interim final rule with comment period 
very carefully and make modifications if necessary.
    Response: We appreciate the commenters' support and recognition of 
our efforts to develop a process that is as fair, reasonable, and 
intuitive as possible within the statutory guidelines for determining 
if and by how much the FTE resident caps of hospitals that were members 
of Medicare GME affiliated groups will be reduced. Likewise, we have 
made sure that we applied deliberate, thoughtful, and equitable 
treatment in reviewing and responding to public comments we received on 
the interim final rule with comment period.
    Comment: Commenters suggested that CMS test its methodology for 
validity because it is difficult to assess such a national policy on 
hospital-specific reductions. Commenters asked CMS to compare the sum 
of the cap reductions that result from the methodology in the interim 
final rule with comment period to the result that would have occurred 
in the absence of the interim final rule with comment period in order 
to avoid inappropriate results. Moreover, commenters stated that these 
checks should be performed for each affiliated group, and for each 
individual hospital, to ensure that all reductions are not 
counterintuitive, or that a hospital would not be getting a greater 
reduction under application of the MMEA methodology, than in the 
absence of being treated as part of an affiliated group.
    One commenter stated that it did not believe it was the expectation 
of Congress that the inclusion of section 203 within the MMEA would 
result in only minor changes in the overall results of the reduction 
determinations made under section 5503 of the Affordable Care Act. 
Thus, this commenter believed that CMS should implement a ``global 
check'' to ensure that the resulting reductions applied to all 
affiliated groups sum to significantly less than would have been the 
case absent the application of this methodology.
    Response: As the commenters have already acknowledged, it was 
difficult to devise a methodology for applying a pro rata reduction to 
the FTE resident caps of hospitals that were in Medicare GME affiliated 
groups during their reference cost reporting period. This is because we 
had to examine FTE resident caps and counts over a 3-year period, not 
under a single one as under section 422 of the MMA, and account for the 
fact that, for hospitals in Medicare GME affiliated groups, FTE 
resident caps and counts could vary over those 3-year periods. 
Determining if and when to apply section 203 of the MMEA at the 
individual hospital level or at the affiliated group level was somewhat 
challenging. Nevertheless, given the fluid dynamics of Medicare GME 
Affiliated groups that result from sharing FTE resident caps and 
resident rotations, we understood that under any mathematical formula 
that could be applied, there could be the potential for unexpected 
results and unintended consequences. In recognition of this challenge, 
we, in conjunction with the Medicare contractors, made sure that in 
each instance that the pro rata reduction was applied, the FTE resident 
cap reduction to an affiliated hospital was less than the reduction 
that it would have received in the absence of the section 203 of the 
MMEA and being treated as part of a Medicare GME affiliated group. In 
other words, in all cases, we made sure that each affiliated group and 
each hospital only benefited from treatment as a group. Furthermore, we 
also ensured that if an FTE resident cap reduction was warranted at the 
individual hospital level, no other hospital in the affiliated group 
was negatively impacted by the pro rata reduction that occurred to an 
individual hospital. That is, because, as we explained in the interim 
final rule with comment period (76 FR 13518 and 13519), the Medicare 
contractor was to assess each hospital and ultimately make an FTE 
resident cap reduction on an individual basis, other hospitals in the 
Medicare GME affiliated group whose FTE resident counts exceeded their 
applicable FTE resident caps during their reference cost reporting 
periods would not be receiving FTE cap reductions, and would not be 
impacted.
    Comment: One commenter asked CMS to clarify the impact on the 
redistribution of ``unused'' IME cap slots when a Medicare GME 
affiliated group includes a hospital that reports and receives only 
direct GME reimbursement (for example, a children's or cancer 
hospital). The commenter stated that because the residents would likely 
qualify for IME payments at an IPPS hospital, it would seem 
inappropriate to reduce the aggregate IME cap of the affiliated group 
simply because IME slots were being used by a non-IME hospital. (The 
commenter also noted that, with regard to HRSA's Children's GME Payment 
Program (CHGME), HRSA advised children's hospitals receiving cap slots 
under a Medicare GME Affiliation Agreement with an IPPS hospital to 
share only the direct GME cap and not the IME cap.)
    Response: Because children's hospitals are excluded from payment 
under the IPPS under section 1886(d) of the Act, they do not receive 
IME payment and they do not have IME FTE caps for Medicare purposes. 
``IME caps'' that have been assigned to children's hospitals under 
HRSA's CHGME program have no bearing on Medicare payment. Children's 
hospitals with approved medical residency training programs only 
receive direct GME payments from Medicare and, therefore, only have 
direct GME FTE resident caps. Therefore, when a children's hospital is 
part of a Medicare GME affiliation agreement with an IPPS hospital, 
while direct GME FTE resident cap slots may be transferred between the 
two facilities, the amount entered for the IME FTE resident cap slots 
should be ``zero'' or ``not applicable.'' (We note that the same is 
true for teaching IRFs or IPFs that affiliate with IPPS hospitals. The 
IME teaching adjustment under the IRF PPS and the IPF PPS has no 
bearing on the IPPS, and should not be reflected in Medicare GME 
affiliation agreements).
    We disagree with the commenter who believed that we are reducing 
the aggregate IME cap of the affiliated group simply because IME slots 
are being used by a hospital that does not receive payment under the 
IPPS. Rather, we believe that under section 5503 of the Affordable Care 
Act, the FTE resident caps of hospitals, affiliated or not, are being 
reduced in the instance where there is excess capacity between the

[[Page 51721]]

hospital's FTE resident cap and FTE resident count. If, under the 
Medicare GME affiliation agreement, an IPPS hospital sends FTE slots 
and residents to a children's hospital, only direct GME FTE slots are 
being transferred. IME slots remain with the IPPS hospital, and if they 
are not actually being used by the IPPS hospital, there is excess IME 
capacity. Thus, if, in the Medicare GME affiliated group as a whole, 
the aggregate IME FTE resident cap exceeds the aggregate IME FTE 
resident count (that is, there is excess capacity), whether or not a 
children's hospital is one of the hospitals in the affiliated group, 
one or more of the hospitals in that affiliated group will ultimately 
be subject to a reduction to its FTE resident cap. (Because a 
children's hospital has no IME cap, it will obviously not be the 
hospital subject to the IME FTE resident cap reduction.)
    Comment: One commenter asked CMS to confirm that the ``actual cap 
reduction'' cannot exceed the ``1996'' FTE cap for a hospital that was 
a member of a Medicare GME affiliated group during their reference cost 
reporting period. Specially, the commenter asked for confirmation that 
a hospital with a ``1996'' FTE cap of zero would never have an FTE cap 
reduction. The commenter stated that they assumed no hospital would be 
assigned a negative ``final FTE cap'' effective July 1, 2011.
    Response: The commenter is correct that an FTE resident cap 
reduction under section 5503 of the Affordable Care Act, consistent 
with section 422 of the MMA, cannot exceed the amount in a hospital's 
1996 FTE resident cap (including applicable add-ons for new programs 
under Sec.  413.79(e) of the regulations). Further, an FTE resident cap 
cannot be reduced below zero, nor would an FTE resident cap that is 
already zero be further reduced.
    Comment: Commenters reiterated that it is Congress' position that 
only unused slots be removed from hospitals subject to section 5503 of 
the Affordable Care Act and, therefore, asked CMS to consider the most 
recent cost reporting data available, specifically from the academic 
year 2010, in the implementation of section 5503. These commenters 
asserted that section 203 of the MMEA applies to ``hospitals which are 
members of the same affiliated group (emphasis added),'' and that it is 
effective ``as if included in the enactment of section 5503(a)'' of the 
Affordable Care Act. The commenters stressed that the statute did not 
state that the provision pertains to ``hospitals that were members of 
the same affiliated group.'' The commenters argued that ``without 
explanation,'' the interim final rule with comment period applies the 
protections of the MMEA only to those hospitals that were affiliated 
prior to the 2010 academic year, which is contrary to the plain reading 
of the statute. Rather, the commenters believed that a hospital that 
was in an affiliated group on the date the ACA was enacted is entitled 
to protection under the MMEA.
    Response: We disagree with the commenters that the plain reading of 
the statute requires that the protections of the MMEA regarding being a 
member of a Medicare GME affiliated group be applied to hospitals that 
``are'' members of the same affiliated group ``as of the date of 
enactment'' (that is, March 23, 2010) because the MMEA is effective 
``as if included in the enactment of section 5503(a)'' of the 
Affordable Care Act. Rather, we believe that the plain reading of the 
language that section 203 of the MMEA is effective ``as if included in 
the enactment of section 5503(a)'' of the Affordable Care Act means 
that (1) the provisions of section 5503 should be applied to affiliated 
hospitals (that is, consideration as a group should be given, not only 
at the individual hospital level), and (2) for these affiliated 
hospitals, the reference resident level for each such hospital shall be 
the reference resident level with respect to the cost reporting period 
that results in the smallest difference between the reference resident 
level and the otherwise applicable resident limit. Section 203 of the 
MMEA did not in any way make any changes to the Affordable Care Act 
timeframe of the reference cost reporting periods. Rather, section 203 
of the MMEA only stated that, for a hospital that is part of a Medicare 
GME affiliated group, that reference period should be the one that 
results in the smallest difference between the FTE resident cap and the 
FTE resident count. As a result, even for hospitals that are 
affiliated, their reference cost reporting period would be chosen from 
the very same reference cost reporting periods as nonaffiliated 
hospitals; that is, any of the three most recent cost reporting periods 
ending before March 23, 2010, for which a cost report has been settled 
or has been submitted to the Medicare contractor by March 23, 2010. 
Therefore, the fact that a hospital was affiliated as of March 23, 
2010, has no bearing on the choice of the reference cost reporting 
period. Because the MMEA did not revise the rule regarding the 
timeframe for the reference cost reporting periods, the hospital's cost 
report for its academic year 2010 cannot be used as the hospital's 
reference cost reporting period.
    Comment: Commenters made the following suggestions on how CMS 
should properly implement section 203 of the MMEA:
    (1) Consistent with the method that CMS initially proposed for 
implementing the provision for affiliated hospitals under section 422 
of the MMA, use the adjusted FTE cap from the Medicare GME affiliation 
agreement in effect for academic year 2010, while determining the FTE 
count from whichever cost reporting period CMS would otherwise use.
    (2) Use the adjusted FTE cap and the FTE count from a cost 
reporting period that at least partially overlaps academic year 2010. 
For a hospital with a December 31 fiscal year end, this period would be 
its fiscal year 2009 cost reporting period. The commenter also stated 
that where the adjusted FTE caps for those earlier periods is favorable 
to hospitals; it had no objection to CMS' exercise of its discretion to 
use those earlier period adjusted FTE caps in its FTE cap reduction 
calculation. However, for hospitals that were in an affiliated group 
only in academic year 2010, the commenter asserted that the legislation 
requires that CMS take the corresponding agreement into account in its 
calculations.
    (3) Allow the hospital to show that it has slots approved within 
the past 3 years that remained unfilled, accounting for at least 5 
percent of the hospital's unadjusted 1996 FTE caps;
    (4) Consider whether the hospital has evidence of cross-training 
activities in years prior to academic year 2010. In the commenter's 
case, the commenter alleged that two hospitals had been ``training 
partners since 2006,'' but as a result of a ``mere oversight,'' they 
had not entered into a Medicare GME affiliation agreement until July 1, 
2009. The commenter asserted that ``nothing about the joint training, 
however, could be characterized as a `rushed attempt to avoid a cap 
reduction.' ''
    Response: In response to the commenters' first recommendation, the 
portion of section 422 of the MMA that is relevant to hospitals that 
were part of a Medicare GME affiliated group is implemented at section 
1886(h)(7)(A)(iii) of the Act, which states, ``the provisions of clause 
(i) shall be applied to hospitals which are members of the same 
affiliated group * * * as of July 1, 2003.'' As we explained in the 
August 11, 2004 final rule (69 FR 49126), ``we proposed to interpret 
clause (i) to mean that the Secretary is to use a hospital's July 1, 
2003 `affiliated' FTE resident cap as the otherwise applicable FTE 
resident cap when determining a possible reduction

[[Page 51722]]

to the FTE resident cap. In other words, if a hospital is affiliated as 
of July 1, 2003, we proposed to superimpose the `affiliated' FTE 
resident cap onto the hospital's reference cost reporting period * * * 
If a hospital is part of a Medicare affiliated group for the program 
year beginning July 1, 2003, we are proposing to compare the hospital's 
July 1, 2003 `affiliated' FTE resident cap to its resident level on the 
most recent cost report ending on or before September 30, 2002.''
    We did not finalize this approach under the MMA because we received 
public comments that opposed this approach and ``expressed great 
concern regarding the proposed methodology whereby a hospital's 
`affiliated' FTE resident cap for the period July 1, 2003 to June 30, 
2004 would be compared to the hospital resident FTE counts 
corresponding to a different (in some cases, not even overlapping) 
period for purposes of section 422'' (69 FR 49128). Those commenters 
stated that CMS should provide the most straightforward option and that 
``it would not `make sense' to reduce the FTE resident cap of a 
hospital based on a comparison of its cap in an affiliation agreement 
that was from a period different than its reference cost reporting 
period. Therefore, most commenters generally recommended that each 
hospital's specific July 1, 2003 `affiliated' FTE resident cap should 
be compared to its FTE resident count for the July 1, 2003 through June 
30, 2004 academic year, while one commenter recommended that CMS allow 
each hospital to elect whether to have its specific July 1, 2003 
`affiliated' FTE resident cap compared to its FTE resident count for 
the [cost reporting] period July 1, 2003 to June 30, 2004, for purposes 
of determining if and by how much the hospital's FTE resident caps 
would be reduced'' (69 FR 49128).
    As we acknowledged when we implemented section 422 of the MMA, 
hospitals either benefit or are disadvantaged somewhat in each instance 
that Congress chooses a base year or years for purposes of determining 
future payments (69 FR 49129). Similarly, for section 5503 of the 
Affordable Care Act, Congress clearly specified the base years, and the 
public has been given notice since November 24, 2010, that they consist 
of the three most recent cost reporting periods ending before March 23, 
2010, for which a cost report has been settled or submitted to the 
Medicare contractor by March 23, 2010. We strove to implement section 
422 of the MMA in the fairest and most reasonable manner, and we are 
making every effort to implement section 5503 of the Affordable Care 
Act consistently with section 422 whenever feasible. We believe it is 
certainly reasonable to conclude that just as many commenters opposed 
our original proposal under section 422 to superimpose the adjusted 
affiliated FTE resident cap from the affiliation agreement ``as of July 
1, 2003'' onto an earlier reference cost report, many commenters would 
again oppose and reject a final similar policy under section 5503. 
Therefore, in the case of section 203 of the MMEA, we believe it would 
be inappropriate to adopt the position of a small number of commenters 
suggesting that we compare an FTE resident cap that applies to a later 
Medicare GME affiliation agreement to an FTE resident count from an 
earlier cost reporting period.
    While the commenters' suggested method in the instant case would 
help a particular hospital, because under the July 1, 2009 affiliation 
agreement the commenters mentioned, this hospital happened to have 
given away slots, thereby reducing its adjusted FTE resident caps, this 
method could adversely affect other hospitals that were receiving slots 
under the July 1, 2009 affiliation agreement. Therefore, we are not 
adopting the commenters' suggestion regarding use of the adjusted FTE 
cap from the Medicare GME affiliation agreement in effect for academic 
year 2010, while determining the FTE count from whichever cost 
reporting period CMS would otherwise use.
    We do not agree with the commenters' second suggestion to use the 
adjusted FTE resident cap and the FTE resident count from a cost 
reporting period that at least partially overlaps the July 1, 2009-June 
30, 2010 academic year because this could result in use of a reference 
cost report that does not comport with the statutory requirement to use 
one of the three most recent cost reporting periods ending before March 
23, 2010, for which a cost report has been settled or has been 
submitted to the Medicare contractor by March 23, 2010. As the 
commenters even noted, for a hospital with a December 31 fiscal year 
end, this period would be its fiscal year 2009 cost reporting period. 
However, that cost report would not likely have been submitted to the 
Medicare contractor by March 23, 2010. The commenters stated that they 
have no objection to the use of an earlier cost reporting period where 
the adjusted FTE caps for those earlier periods are favorable to a 
hospital. However, we do not believe it is appropriate to institute a 
policy where hospitals may pick and choose which cost reporting period 
would be most favorable to them to use as the reference cost reporting 
period. As we stated in response to a comment in the November 24, 2010 
final rule (75 FR 72160), ``* * * we do not believe it would be 
appropriate to include in the determination of which cost reports are 
used to establish a hospital's reference resident level, those cost 
reporting periods that occurred at the time the Affordable Care Act was 
in development. Rather the cost reporting period used to determine the 
reference resident level should be a cost reporting period that 
reflects a number of FTE residents that a hospital is accustomed to 
training, not a number of FTE residents that is based on a hospital's 
rushed attempt to avoid a cap reduction.''
    Regarding the commenters' third recommendation, there is no 
skirting the issue that there are still unfilled slots. We do not have 
the authority to waive cap reductions for any excess capacity, even for 
hospitals that may demonstrate that they have been or are consistently 
filling almost all of their FTE slots. Regarding the fourth 
recommendation, we do not believe there is any validity to considering 
whether a hospital had evidence of cross-training activities in years 
prior to the July 1, 2009-June 30, 2010 academic year. Evidence of 
cross-training does not equate to an actual, formal Medicare GME 
affiliation agreement in which responsible representatives of each 
hospital agree to exchange FTE resident cap slots. Rather, in 
accordance with the long-standing regulations regarding Medicare GME 
affiliation agreements at section 413.79(f)(1), a formal agreement must 
be submitted to CMS and the Medicare contractor by July 1 of an 
academic year in order to effectuate the transfer of FTE slots. We 
cannot deem hospitals to be affiliated simply because cross-training 
occurred. Accordingly, we are not adopting the commenters' third and 
fourth suggestions either.
    Comment: Commenters stated that CMS should not be resistant to 
changing its policy as expressed in the interim final rule with comment 
period out of a concern that doing so would violate the ``logical 
outgrowth'' doctrine. The commenters asserted that their comments 
addressed the ``exact same'' subject-matter as that addressed in the 
interim final rule with comment period, namely implementing section 203 
of the MMEA for hospitals that are members of an affiliated group. 
Although CMS did not make any proposals pertaining to the use of 
academic year 2010 Medicare GME affiliation agreements in the interim 
final rule with comment period, the commenter stated that CMS should 
have done so as part of ``proper

[[Page 51723]]

rulemaking.'' Further, the commenters asserted that CMS should have 
recognized that members of an affiliated group in academic year 2010 
are entitled to the protections of the statute; therefore, CMS cannot 
use its flawed, incomplete analysis as a basis for rendering its final 
implementation decisions deficient as well. In addition, the commenters 
argued that CMS has taken latitude in prior rules and in implementing a 
similar provision in the MMA, where CMS made major changes between its 
proposed rule and final rule concerning cap reductions for affiliated 
providers. Lastly, the commenters understood that CMS is unlikely to 
apply changes made at this juncture to its calculation of the pool of 
slots to be reallocated and as such, there are no affected parties 
meriting protection under the logical outgrowth doctrine. Therefore, 
based on these arguments, commenters expect CMS to furnish a legal 
memorandum that addresses why it is legally impossible for CMS to 
revise its interim final rule with comment period.
    Response: Contrary to the commenters' assumption, we are not 
concerned about logical outgrowth as we do believe that the commenters' 
comments are within the scope of the interim final rule with comment 
period on determination of possible FTE cap reductions for hospitals 
that are members of a Medicare GME affiliated group. Rather, we 
disagree with the commenters' arguments both on statutory and policy 
grounds, as explained in response to the same commenters' comments 
above. (For example, we disagree with the commenters on what the plain 
reading of the language at section 203 of the MMEA is, and we disagree 
with the commenters that it would be appropriate to include in the 
determination of which cost reports are used to establish a hospital's 
reference resident level, those cost reporting periods that occurred at 
the time the Affordable Care Act was in development). Therefore, we are 
not accepting the commenters' recommendations and are finalizing the 
methodology for determining if and by how much the FTE resident caps of 
hospitals in Medicare GME affiliated groups are to be reduced, as 
expressed in the interim final rule with comment period (76 FR 13515).
    Comment: Commenters urged CMS to allow hospitals to provide updated 
FTE count data to CMS, given the severity of the consequences of the 
reductions. Commenters stated that CMS has given its contractors until 
December 31, 2011, to finalize their FTE cap reduction audits so there 
is sufficient time to review any data that hospitals may furnish them 
regarding their actual FTE counts for the cost reporting periods at 
issue.
    Response: If, by allowing hospitals to provide ``updated'' FTE 
count data, the commenters mean that hospitals should be allowed to 
provide FTE count data from cost reporting periods after the three 
applicable reference cost reporting periods, as we stated above, we do 
not believe it would be appropriate to include in the determination of 
which cost reports are used to establish a hospital's reference 
resident level, those cost reporting periods that occurred at the time 
the Affordable Care Act was in development. In response to the 
commenters' assertion that because CMS has given its contractors until 
December 31, 2011, to finalize FTE cap reduction audits, there is 
sufficient time for the contractors to review data regarding actual FTE 
counts, as we explained in the November 24, 2010 final rule (75 FR 
72154), this provision regarding audits continuing until December 31, 
2011, was intended to be used only under certain limited circumstances. 
Specifically, we explained that ``there may be instances where the 
audits of the reference resident levels may not be completed by July 1, 
2011, and that, within the scope of their normal audit work, the 
Medicare contractors will complete as many of these audits as possible, 
and some of the audits may not be completed until December 31, 2011'' 
(emphasis added) (75 FR 72154). Thus, the intent was not to require the 
Medicare contractors to perform lengthy and protracted reviews 
specifically for the purpose of implementing section 5503, nor to allow 
hospitals to present additional FTE resident count data in all 
instances. Rather, only if additional FTE resident count data was 
required by and presented to the contractor within the scope of the 
contractor's normal audit work, and that normal audit work would not be 
completed by July 1, 2011, it would be permissible for the audit work 
to proceed until December 31, 2011. Therefore, as implemented, the 
estimate of slots available for redistribution that CMS determined 
prior to July 1, 2011, would be relatively close to the number of 
available slots that would be determined based on the final audited 
data. If we were to allow all hospitals to revise their cost report 
data and delay all decisions until December 31, 2011, the estimated 
number of slots available for redistribution would be rendered 
completely meaningless.
    Comment: Commenters expressed general dissatisfaction with caps on 
resident FTEs because they believed the caps are outdated. One 
commenter expressed dissatisfaction that urban teaching hospitals in 
several states were unjustly excluded from receiving resident slots 
under section 5503 of the Affordable Care Act.
    Response: We thank the commenters for these comments, but note that 
they are not within the scope of the interim final rule with comment 
period.
b. Final Policies
    After consideration of the public comments we received, we are 
finalizing all of the provisions set forth in the March 14, 2011 
interim final rule with comment period, including the revision of Sec.  
413.79(m)(7) of the regulations, without modification.
4. Collection of Information Requirements
    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

(44 U.S.C. Chapter 35)
5. Regulatory Impact Statement
a. Statement of Need
    We need to issue a document that will finalize the provisions of 
the March 14, 2011 interim final rule with comment period, including 
the regulatory provisions under 42 CFR 413.79(m)(7).
b. Overall Impact
    We have examined the impact of this rule as required by Executive 
Order 12866 on Regulatory Planning and Review (September 30, 1993), 
Executive Order 13563 on Improving Regulation and Regulatory Review 
(February 2, 2011), the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
section 202 of the Unfunded Mandates Reform Act of 1995 (March 22, 
1995; Pub. L. 104-4), Executive Order 13132 on Federalism (August 4, 
1999) 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

[[Page 51724]]

in any 1 year). This rule does not reach the economic threshold and 
thus is not considered a major rule.
    In the November 24, 2010 final rule which implemented section 5503 
of the Affordable Care Act (75 FR 72239), we mentioned that we were 
unable to project how many FTE resident slots will be available for 
redistribution under section 5503 of the Affordable Care Act. Unlike 
section 422 of the MMA, which also provided for a redistribution of FTE 
resident slots but provided that the redistributed slots will be paid 
using the national average per resident amount (PRA) for direct GME 
payment purposes, section 5503 of the Affordable Care Act requires that 
hospitals be paid for their additional FTE resident slots using the 
hospitals' specific PRAs. Because we had not yet determined the number 
of FTE resident slots that will be redistributed under section 5503 of 
the Affordable Care Act or which hospitals will be receiving additional 
FTE resident slots, we could not calculate a direct GME impact for 
section 5503 of the Affordable Care Act. Similarly, we cannot calculate 
a direct GME dollar impact for section 203 of the MMEA.
    Because the general effect of section 203 of the MMEA is to protect 
from loss or mitigate the loss of slots of hospitals that are members 
of a Medicare GME affiliated group, there are fewer direct GME and IME 
slots available for redistribution to other hospitals. However, we are 
unable to compute a dollar impact on the redistribution of those slots 
to other hospitals. First, although there are currently 307 hospitals 
that are members of a Medicare GME affiliated group, these hospitals 
were not necessarily members of Medicare GME affiliated groups during 
the reference cost reporting periods specified by section 5503 of the 
Affordable Care Act. Second, since, as of this date, final 
determinations have not been made with regard to the number of slots 
that all affected hospitals will be losing or receiving, we cannot 
determine a financial impact for purposes of direct GME and IME for 
this provision.
    In the interim final rule with comment period, we solicited public 
comment on our analysis. We did not receive any public comments 
specific to this impact.
    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 physician practices, hospitals and 
other providers are small entities, either by nonprofit status or by 
qualifying as small businesses under the Small Business 
Administration's size standards (revenues of less than $7.0 to $34.5 
million in any 1 year). States and individuals are not included in the 
definition of a small entity. For details, see the Small Business 
Administration's Web site 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.
    Individuals and States are not included in the definition of a 
small entity.
    The RFA requires an agency to prepare an initial regulatory 
flexibility analysis when they issue a general notice of proposed 
rulemaking. However, HHS has maintained a longstanding policy of 
voluntarily preparing initial regulatory flexibility analyses for all 
rulemaking. The Secretary has determined that this final rule will not 
have a significant economic impact on a substantial number of small 
entities.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. 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 for Medicare payment regulations and has fewer than 
100 beds. We are not preparing an analysis for section 1102(b) of the 
Act because the Secretary has determined that this final 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 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 2011, that 
threshold is approximately $136 million. This rule will have no 
consequential effect on State, local, or tribal governments or on the 
private sector.
    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. Because this rule does not impose any costs on State or 
local governments, the requirements of Executive Order 13132 are not 
applicable.
c. Anticipated Effects
    We believe the general effect of section 203 of the MMEA is that it 
could protect from loss or mitigate the loss of slots for hospitals 
that are members of a Medicare GME affiliated group, and therefore, 
there could be fewer direct GME and IME slots available for 
redistribution to other hospitals.
d. Alternatives Considered
    Although there may be alternatives, the method we are finalizing in 
this final rule is the most consistent with that of a similar provision 
for hospitals that are members of Medicare GME affiliated groups 
implemented as part of section 422 of the MMA.
e. Conclusion
    The analysis above, together with the remainder of this preamble, 
provides a regulatory flexibility analysis as well as a regulatory 
impact analysis. For the reasons outlined in the RIA, we are not 
preparing an analysis for either the RFA or section 1102(b) of the Act 
because we have determined that this final rule will not have a direct 
significant economic impact on a substantial number of small entities 
or a direct significant impact on the operations of a substantial 
number of small rural hospitals.
    In accordance with the provisions of Executive Order 12866, this 
rule was reviewed by the Office of Management and Budget.
6. Comment on Issues Outside of the Scope of the Interim Final Rule 
With Comment Period
    We received one comment regarding nuyrsing and allied health pass-
through payments. This comment is outside of the scope of the interim 
final rule with comment period. Therefore, we are not responding to is 
in this final rule.

V. Changes to the IPPS for Capital-Related Costs

A. Overview

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a prospective payment system established by the 
Secretary.'' Under the statute, the Secretary has broad authority in 
establishing and implementing the IPPS for acute care hospital 
inpatient capital-related costs. We initially implemented the IPPS for 
capital-related costs in the Federal fiscal year (FY) 1992 IPPS final 
rule (56 FR 43358), in which we

[[Page 51725]]

established a 10-year transition period to change the xpayment 
methodology for Medicare hospital inpatient capital-related costs from 
a reasonable cost-based methodology to a prospective methodology (based 
fully on the Federal rate).
    FY 2001 was the last year of the 10-year transition period 
established to phase in the IPPS for hospital inpatient capital-related 
costs. For cost reporting periods beginning in FY 2002, capital IPPS 
payments are based solely on the Federal rate for almost all acute care 
hospitals (other than hospitals receiving certain exception payments 
and certain new hospitals). (We refer readers to the FY 2002 IPPS final 
rule (66 FR 39910 through 39914) for additional information on the 
methodology used to determine capital IPPS payments to hospitals both 
during and after the transition period.) The basic methodology for 
determining capital prospective payments using the Federal rate is set 
forth in Sec.  412.312 of the regulations. For the purpose of 
calculating capital payments for each discharge, currently the standard 
Federal rate is adjusted as follows:

(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment Factor 
(GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 + 
Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if 
applicable).

B. Exception Payments

    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital incurs unanticipated 
capital expenditures in excess of $5 million due to extraordinary 
circumstances beyond the hospital's control. This policy was originally 
established for hospitals during the 10-year transition period, but as 
we discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised 
the regulations at Sec.  412.312 to specify that payments for 
extraordinary circumstances are also made for cost reporting periods 
after the transition period (that is, cost reporting periods beginning 
on or after October 1, 2001). Additional information on the exception 
payment for extraordinary circumstances in Sec.  412.348(f) can be 
found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of the hospital (Sec.  412.348(c)), but were available only during the 
10-year transition period. After the end of the transition period, 
eligible hospitals can no longer receive this exception payment. 
However, for a certain period after the transition period, eligible 
hospitals may receive additional payments under the special exceptions 
provisions at Sec.  412.348(g), which guarantees all eligible hospitals 
a minimum payment of 70 percent of its Medicare allowable capital-
related costs provided that special exceptions payments do not exceed 
10 percent of total capital IPPS payments. Hospitals eligible for 
special exceptions payments are required to submit documentation to the 
fiscal intermediary or MAC indicating the completion date of their 
project. Special exceptions payments may be made only for the 10 years 
from the cost reporting year in which the hospital completes its 
qualifying project, and the hospital must have completed the project no 
later than the hospital's cost reporting period beginning before 
October 1, 2001. Thus, an eligible hospital may receive special 
exceptions payments for up to 10 years beyond the end of the capital 
IPPS transition period. Under this limitation on the period for special 
exceptions payments at Sec.  412.348(g)(7) of the regulations, FY 2012 
is the final year hospitals can receive special exceptions payments. 
(For more detailed information regarding the special exceptions policy 
under Sec.  412.348(g), we refer readers to the FY 2002 IPPS final rule 
(66 FR 39911 through 39914) and the FY 2003 IPPS final rule (67 FR 
50102).)

C. New Hospitals

    Under the IPPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years. For 
example, the following hospitals are not considered new hospitals: (1) 
A hospital that builds new or replacement facilities at the same or 
another location, even if coincidental with a change of ownership, a 
change in management, or a lease arrangement; (2) a hospital that 
closes and subsequently reopens; (3) a hospital that has been in 
operation for more than 2 years but has participated in the Medicare 
program for less than 2 years; and (4) a hospital that changes its 
status from a hospital that is excluded from the IPPS to a hospital 
that is subject to the capital IPPS. For more detailed information, we 
refer readers to the FY 1992 IPPS final rule (56 FR 43418). During the 
10-year transition period, a new hospital was exempt from the capital 
IPPS for its first 2 years of operation and was paid 85 percent of its 
reasonable costs during that period. Originally, this provision was 
effective only through the transition period and, therefore, ended with 
cost reporting periods beginning in FY 2002. Because, as discussed in 
the FY 2003 IPPS final rule (67 FR 50101), we believe that special 
protection to new hospitals is also appropriate even after the 
transition period, we revised the regulations at Sec.  412.304(c)(2) to 
provide that, for cost reporting periods beginning on or after October 
1, 2002, a new hospital (defined under Sec.  412.300(b)) is paid 85 
percent of its Medicare allowable capital-related costs through its 
first 2 years of operation, unless the new hospital elects to receive 
full prospective payment based on 100 percent of the Federal rate. (We 
refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 
50102) for a detailed discussion of the special payment provisions for 
new hospitals under the capital IPPS after the 10-year transition 
period.)

D. Hospitals Located in Puerto Rico

    Section 412.374 of the regulations provides for the use of a 
blended payment amount for prospective payments for capital-related 
costs to hospitals located in Puerto Rico. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In general, hospitals located 
in Puerto Rico are paid a blend of the applicable capital IPPS Puerto 
Rico rate and the applicable capital IPPS Federal rate.
    Prior to FY 1998, hospitals in Puerto Rico were paid a blended 
capital IPPS rate that consisted of 75 percent of the capital IPPS 
Puerto Rico specific rate and 25 percent of the capital IPPS Federal 
rate. However, effective October 1, 1997 (FY 1998), in conjunction with 
the change to the operating IPPS blend percentage for hospitals located 
in Puerto Rico required by section 4406 of Public Law 105-33, we 
revised the methodology for computing capital IPPS payments to 
hospitals in Puerto Rico to be based on a blend of 50 percent of the 
capital IPPS Puerto Rico rate and 50 percent of the capital IPPS 
Federal rate. Similarly, in conjunction with the change in operating 
IPPS payments to hospitals located in Puerto Rico for FY 2005 required 
by section 504 of Public Law 108-173, we again revised the methodology 
for computing capital IPPS payments to hospitals located in Puerto Rico 
to be based on a blend of 25 percent of the capital IPPS Puerto Rico 
rate and 75 percent of the capital IPPS

[[Page 51726]]

Federal rate effective for discharges occurring on or after October 1, 
2004.

E. Changes for FY 2012: MS-DRG Documentation and Coding Adjustment

1. Background
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we adopted the MS-DRG patient classification system for 
the IPPS, effective October 1, 2007, to better recognize patient 
severity of illness in Medicare payment rates. Adoption of the MS-DRGs 
resulted in the expansion of the number of DRGs from 538 in FY 2007 to 
745 in FY 2008. (Currently, there are 747 MS-DRGs, and for FY 2012, we 
are adopting 4 additional MS-DRGs (for a total of 751 MS-DRG). By 
increasing the number of DRGs and more fully taking into account 
patient severity of illness in Medicare payment rates, the MS-DRGs 
encourage hospitals to change their documentation and coding of patient 
diagnoses. In that same final rule with comment period (72 FR 47183), 
we indicated that we believe the adoption of the MS-DRGs had the 
potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to the 
incentives for changes in documentation and coding. Accordingly, we 
established adjustments to both the national operating standardized 
amount and the national capital Federal rate to eliminate the estimated 
effect of changes in documentation and coding resulting from the 
adoption of the MS-DRGs that do not reflect real changes in case-mix. 
Specifically, we established prospective documentation and coding 
adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 2009, and 
-1.8 percent for FY 2010. However, to comply with section 7(a) of 
Public Law 110-90, enacted on September 29, 2007, in a final rule 
published in the Federal Register on November 27, 2007 (72 FR 66886 
through 66888), we modified the documentation and coding adjustment for 
FY 2008 to -0.6 percent, and consequently revised the FY 2008 IPPS 
operating and capital payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -1.8 
percent adjustment established in the FY 2008 IPPS final rule with 
comment period. As discussed in the FY 2008 IPPS final rule with 
comment period (72 FR 48447 and 48733 through 48774), we applied an 
additional documentation and coding adjustment of -0.9 percent to the 
FY 2009 IPPS national standardized amounts and the national capital 
Federal rate. The documentation and coding adjustments established in 
the FY 2009 IPPS final rule, as amended by Public Law 110-90, are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment in 
FY 2008, yielding a combined effect of -1.5 percent. (For additional 
details on the development and implementation of the documentation and 
coding adjustments for FY 2008 and FY 2009, we refer readers to section 
II.D. of this preamble and the following rules published in the Federal 
Register: August 22, 2007 (72 FR 47175 through 47186 and 47431 through 
47432); November 27, 2007 (72 FR 66886 through 66888); and August 19, 
2008 (73 FR 48447 through 48450 and 48773 through 48775).)
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 24092 
through 24101), we presented the results of a retrospective evaluation 
of the FY 2008 data for claims paid through December 2008. We sought 
public comment on our methodology and analysis and our proposal to 
apply a prospective adjustment to address the effect of documentation 
and coding changes unrelated to changes in real case-mix in FY 2008. In 
addition, we sought public comment on addressing in the FY 2011 
rulemaking cycle any effect of documentation and coding changes that do 
not reflect real changes in case-mix for discharges occurring during FY 
2009. However, after consideration of the public comments received on 
the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule, consistent with the 
application of the documentation and coding adjustment to the operating 
IPPS standardized amounts, we determined that it would be appropriate 
to postpone the adoption of any additional documentation and coding 
adjustments to the capital IPPS rates until a full analysis of FY 2009 
case-mix changes could be completed (74 FR 43926 through 43928).
    For the FY 2011 IPPS/LTCH PPS proposed rule (75 FR 24014), we 
performed a thorough retrospective evaluation of the most recent 
available claims data, and the results of this evaluation were used by 
our actuaries to determine any necessary payment adjustments beyond the 
cumulative -1.5 percent adjustment that has already been applied to the 
national capital Federal rate to ensure budget neutrality for the 
implementation of MS-DRGs. Specifically, we performed a retrospective 
evaluation of the FY 2009 claims data updated through December 2009 
using the same analysis methodology as we did for FY 2008 claims in the 
FY 2010 IPPS/RY 2010 LTCH PPS proposed and final rules. Based on this 
evaluation, our actuaries determined that the implementation of the MS-
DRG system resulted in a 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. We also noted our intent to 
update our analysis with FY 2009 data on claims paid through March 2009 
(sic) for the FY 2011 IPPS/LTCH PPS final rule. (We note that the March 
2009 update date for claims paid data in the proposed rule should have 
stated March 2010.)
    As intended, as discussed in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50355), we updated our analysis with FY 2009 data on claims paid 
through March 2010 in that final rule. For the FY 2011 IPPS/LTCH PPS 
final rule, applying the same analysis methodology as we did for the 
proposed rule to an FY 2009 claims data updated through March 2010 
verified the 5.4 percent change in case-mix due to documentation and 
coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2009. The 5.4 percent estimate of the cumulative 
effect of changes in documentation and coding under the MS-DRG system 
that did not reflect real changes in case-mix for FYs 2008 and 2009 
exceeded the cumulative -1.5 percent prospective documentation and 
coding adjustment that had already been applied to the national capital 
Federal rate by 3.9 percentage points (5.4 percent minus 1.5 percent). 
Therefore, in FY 2011, an additional cumulative adjustment of -3.9 
percent to the national capital Federal rate would be necessary to 
eliminate the full effect of the documentation and coding changes due 
to the adoption of the MS-DRGs on future payments.
    Therefore, in that same final rule, under the Secretary's broad 
authority under section 1886(g) of the Act, consistent with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, we 
implemented an adjustment to the FY 2011 national capital Federal rate 
of -2.9 percent to account for part of the effect of the estimated 
changes in documentation and coding changes under the MS-DRG system 
that occurred in FYs 2008 and 2009 that did not reflect real changes in 
case-mix. We also established that we will leave the -2.9 percent 
adjustment in place for subsequent fiscal years to account for the 
effect of that documentation and coding change in

[[Page 51727]]

subsequent years. Furthermore, we stated our intention to address the 
remaining estimated adjustment to the national capital Federal rate of 
-1.0 percent (that is, the estimated effect of documentation and coding 
changes under the MS-DRG system of -5.4 percent minus the existing -0.6 
percent and -0.9 percent adjustments and the -2.9 percent adjustment 
for FY 2011) in future rulemaking cycles.
2. Prospective MS-DRG Documentation and Coding Adjustment to the 
National Capital Federal Rate for FY 2012 and Subsequent Years
    As we stated in the FY 2012 IPPS/LTCH PPS proposed rule, we 
continue to believe that it is appropriate to make adjustments to the 
capital IPPS rates to eliminate the effect of any documentation and 
coding changes as a result of the implementation of the MS-DRGs. These 
adjustments are intended to ensure that future annual aggregate IPPS 
payments are the same as payments that otherwise would have been made 
had the prospective adjustments for documentation and coding applied in 
FY 2008 and FY 2009 accurately reflected the changes due to 
documentation and coding that occurred in those years. As noted in 
section V.A. of the preamble of the proposed rule and this preamble, 
under section 1886(g) of the Act, the Secretary has broad authority in 
establishing and implementing the IPPS for acute-care hospital 
inpatient capital-related costs (that is, the capital IPPS). We have 
consistently stated since the initial implementation of the MS-DRG 
system that we do not believe it is appropriate for Medicare 
expenditures under the capital IPPS to increase due to MS-DRG related 
changes in documentation and coding. Accordingly, we believe that it is 
appropriate under the Secretary's broad authority under section 1886(g) 
of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act 
and section 7(b) of Public Law 110-90, to make adjustments to the 
national capital Federal rate to eliminate the full effect of the 
documentation and coding changes resulting from the adoption of the MS-
DRGs. We believe that this is appropriate because, in absence of such 
adjustments, the effect of the documentation and coding changes 
resulting from the adoption of the MS-DRGs results in inappropriately 
high capital IPPS payments because that portion of the increase in 
aggregate payments is not due to an increase in patient severity of 
illness (and costs).
    As discussed above, based on our retrospective evaluation of the FY 
2009 claims, our actuaries determined that implementation of the MS-DRG 
system resulted in a 5.4 percent change in case-mix due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009. To date, we have made 
adjustments to the national capital Federal rate to account for 4.4 
percent (that is, -0.6 percent in FY 2008, -0.9 percent in FY 2009, and 
-2.9 percent in FY 2011) of the estimated 5.4 percent documentation and 
coding effect. Thus, our current estimate of the remaining adjustment 
to the national capital Federal rate is -1.0 percent to account for the 
effect of documentation and coding changes under the MS-DRG system for 
FYs 2008 and 2009.
    In the proposed rule, under the Secretary's broad authority under 
section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, 
consistent with the intention we stated in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50357), we proposed to reduce the national capital 
Federal rate in FY 2012 by -1.0 percent to account for the remainder of 
the cumulative effect of the estimated changes in documentation and 
coding under the MS-DRG system in FYs 2008 and 2009 that did not 
reflect real changes in case-mix. Furthermore, consistent with the 
documentation and coding adjustments we have made in the past, we 
proposed to leave this proposed -1.0 percent adjustment in place for 
subsequent fiscal years to account for the effect in FY 2012 and 
subsequent years. As explained above, this proposed -1.0 percent 
adjustment accounts for the remainder of our current estimate of the 
cumulative effect of documentation and coding changes under the MS-DRG 
system for FYs 2008 and 2009 of -5.4 percent minus the existing -0.6 
percent, -0.9 percent, and -2.9 percent adjustments.
    We did not receive any public comments on our proposal to 
permanently reduce the national capital Federal rate in FY 2012 by -1.0 
percent to account for the remainder of the cumulative effect of the 
estimated changes in documentation and coding under the MS-DRG system 
that occurred during FYs 2008 and 2009 that did not reflect real 
changes in case-mix. (The public comments we received on our 
methodology and the magnitude of our estimate of cumulative effect of 
the estimated changes in documentation and coding under the MS-DRG 
system that occurred during FYs 2008 and 2009 that did not reflect real 
changes in case-mix are discussed in section II.D. of this preamble.)
    In this final rule, under the Secretary's broad authority under 
section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Pub. L. 110-90, 
consistent with the intention we stated in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50357), as we proposed, we are reducing the national 
capital Federal rate in FY 2012 by -1.0 percent to account for the 
remainder of the cumulative effect of the estimated changes in 
documentation and coding under the MS-DRG system that occurred during 
FYs 2008 and 2009 that did not reflect real changes in case-mix. 
Furthermore, consistent with the documentation and coding adjustments 
we have made in the past, and as we proposed, we will leave this -1.0 
percent adjustment in place for subsequent fiscal years to account for 
the effect in FY 2012 and subsequent years. As explained above, this -
1.0 percent adjustment accounts for the remainder of our current 
estimate of the cumulative effect of documentation and coding changes 
under the MS-DRG system that occurred during FYs 2008 and 2009 of -5.4 
percent minus the existing -0.6 percent, -0.9 percent, and -2.9 percent 
adjustments.
3. Documentation and Coding Adjustment to the Puerto Rico-Specific 
Capital Rate
    Under Sec.  412.74, Puerto Rico hospitals are currently paid based 
on 75 percent of the national capital Federal rate and 25 percent of 
the Puerto Rico-specific capital rate. In the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50358 through 50359), we discussed the retrospective 
evaluation of the FY 2009 claims data from the March 2010 update of the 
MedPAR file of hospitals located in Puerto Rico using the same 
methodology used to estimate documentation and coding changes under 
IPPS for non-Puerto Rico hospitals. This analysis shows that the change 
in case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FYs 2008 and 2009 
from hospitals located in Puerto Rico was approximately 2.6 percent. 
(As discussed in that same final rule, the Puerto Rico-specific capital 
rate was not adjusted for the cumulative effects of documentation and 
coding changes in FY 2008 or FY 2009.) We also explained that we 
continue to believe that such an adjustment is appropriate because all 
hospitals have the same financial incentives for documentation and 
coding improvements, and the same ability to benefit from the resulting 
increase in

[[Page 51728]]

aggregate payments that do not reflect real changes in case-mix.
    Given this case-mix increase due to changes in documentation and 
coding under the MS-DRGs, consistent with the adjustment we made to the 
FY 2011 national capital Federal rate (discussed above) and consistent 
with our adjustment to the FY 2011 Puerto Rico-specific standardized 
amount, under the Secretary's broad authority under section 1886(g) of 
the Act, we established an adjustment to the Puerto Rico-specific 
capital rate of -2.6 percent in FY 2011 for the cumulative increase in 
case-mix due to changes in documentation and coding under the MS-DRGs 
for FYs 2008 and 2009. In addition, consistent with our implementation 
of other prospective MS-DRG documentation and coding adjustments to the 
capital Federal rate and operating IPPS standardized amounts, we 
established that we will leave that -2.6 percent adjustment in place 
for subsequent fiscal years in order to ensure that changes in 
documentation and coding resulting from the adoption of the MS-DRGs do 
not lead to an increase in aggregate payments not reflective of an 
increase in real case-mix in subsequent years. The -2.6 percent 
adjustment to the capital Puerto Rico-specific rate that we made in FY 
2011 reflects the entire amount of our current estimate of the effects 
of documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FYs 2008 and 2009 from hospitals 
located in Puerto Rico. Consequently, in the FY 2012 IPPS/LTCH PPS 
proposed rule, we did not propose to make any additional adjustments to 
the capital Puerto Rico-specific rate for FY 2012 for the effect of 
documentation and coding that did not reflect real changes in case-mix.
    We did not receive any public comments on our proposal not to make 
any additional adjustments to the capital Puerto Rico-specific rate for 
FY 2012 for the effect of documentation and coding changes that did not 
reflect real changes in case-mix and, therefore, are adopting our 
proposal as final in this final rule.

F. Other Changes for FY 2012

    The annual update to the capital IPPS national Federal and Puerto 
Rico-specific rates, as provided for at Sec.  412.308(c), for FY 2012 
is discussed in section III. of the Addendum to this final rule.

VI. Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. A per discharge limit (the target amount as 
defined in Sec.  413.40(a)) was set for each hospital or hospital unit 
based on the hospital's own cost experience in its base year, and 
updated annually by a rate-of-increase percentage. The updated target 
amount was multiplied by total Medicare discharges during that period 
and applied as an aggregate upper limit (the ceiling as defined in 
Sec.  413.40(a)) on total inpatient operating costs for a hospital's 
cost reporting period. Prior to October 1, 1997, these payment 
provisions applied consistently to all categories of excluded 
providers, which included rehabilitation hospitals and units (now 
referred to as IRFs), psychiatric hospitals and units (now referred to 
as IPFs), LTCHs, children's hospitals, and IPPS-excluded cancer 
hospitals.
    Payment to children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.)
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25968), we 
proposed that the FY 2012 rate-of-increase percentage to be applied to 
the target amount for cancer and children's hospitals and RNHCIs would 
be the estimated FY 2012 percentage increase in the IPPS operating 
market basket, estimated to be 2.8 percent. Beginning with FY 2006, we 
have used the percentage increase in the IPPS operating market basket 
to update the target amounts for children's and cancer hospitals. As 
explained in the FY 2006 IPPS final rule (70 FR 47396 through 47398), 
with IRFs, IPFs, and LTCHs being paid under their own PPS, the 
remaining number of providers being paid based on reasonable cost 
subject to a ceiling (that is, children's hospitals, 11 cancer 
hospitals, and RNHCIs) is too small and the cost report data are too 
limited to be able to create a market basket solely for these 
hospitals. For FY 2012, we proposed to continue to use the IPPS 
operating market basket to update the target amounts for children's and 
cancer hospitals and RNHCIs for the reasons discussed in the FY 2006 
IPPS final rule.
    In the FY 2012 IPPS/LTCH PPS proposed rule, we proposed to use the 
revised and rebased FY 2006-based IPPS operating market basket to 
update the target amounts for children's and cancer hospitals and 
RNHCIs for FY 2012. Therefore, based on IHS Global Insight, Inc.'s 2011 
first quarter forecast, with historical data through the 2010 fourth 
quarter, we estimated that the FY 2012 update to the IPPS operating 
market basket would be 2.8 percent (that is, the estimate of the market 
basket rate-of-increase). However, we proposed that if more recent data 
become available for the final rule, we would use them to calculate the 
IPPS operating market basket update for FY 2012. Therefore, based on 
IHS Global Insight, Inc.'s 2011 second quarter forecast, with 
historical data through the 2011 first quarter, we estimate that the 
final FY 2012 update to the IPPS operating market basket is 3.0 
percent. Moreover, consistent with our proposal that the percentage 
increase in the rate-of-increase limits for cancer and children's 
hospitals and RNHCIs would be the percentage increase in the FY 2012 
IPPS operating market basket, the FY 2012 rate-of-increase percentage 
that is applied to the FY 2011 target amounts in order to calculate the 
final FY 2012 target amounts for cancer and children's hospital and 
RNHCIs is 3.0 percent, in accordance with the applicable regulations in 
42 CFR 413.40.
    We note that IRFs, IPFs, and LTCHs, which were paid previously 
under the reasonable cost methodology, now receive payment under their 
own prospective payment systems, in accordance with changes made to the 
statute. In general, the prospective payment systems for IRFs, IPFs, 
and LTCHs provided transition periods of varying lengths during which 
time a portion of the prospective payment was based on cost-based 
reimbursement rules under Part 413. (However, certain providers do not 
receive a transition period or may elect to bypass the transition 
period as applicable under 42 CFR Part 412, Subparts N, O, and P.) We 
note that the various transition periods provided for under the IRF 
PPS, the IPF PPS, and the LTCH PPS have ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section IV. of the Addendum to this final rule for the 
specific final update changes to the Federal payment rates for LTCHs 
under the LTCH PPS for FY 2012. The annual updates for the IRF PPS and 
the IPF PPS are issued by the agency in separate Federal Register 
documents.

[[Page 51729]]

B. Critical Access Hospital (CAH) Payment for Ambulance Services

1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs (MRHFPs) under which individual 
States may designate certain facilities as critical access hospitals 
(CAHs). Facilities that are so designated and that meet the CAH 
conditions of participation under 42 CFR Part 485, Subpart F, will be 
certified as CAHs by CMS. Regulations governing payments to CAHs for 
services to Medicare beneficiaries are located in 42 CFR Part 413. 
Section 1834(l) of the Act sets forth the payment rules for ambulance 
services. Generally, payment to ambulance providers and suppliers for 
ambulance services are made under the ambulance fee schedule. Section 
205 of Public Law 106-554 (BIPA) amended section 1834(l) of the Act by 
adding a paragraph (8) to that section, which provides that the 
Secretary shall pay the reasonable costs incurred in furnishing 
ambulance services if such services are furnished by a CAH (as defined 
in section 1861(mm)(1) of the Act), or by an entity that is owned and 
operated by a CAH, but only if the CAH or entity is the only provider 
or supplier of ambulance services that is located within a 35-mile 
drive of the CAH. The term ``provider of ambulance services'' includes 
all Medicare-participating providers that submit claims under Medicare 
for ambulance services (for example, hospitals, CAHs, skilled nursing 
facilities (SNFs), and home health agencies (HHAs)). The term 
``supplier of ambulance services'' is defined as an entity that 
provides ambulance services and that is independent of any Medicare-
participating or non-Medicare-participating provider. Section 205 was 
effective for services furnished on or after December 21, 2000. 
Regulations implementing section 1834(l)(8) of the Act are set forth at 
42 CFR 413.70(b)(5).
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50361), we 
implemented section 3128(a) of the Affordable Care Act, which amended 
section 1834(l)(8) of the Act by inserting ``101 percent of'' before 
``the reasonable costs.'' As such, section 3128(a) increased payment 
for ambulance services furnished by a qualifying CAH or entity owned 
and operated by a CAH to 101 percent of reasonable costs, effective for 
cost reporting periods beginning on or after January 1, 2004. We 
amended the regulations at Sec.  413.70(b)(5)(i) to conform to this 
statutory change by stating that, effective for cost reporting periods 
beginning on or after January 1, 2004, payment for ambulance services 
furnished by a CAH or an entity that is owned and operated by a CAH is 
101 percent of the reasonable costs of the CAH or the entity in 
furnishing those services, but only if the CAH or the entity furnishing 
those services is the only provider or supplier of ambulance services 
located within a 35-mile drive of the CAH or the entity.
2. Requirement for CAH Ambulance Within a 35-Mile Location of a CAH or 
Entity
    Section 413.70(b)(5) of the existing regulations states that 
payment for ambulance services furnished by a CAH or an entity that is 
owned and operated by a CAH is 101 percent of reasonable costs of the 
CAH or the entity in furnishing those services, but only if the CAH or 
the entity is ``the only provider or supplier of ambulance services 
located within a 35-mile drive of the CAH or the entity''. However, the 
statutory language at section 1834(l)(8) of the Act states that a CAH 
is eligible to be paid based on 101 percent of reasonable costs for 
ambulance services furnished by the CAH or by an entity that is owned 
and operated by a CAH, but only if the CAH or the entity is the only 
provider or supplier of ambulance services that is located within a 35-
mile drive of such CAH. Because the statute only requires that there be 
no other provider or supplier of ambulance services within a 35-mile 
drive of the CAH and does not address whether there is another provider 
or supplier of ambulance services within a 35-mile drive of the CAH-
owned and operated entity, we believe that the existing regulation is 
not consistent with the plain reading of the statutory language at 
section 1834(l)(8) of the Act. In addition, we believe the plain 
reading of the statutory language at section 1834(l)(8) of the Act does 
not address the situation where there is no provider or supplier of 
ambulance services within a 35-mile drive of the CAH, but there is a 
CAH-owned and operated entity furnishing ambulance services that is 
more than a 35-mile drive from the CAH, thus creating a ``gap'' in the 
statutory language. That is, the statutory language does not address 
the situation where the entity that is owned and operated by the CAH is 
located more than a 35-mile drive from the CAH.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25969 through 
25971), in order to ensure that the regulations are consistent with the 
plain language of section 1834(l)(8) of the Act, we proposed to revise 
Sec.  413.70(b)(5)(i) by adding a new paragraph (C) to state that, 
effective for cost reporting periods beginning on or after October 1, 
2011, payment for ambulance services furnished by a CAH or by a CAH-
owned and operated entity is 101 percent of reasonable costs of the CAH 
or the entity in furnishing those services, but only if the CAH or the 
entity is the only provider or supplier of ambulance services located 
within a 35-mile drive of the CAH (Figure 1). Under this proposed 
change, the CAH-owned and operated entity would be paid 101 percent of 
reasonable costs for its ambulance services only if there is no other 
provider or supplier of ambulance services within a 35-mile drive of 
the CAH. However, if there is a provider or supplier of ambulance 
services located within a 35-mile drive of the CAH (Figure 2), the CAH-
owned and operated entity would not be paid at 101 percent of 
reasonable costs, but instead would be paid under the ambulance fee 
schedule.
Figure 1:
    The CAH-owned and operated entity would be paid at 101 percent of 
reasonable costs for its ambulance services because there is no other 
provider or supplier of ambulance services within a 35-mile drive of 
the CAH.

[[Page 51730]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.019

Figure 2:
    The CAH-owned and operated entity would be paid under the ambulance 
fee schedule for its ambulance services because the CAH-owned and 
operated entity is not the only provider or supplier of ambulance 
services located within a 35-mile drive of the CAH.
[GRAPHIC] [TIFF OMITTED] TR18AU11.020

    In addition, in the FY 2012 IPPS/LTCH PPS proposed rule, we 
proposed to establish a policy that would address the ``gap'' in the 
statutory language, that is, where the CAH-owned and operated entity 
furnishing ambulance services is more than a 35-mile drive from the 
CAH, but there is no other provider or supplier of ambulance services 
located within a 35-mile drive of the CAH. We proposed to include in 
the proposed new paragraph (C) of Sec.  413.70(b)(5)(i) a provision 
which states that, effective for cost reporting periods beginning on or 
after October 1, 2011, if there is no provider or supplier of ambulance 
services within a 35-mile drive of the CAH and there is a CAH-owned and 
operated entity that is more than a 35-mile drive from the CAH, the 
CAH-owned and operated entity would be paid at 101 percent of 
reasonable costs for its ambulance services as long as that entity is 
the closest provider or supplier of ambulance services to the CAH 
(Figure 3). Allowing the CAH-owned and operated entity to be paid at 
101 percent of reasonable costs if there is no other provider or 
supplier of ambulance services that is closer to the CAH is consistent 
with the original purpose of section 1834(l)(8) of the Act, which was 
intended to help ensure an adequate level of ambulance services in 
areas served by CAHs. The statute allows for reasonable cost-based 
payment only if there is no other provider or supplier of ambulance 
services within a 35-mile drive of the CAH. If there is another 
provider or supplier of ambulance services located within a 35-mile 
drive of the CAH, the statute does not allow for payment to the CAH or 
a CAH-owned and operated entity at 101 percent of reasonable costs 
because there is an adequate level of ambulance services available. 
Accordingly, where a CAH-owned and operated entity is located more than 
a 35-mile drive from the CAH, we proposed to allow payment at 101 
percent of reasonable costs only if there is no other provider or 
supplier of ambulance services located closer to the CAH. If there is a 
closer provider or supplier of ambulance services, that closer provider 
or supplier would also be assuring an adequate level of ambulance 
services in the area served by the CAH, and there would be no need to 
pay the CAH-owned and operated entity at 101 percent of reasonable 
costs in order to ensure access to ambulance services. Therefore, if 
the CAH-owned and operated entity (located more than a 35-mile drive 
from the CAH) is not the closest provider or supplier of ambulance 
services to the CAH (Figure 4), the CAH-owned and operated entity would 
be reimbursed under the ambulance fee schedule.

[[Page 51731]]

Figure 3:
    The CAH-owned and operated entity would be paid at 101 percent of 
reasonable costs for its ambulance services because even though the 
CAH-owned and operated entity is more than a 35-mile drive from the 
CAH, it is the closest provider or supplier of ambulance services to 
the CAH.
[GRAPHIC] [TIFF OMITTED] TR18AU11.021

    Figure 4:
    The CAH-owned and operated entity would receive payment under the 
ambulance fee schedule for its ambulance services because there is 
another provider or supplier of ambulance services that is closer to 
the CAH than the CAH-owned and operated entity.
[GRAPHIC] [TIFF OMITTED] TR18AU11.022

    Comment: One commenter requested that CMS apply a similar policy as 
that proposed for CAH ambulance services to any provider-based 
department of a CAH.
    Response: We believe that the commenter's request to address 
policies concerning other CAH provider-based departments is outside of 
the scope of the proposed rule. Our proposal only addressed the 
requirements that a CAH and CAH-owned and operated entity would need to 
meet in order to be paid 101 percent of reasonable costs for ambulance 
services. Therefore, we are not responding to this comment in this 
final rule, but may consider the commenter's suggestion in future 
rulemaking.
    Comment: One commenter stated that, while the examples discussed in 
the proposed rule clearly specified how CAHs and CAH-owned and operated 
entities in certain situations would be paid, the commenter was aware 
of other situations that were not addressed in the proposed rule. The 
commenter stated that many facilities operate ambulance services in 
several locations and requested that CMS address the following scenario 
(referred to as ``scenario one'' in the remainder of this section):
    ``A CAH has a CAH-based ambulance on its campus. There is no other 
ambulance service within a 35-mile drive of the CAH. The CAH owns and 
operates a satellite of its ambulance service at a 45-mile drive from 
the CAH. Under this scenario, the CAH-based ambulance site would be 
paid at 101 percent of reasonable cost, but would the CAH-owned 
satellite be paid at 101 percent of costs or on the fee schedule? Note 
that the two sites represent different locations of the same ambulance 
entity.''
    The commenter also requested that CMS address the following 
scenario (referred to as ``scenario two'' in the remainder of this 
section):
    ``In another scenario, assume that both the CAH and the CAH-owned 
entity's ambulance services would be paid at 101 percent of reasonable 
costs in the above situation. How would the CAH's ambulance services be 
reimbursed if there was a non-CAH owned or operated ambulance service

[[Page 51732]]

that was located between the CAH and its ambulance satellite site? For 
example, if the CAH-owned entity was located 45 miles from the CAH 
(which had its own ambulance onsite), but the independent ambulance was 
located 40 miles from the CAH? Would the CAH-owned entity 45 miles from 
the CAH be paid on a fee basis or at 101 percent of reasonable costs?''
    Response: Regarding scenario one, the type of payment that the CAH 
and the CAH-owned and operated entity would receive for their ambulance 
services would depend on whether the CAH and the CAH-owned and operated 
entity operate as one legal entity or are two separate legal entities. 
If the CAH and the CAH-owned and operated entity are two separate legal 
entities, the fact that the CAH has an ambulance on its main campus 
would preclude the CAH-owned and operated entity from receiving payment 
at 101 percent of reasonable costs for its ambulance services because 
the CAH-owned and operated entity is not the only provider of ambulance 
services that is located within a 35-mile drive from the CAH. The CAH-
owned and operated entity would not receive payment based on reasonable 
cost but, instead, would be paid using the ambulance fee schedule 
because there is a provider or supplier of ambulance services located 
within a 35-mile drive of the CAH, which is the ambulance stationed at 
the main CAH. However, if the CAH and the CAH-owned and operated entity 
are one legal entity, both the CAH and the CAH-owned and operated 
entity would be paid based on 101 percent of reasonable costs for their 
ambulance services as long as there is no other provider or supplier of 
ambulance services closer to the main CAH than the CAH-owned and 
operated entity.
    For purposes of discussing scenario two, we assume that the CAH and 
the CAH-owned and operated entity are one legal entity. As described 
above, in scenario two, the CAH has an ambulance service on its main 
campus, a CAH-owned and operated entity is located a 45-mile drive from 
the CAH, and there is also a non-CAH ambulance that is located a 40-
mile drive from the CAH. In this scenario, because the non-CAH 
ambulance is closer to the CAH than the CAH-owned and operated entity, 
the CAH-owned and operated entity would not receive payment at 101 
percent of reasonable costs but rather would be paid using the 
ambulance fee schedule. However, because there is no other provider or 
supplier of ambulance services within a 35-mile drive of the main CAH, 
the main CAH would be paid based on 101 percent of reasonable costs for 
its ambulance services.
    After consideration of the public comments we received, we are 
adopting our proposals without modification. Specifically, we are 
adopting, as final, the proposed revision of Sec.  413.70(b)(5)(i) of 
the regulations by adding a new paragraph (C) to specify that, for cost 
reporting periods beginning on or after October 1, 2011, payment for 
ambulance services furnished by a CAH or by a CAH-owned and operated 
entity is 101 percent of reasonable costs of the CAH or the entity in 
furnishing those services, but only if the CAH or the entity is the 
only provider or supplier of ambulance services located within a 35-
mile drive of the CAH.
    In addition, we are adopting, as final, our proposal to include in 
new Sec.  413.70(b)(5)(i) (C), a provision to address the ``gap'' in 
the statutory language, where there is no other provider or supplier of 
ambulance services located within a 35-mile drive of the CAH, but there 
is a CAH-owned and operated entity furnishing ambulance services more 
than a 35-mile drive from the CAH. Specifically, for cost reporting 
periods beginning on or after October 1, 2011, if there is no provider 
or supplier of ambulance services located within a 35-mile drive of the 
CAH and there is a CAH-owned and operated entity that is more than a 
35-mile drive from the CAH, the CAH-owned and operated entity will be 
paid at 101 percent of reasonable costs for its ambulance services as 
long as that entity is the closest provider or supplier of ambulance 
services to the CAH. However, if there is a provider or supplier of 
ambulance services that is closer to the CAH than the CAH-owned and 
operated entity, the CAH-owned and operated entity will be paid based 
on the ambulance fee schedule.
    We also are finalizing a conforming change to Sec.  
413.70(b)(5)(i)(B) to make the effective date of that paragraph 
consistent with the effective date of the new paragraph (C).

C. Report of Adjustment (Exceptions) Payments

    Section 4419(b) of Public Law 105-33 requires the Secretary to 
publish annually in the Federal Register a report describing the total 
amount of adjustment payments made to excluded hospitals and hospital 
units by reason of section 1886(b)(4) of the Act during the previous 
fiscal year.
    The process of requesting, adjusting, and awarding an adjustment 
payment is likely to occur over a 2-year period or longer. First, 
generally, an excluded hospital or an excluded unit of a hospital must 
file its cost report for a fiscal year in accordance with Sec.  
413.24(f)(2). The fiscal intermediary or MAC reviews the cost report 
and issues a notice of provider reimbursement (NPR). Once the hospital 
or hospital unit receives the NPR, if its operating costs are in excess 
of the ceiling, the hospital or hospital unit may file a request for an 
adjustment payment. After the fiscal intermediary or MAC receives the 
hospital's or hospital unit's request in accordance with applicable 
regulations, the fiscal intermediary or MAC or CMS, depending on the 
type of adjustment requested, reviews the request and determines if an 
adjustment payment is warranted. This determination is sometimes not 
made until more than 6 months after the date the request is filed 
because there are times when the applications are incomplete and 
additional information must be requested in order to have a completed 
application. However, in an attempt to provide interested parties with 
data on the most recent adjustments for which we do have data, we are 
publishing data on adjustment payments that were processed by the 
fiscal intermediary or MAC or CMS during FY 2010.
    The table below includes the most recent data available from the 
fiscal intermediaries or MACs and CMS on adjustment payments that were 
adjudicated during FY 2010. As indicated above, the adjustments made 
during FY 2010 only pertain to cost reporting periods ending in years 
prior to FY 2009. Total adjustment payments given to excluded hospitals 
and hospital units during FY 2010 are $11,364,155. The table depicts 
for each class of hospitals, in the aggregate, the number of adjustment 
requests adjudicated, the excess operating costs over the ceiling, and 
the amount of the adjustment payments.

----------------------------------------------------------------------------------------------------------------
                                                                                    Excess cost     Adjustment
                        Class of hospital                             Number       over ceiling      payments
----------------------------------------------------------------------------------------------------------------
Psychiatric.....................................................               1        $951,810        $884,441
Children's......................................................               1         377,648         305,160

[[Page 51733]]

 
Cancer..........................................................               2      18,108,765      10,174,554
Religious Nonmedical Health Care Institution (RNHCI)............               0               0               0
                                                                                                 ---------------
    Total.......................................................  ..............  ..............      11,364,155
----------------------------------------------------------------------------------------------------------------

VII. Changes to the Long-Term Care Hospital Prospective Payment System 
(LTCH PPS) for FY 2012

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority
    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals that are described in section 1886(d)(1)(B)(iv) of the 
Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines an LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 
55954). For the initial implementation of the LTCH PPS (FYs 2003 
through FY 2007), the system used information from LTCH patient records 
to classify patients into distinct long-term care diagnosis-related 
groups (LTC-DRGs) based on clinical characteristics and expected 
resource needs. Beginning in FY 2008, we adopted the Medicare severity 
long-term care diagnosis-related groups (MS-LTC-DRGs) as the patient 
classification system used under the LTCH PPS. Payments are calculated 
for each MS-LTC-DRG and provisions are made for appropriate payment 
adjustments. Payment rates under the LTCH PPS are updated annually and 
published in the Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR Part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare 
discharges. (Generally, in section VIII. of this preamble, when we 
refer to discharges, the intent is to describe Medicare discharges.) 
The August 30, 2002 final rule further details the payment policy under 
the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we provided for a 5-year 
transition period. During this 5-year transition period, a LTCH's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decrease in the percentage of the 
LTCH PPS payment that is based on reasonable cost concepts. However, 
effective for cost reporting periods beginning on or after October 1, 
2006, total LTCH PPS payments are based on 100 percent of the Federal 
rate.
    In addition, in the August 30, 2002 final rule, we presented an in-
depth discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 42 
CFR Part 412, Subpart O also contained LTCH provisions related to 
covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements. We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
were to be effective, such that the annual updated rates were effective 
from July 1 through June 30 instead of from October 1 through September 
30. We referred to the July through June time period as a ``long-term 
care hospital rate year'' (LTCH PPS rate year). In addition, we changed 
the publication schedule for the annual update to allow for an 
effective date of July 1. The payment amounts and factors used to 
determine the annual update of the LTCH PPS Federal rate are based on a 
LTCH PPS rate year. In the past, while the LTCH payment rate updates 
were effective July 1, the annual update of the DRG classifications and 
relative weights for LTCHs continued to be linked to the annual 
adjustments of

[[Page 51734]]

the acute care hospital inpatient DRGs and were effective each October 
1.
    As discussed in detail in the RY 2009 LTCH PPS final rule (73 FR 
26797 through 26798), we again changed the schedule for the annual 
updates of the LTCH PPS Federal payment rates beginning with RY 2010. 
We consolidated the rulemaking cycle for the annual update of the LTCH 
PPS Federal payment rates and description of the methodology and data 
used to calculate these payment rates with the annual update of the MS-
LTC-DRG classifications and associated weighting factors for LTCHs so 
that the updates to the rates and the relative weights now occur on the 
same schedule and appear in the same publication. As a result, the 
updates to the rates and the relative weights are now effective on 
October 1 (on a Federal fiscal year schedule), and the annual updates 
to the LTCH PPS Federal rates are no longer published with a July 1 
effective date.
    Public Law 110-173 (MMSEA) enacted on December 29, 2007, included 
provisions that have various effects on the LTCH PPS. In addition to 
amending section 1861 of the Act to add a subsection (ccc) which 
provided an additional definition of LTCHs, Public Law 110-173 also 
required the Secretary to submit, no later than 18 months after the 
date of enactment of the law, a report to Congress on a study of 
national long-term care hospital facility and patient criteria that 
included ``recommendations for such legislation and administrative 
actions, including timelines for the implementation of LTCH patient 
criteria or other actions, as the Secretary determines appropriate.'' 
The payment policy provisions under sections 114(c)(1) and (c)(2) of 
Public Law 110-173 focused on providing 3 years of relief for certain 
LTCHs from the percentage threshold payment adjustment policy at 42 CFR 
412.534 and 412.536. However, because of the original implementation 
schedule of those sections of the regulations, the payment provisions 
had varying timeframes of applicability (73 FR 29701 through 29704). In 
addition, section 114(c)(3) of Public Law 110-173 provided that the 
Secretary shall not apply, for the 3-year period beginning on the date 
of enactment of the Act the revision to the short-stay outlier (SSO) 
policy that was finalized in the RY 2008 LTCH PPS final rule (72 FR 
26904 and 26992). In addition, section 114(c)(4) of Public Law 110-173 
provided that the Secretary shall not, for the 3-year period beginning 
on the date of enactment of the Act, make the one-time adjustment to 
the payment rates provided for in Sec.  412.523(d)(3) or any similar 
provision (73 FR 26800 through 26804). The statute also provided that 
the base rate for RY 2008 be the same as the base rate for RY 2007 (the 
revised base rate, however, does not apply to discharges occurring on 
or after July 1, 2007, and before April 1, 2008) (73 FR 24875 through 
24877). Section 114(d) of Public Law 110-173 established a 3-year 
moratorium (with specified exceptions) on the establishment and 
classification of new LTCHs, LTCH satellites, and on the increase in 
the number of LTCH beds in existing LTCHs or satellite facilities. 
Finally, section 114(f) of Public Law 110-173 provided for an expanded 
review of medical necessity for admission and continued stay at LTCHs.
    In the RY 2009 LTCH PPS final rule (73 FR 26804 through 26812), we 
established the applicable Federal rates for RY 2009, consistent with 
section 1886(m)(2) of the Act as amended by Public Law 110-173. We also 
revised the regulations at Sec.  412.523(d)(3) to change the 
methodology for the one-time budget neutrality adjustment and to comply 
with section 114(c)(4) of Public Law 110-173. Other policy revisions 
that were necessary as a result of the statutory changes of Public Law 
110-173 were addressed in separate interim final rules with comment 
period (73 FR 24871 and 73 FR 29699). In the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (74 FR 43976 through 43990), we addressed all of the 
public comments received and finalized these two interim final rules 
with comment period.
    Section 4302 of the ARRA, Public Law 111-5, enacted on February 17, 
2009, included several amendments to the provisions set forth in 
section 114 of Public Law 110-173. Specifically, section 4302(a) 
modified the effective dates of the provisions of section 114(c) of 
Public Law 110-173, described above, and added an additional category 
of LTCHs or satellite facilities that would not be subject to the 
percentage threshold payment adjustment at Sec.  412.536 for a 3-year 
period. In addition, section 4302(a)(2)(A) of Public Law 111-5 added 
``grandfathered'' satellites (specified in Sec.  412.22(h)(3)(i) of the 
regulations) to those ``applicable'' LTCHs (specified in Sec.  
412.534(g) of the regulations) originally granted relief under section 
114(c) of Public Law 110-173. We issued instructions to the fiscal 
intermediaries and MACs interpreting the provisions of section 4302 of 
Public Law 111-5 (Change Request 6444). In addition, in the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43990 through 43992), we 
implemented the provisions of section 4302 of Public Law 111-5 through 
an interim final rule with comment period. We received one timely 
comment regarding the provisions of section 4302 of Public Law 111-5 
that were implemented through the interim final rule with comment 
period that was included in the FY 2010 IPPS/RY 2010 LTCH PPS final 
rule. We addressed this public comment and finalized the interim final 
rule with comment period in section VII.E. of the preamble of the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50399).
    As discussed in the FY 2011 IPPS/LTCH PPS final rule, a number of 
the provisions of the Affordable Care Act affected the policies, 
payment rates and factors under the LTCH PPS. Specifically, section 
1886(m)(3)(A)(ii) of the Act, as added by section 3401(c) of the 
Affordable Care Act, specifies that, for each of rate years 2010 
through 2019, any annual update to the standard Federal rate shall be 
reduced by the other adjustment specified in new section 1886(m)(4) of 
the Act. Furthermore, section 1886(m)(3)(A)(i) of the Act specifies 
that, for rate year 2012 and subsequent rate years, any annual update 
to the standard Federal rate shall be reduced by the productivity 
adjustment described in section 1886(b)(3)(B)(xi)(II) of the Act. 
Section 1886(m)(3)(A)(ii) and sections 1886(m)(4)(A) and (B) of the Act 
require a 0.25 percentage point reduction for rate year 2010 and a 0.50 
percentage point reduction for rate year 2011. Section 1886(m)(3)(B) of 
the Act provides that the application of paragraph (3) of section 
1886(m) of the Act may result in the annual update being less than zero 
for a rate year, and may result in payment rates for a rate year being 
less than such payment rates for the preceding rate year. Furthermore, 
section 3401(p) of the Affordable Care Act specifies that the 
amendments made by section 3401(c) of such Act shall not apply to 
discharges occurring before April 1, 2010 (75 FR 50387 through 50390). 
Sections 3106 and 10312 of the Affordable Care Act together provide for 
a 2-year extension to the payment policies applicable to LTCHs and LTCH 
satellite facilities set forth in sections 114(c) and (d)(1) of the 
MMSEA, as amended by the ARRA. Specifically, sections 3106 and 10312 of 
the Affordable Care Act together result in the phrase ``3-year period'' 
being replaced with the phrase ``5-year period'' each place it appears 
in sections 114(c) and (d)(1) of MMSEA, as amended by the ARRA. As 
discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50399 through 
50400), sections 3106 and 10312 of the Affordable Care Act, which 
amended sections 114(c) and

[[Page 51735]]

(d)(1) of the MMSEA, as amended by the ARRA, result in the following:
     An additional 2-year delay in the application of the SSO 
payment adjustment, which would have applied the additional payment 
option of an ``IPPS comparable'' payment to LTCHs for certain SSO cases 
where the covered length of stay is less than or equal to the ``IPPS 
comparable threshold.'' Therefore, the Secretary will not apply this 
SSO payment adjustment for the 5-year period beginning on the date of 
enactment of MMSEA (December 29, 2007).
     An additional 2-year delay in the one-time prospective 
budget neutrality adjustment to the standard Federal rate (Sec.  
412.523(d)(3)). Thus, the Secretary is precluded from making the one-
time adjustment to standard Federal rate until December 29, 2012.
     An increase from 3 years to 5 years to the timeframes set 
forth in section 114(c) of the MMSEA as amended by the ARRA, thereby 
extending for an additional 2 years the delay in the application of the 
25-percent payment threshold policy for certain LTCHs and LTCH 
satellite facilities (Sec. Sec.  412.534 and 412.536), and extending 
for an additional 2 years, the increased percentage thresholds outlined 
at section 114(c)(2) of the MMSEA as amended by the ARRA.
     Additional 2-year extensions of the moratorium on the 
establishment of new LTCHs and LTCH satellite facilities and the 
moratorium on the increase of LTCH beds in existing LTCHs or satellite 
facilities as provided by section 114(d) of the MMSEA as amended by the 
ARRA. In general, section 114(d) of the MMSEA as amended by the ARRA 
precluded the establishment and classification of new LTCHs or LTCH 
satellite facilities or additional beds from being added to existing 
LTCHs or LTCH satellite facilities unless one of the specified 
exceptions to the particular moratorium was met.
2. Criteria for Classification as a LTCH
a. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient length of 
stay (LOS) of greater than 25 days. Alternatively, Sec.  
412.23(e)(2)(ii) states that for cost reporting periods beginning on or 
after August 5, 1997, a hospital that was first excluded from the PPS 
in 1986 and can demonstrate that at least 80 percent of its annual 
Medicare inpatient discharges in the 12-month cost reporting period 
ending in FY 1997 have a principal diagnosis that reflects a finding of 
neoplastic disease must have an average inpatient length of stay for 
all patients, including both Medicare and non-Medicare inpatients, of 
greater than 20 days.
b. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c), and therefore, are not subject to the 
LTCH PPS rules:
     Veterans Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR Part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.
3. Limitation on Charges to Beneficiaries
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, if the 
Medicare payment to the LTCH is the full LTC-DRG payment amount, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec. Sec.  409.82, 409.83, 
and 409.87 and for items and services as specified under Sec.  
489.30(a). However, under the LTCH PPS, Medicare will only pay for days 
for which the beneficiary has coverage until the SSO threshold is 
exceeded. Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).
4. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance
    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191). Section 3 of the ASCA requires that the 
Medicare Program deny payment under Part A or Part B for any expenses 
incurred for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act (as added by section 3(a) of the ASCA) provides that 
the Secretary shall waive such denial in two specific types of cases 
and may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in 
the context of the HIPAA regulations, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR Parts 160 and 162, Subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered health care providers, to 
conduct certain electronic healthcare transactions according to the 
applicable transactions and code sets standards.

B. Medicare Severity Long-Term Care Diagnosis-Related Group (MS-LTC-
DRG) Classifications and Relative Weights for FY 2012

1. Background
    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a diagnosis-related 
group (DRG)-based patient classification system reflecting the 
differences in patient resources and costs). Section 307(b)(1) of the 
BIPA modified the requirements of section 123 of the BBRA by requiring 
that the Secretary examine ``the feasibility and the impact of basing 
payment under such a system [the long-term care hospital (LTCH) PPS] on 
the use of existing (or refined) hospital DRGs that have been modified 
to account for different resource use of LTCH patients, as well as the 
use of the most recently available hospital discharge data.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time

[[Page 51736]]

under the IPPS. As a component of the LTCH PPS, we refer to this 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' Although the patient classification system used 
under both the LTCH PPS and the IPPS are the same, the relative weights 
are different. The established relative weight methodology and data 
used under the LTCH PPS result in relative weights under the LTCH PPS 
that reflect ``the differences in patient resource use * * *'' of LTCH 
patients (section 123(a)(1) of the BBRA (Pub. L. 106-113)).
    As part of our efforts to better recognize severity of illness 
among patients, in the FY 2008 IPPS final rule with comment period (72 
FR 47130), the MS-DRGs and the Medicare severity long-term care 
diagnosis-related groups (MS-LTC-DRGs) were adopted under the IPPS and 
the LTCH PPS, respectively, effective beginning October 1, 2007 (FY 
2008). For a full description of the development and implementation and 
rationale for the use of the MS-DRGs and MS-LTC-DRGs, we refer readers 
to the FY 2008 IPPS final rule with comment period (72 FR 47141 through 
47175 and 47277 through 47299). (We note that, in that same final rule, 
we revised the regulations at Sec.  412.503 to specify that for LTCH 
discharges occurring on or after October 1, 2007, when applying the 
provisions of 42 CFR Part 412, Subpart O applicable to LTCHs for policy 
descriptions and payment calculations, all references to LTC-DRGs would 
be considered a reference to MS-LTC-DRGs. For the remainder of this 
section, we present the discussion in terms of the current MS-LTC-DRG 
patient classification system unless specifically referring to the 
previous LTC-DRG patient classification system that was in effect 
before October 1, 2007.) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.
    The MS-DRGs adopted in FY 2008 represent an increase in the number 
of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). The MS-DRG 
classifications are updated annually. As described in section II.G. of 
this preamble, for FY 2012, we are deleting one MS-DRG and creating two 
new MS-DRGs for a net gain of one MS-DRG. With these adopted changes, 
we have a total of 751 MS-DRG groupings for FY 2012. Consistent with 
section 123 of the BBRA, as amended by section 307(b)(1) of the BIPA, 
and Sec.  412.515 of the regulations, we use information derived from 
LTCH PPS patient records to classify LTCH discharges into distinct MS-
LTC-DRGs based on clinical characteristics and estimated resource 
needs. We then assign an appropriate weight to the MS-LTC-DRGs to 
account for the difference in resource use by patients exhibiting the 
case complexity and multiple medical problems characteristic of LTCHs.
    In a departure from the IPPS, and as discussed in greater detail 
below in section VII.B.3.f. of this preamble, we use low-volume MS-LTC-
DRGs (that is, MS-LTC-DRGs with less than 25 LTCH cases) in determining 
the MS-LTC-DRG relative weights because LTCHs do not typically treat 
the full range of diagnoses as do acute care hospitals. For purposes of 
determining the relative weights for the large number of low-volume MS-
LTC-DRGs, we group all of the low-volume MS-LTC-DRGs into five 
quintiles based on average charge per discharge. (A detailed discussion 
of the initial development and application of the quintile methodology 
appears in the August 30, 2002 LTCH PPS final rule (67 FR 55978).) We 
also account for adjustments to payments for short-stay outlier (SSO) 
cases (that is, cases where the covered length of stay at the LTCH is 
less than or equal to five-sixths of the geometric average length of 
stay for the MS-LTC-DRG). Furthermore, we made adjustments to account 
for nonmonotonically increasing weights, when necessary. That is, 
theoretically, cases under the MS-LTC-DRG system that are more severe 
require greater expenditure of medical care resources and will result 
in higher average charges such that, in the severity levels within a 
base MS-LTC-DRG, the weights should increase monotonically with 
severity from the lowest to highest severity level. (We discuss 
nonmonotonicity in greater detail and our methodology to adjust the MS-
LTC-DRG relative weights to account for nonmonotonically increasing 
relative weights in section VII.B.3.g. (Step 6) of this preamble.)
2. Patient Classifications Into MS-LTC-DRGs
a. Background
    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the MS-DRGs used under the 
IPPS.
    The MS-DRGs are organized into 25 major diagnostic categories 
(MDCs), most of which are based on a particular organ system of the 
body; the remainder involve multiple organ systems (such as MDC 22, 
Burns). Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy 
that orders operating room (O.R.) procedures or groups of O.R. 
procedures by resource intensity. The GROUPER software program does not 
recognize all ICD-9-CM procedure codes as procedures affecting DRG 
assignment. That is, procedures that are not surgical (for example, 
EKG), or minor surgical procedures (for example, biopsy of skin and 
subcutaneous tissue (procedure code 86.11)) do not affect the MS-LTC-
DRG assignment based on their presence on the claim.
    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge and that payment varies 
by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
     Principal diagnosis;
     Additional or secondary diagnoses;
     Surgical procedures;
     Age;
     Sex; and
     Discharge status of the patient.
    Through FY 2010, the number of secondary or additional diagnoses 
and the number of surgical procedures considered for MS-DRG assignment 
was limited to eight and six, respectively. In the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50127), we established that, for claims submitted 
on the 5010 format beginning January 1, 2011, we would increase the 
capacity to process diagnosis and procedure codes up to 25 diagnoses 
and 25 procedures. This includes one principal diagnosis and up to 24 
secondary diagnoses for severity of illness determinations. We refer 
readers to section II.G.11.c. of the preamble of the FY 2011 IPPS/LTCH 
PPS final rule for a complete discussion of this change (75 FR 50127).
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the most current version 
of the International Classification of Diseases, Ninth Revision, 
Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets 
Standards regulations at 45 CFR Parts 160 and 162 require that no later 
than October 16, 2003, all covered entities must comply with the 
applicable requirements of Subparts A and I through R of Part 162.

[[Page 51737]]

Among other requirements, those provisions direct covered entities to 
use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, 
Version 4010, and the applicable standard medical data code sets for 
the institutional health care claim or equivalent encounter information 
transaction (45 CFR 162.1002 and 45 CFR 162.1102). For additional 
information on the ICD-9-CM Coding System, we refer readers to the FY 
2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 
47277 through 47281). We also refer readers to the detailed discussion 
on correct coding practices in the August 30, 2002 LTCH PPS final rule 
(67 FR 55981 through 55983). Additional coding instructions and 
examples are published in the Coding Clinic for ICD-9-CM, a product of 
the American Hospital Association. (We refer readers to section 
II.G.13. of this preamble for additional information on the annual 
revisions to the ICD-9-CM codes.)
    With respect to the ICD-9-CM coding system, we have been discussing 
the conversion to the ICD-10-CM and the ICD-10-PCS coding systems for 
many years. As is discussed in detail in section II.G.11. of the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50122 through 50127) and in 
section III.G.13 of this final rule, the ICD-10 coding systems 
applicable to hospital inpatient services will be implemented on 
October 1, 2013. In order for the industry to make the necessary 
conversions from ICD-9-CM to ICD-10-CM and ICD-10-PCS, we proposed, 
through the ICD-9-CM Coordination and Maintenance Committee, to 
consider a moratorium on updates to the ICD-9-CM and ICD-10 coding 
sets. We refer readers to section II.G.13. of this preamble for 
additional information on the adoption of the ICD-10-CM and ICD-10-PCS 
systems.
    To create the MS-DRGs (and by extension, the MS-LTC-DRGs), 
individual DRGs were subdivided according to the presence of specific 
secondary diagnoses designated as complications or comorbidities (CCs) 
into three, two, or one level, depending on the impact of the CCs on 
resources used for those cases. Specifically, there are sets of MS-DRGs 
that are split into 2 or 3 subgroups based on the presence or absence 
of a CC or a major complication and comorbidity (MCC). We refer readers 
to section II.D. of the FY 2008 IPPS final rule with comment period for 
a detailed discussion about the creation of MS-DRGs based on severity 
of illness levels (72 FR 47141 through 47175).
    Medicare contractors (that is, fiscal intermediaries and MACs) 
enter the clinical and demographic information submitted by LTCHs into 
their claims processing systems and subject this information to a 
series of automated screening processes called the Medicare Code Editor 
(MCE). These screens are designed to identify cases that require 
further review before assignment into a MS-LTC-DRG can be made. During 
this process, certain cases are selected for further development (74 FR 
43949).
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). The GROUPER software used 
under the LTCH PPS is the same GROUPER software program used under the 
IPPS. Following the MS-LTC-DRG assignment, the Medicare contractor 
determines the prospective payment amount by using the Medicare PRICER 
program, which accounts for hospital-specific adjustments. Under the 
LTCH PPS, we provide an opportunity for LTCHs to review the MS-LTC-DRG 
assignments made by the Medicare contractor and to submit additional 
information within a specified timeframe as provided in Sec.  
412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the MS-LTC-DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the MedPAR file. The data in this file are used to 
evaluate possible MS-DRG and MS-LTC-DRG classification changes and to 
recalibrate the MS-DRG and MS-LTC-DRG relative weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517), respectively.
b. Changes to the MS-LTC-DRGs for FY 2012
    As specified by our regulations at Sec.  412.517(a), which requires 
that the MS-LTC-DRG classifications and relative weights be updated 
annually and consistent with our historical practice of using the same 
patient classification system under the LTCH PPS as is used under the 
IPPS, as we proposed, we are updating the MS-LTC-DRG classifications 
effective October 1, 2011, through September 30, 2012 (FY 2012) 
consistent with the changes to specific MS-DRG classifications 
presented in section II.G. of this final rule (that is, GROUPER Version 
29.0). Therefore, the MS-LTC-DRGs for FY 2012 presented in this final 
rule are the same as the MS-DRGs that are being used under the IPPS for 
FY 2012. In addition, because the MS-LTC-DRGs for FY 2012 are the same 
as the MS-DRGs for FY 2012, the other changes that affect MS-DRG (and 
by extension MS-LTC-DRG) assignments under Version 29.0 of the GROUPER 
discussed in section II.G. of the preamble of this final rule, 
including the changes to the MCE software and changes to the ICD-9-CM 
coding system, also are applicable under the LTCH PPS for FY 2012.
3. Development of the FY 2012 MS-LTC-DRG Relative Weights
a. General Overview of the Development of the MS-LTC-DRG Relative 
Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55984), one of the primary goals for the implementation of the LTCH PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
medical care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
Medicare patients whose care is more costly. To accomplish these goals, 
we have annually adjusted the LTCH PPS standard Federal prospective 
payment system rate by the applicable relative weight in determining 
payment to LTCHs for each case.
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of existing procedures for assigning weights in cases of 
zero volume and/or nonmonotonicity (as discussed in the FY 2008 IPPS 
final rule with comment period (72 FR 47289 through 47295) and the FY 
2009 IPPS final rule (73 FR 48542 through 48550)), as we proposed, the 
basic methodology for developing the FY 2012 MS-LTC-DRG relative 
weights in this final rule continues to be determined in accordance 
with the general methodology established in the August 30, 2002 LTCH 
PPS final rule (67 FR 55989 through 55991). Under the LTCH PPS, 
relative weights for each MS-LTC-DRG are a primary element used to 
account for the variations in cost per discharge and resource 
utilization among the payment groups (Sec.  412.515). To ensure that 
Medicare patients classified to each MS-LTC-DRG have access to an 
appropriate level of services and to encourage efficiency, we 
calculated a relative weight for each MS-LTC-DRG that represents the 
resources needed by an average

[[Page 51738]]

inpatient LTCH case in that MS-LTC-DRG. For example, cases in a MS-LTC-
DRG with a relative weight of 2 will, on average, cost twice as much to 
treat as cases in a MS-LTC-DRG with a relative weight of 1.
b. Development of the MS-LTC-DRG Relative Weights for FY 2012
    Beginning with the FY 2008 update, we established a budget 
neutrality requirement for the annual update to the MS-LTC-DRG 
classifications and relative weights at Sec.  412.517(b) (in 
conjunction with Sec.  412.503), such that estimated aggregate LTCH PPS 
payments would be unaffected, that is, would be neither greater than 
nor less than the estimated aggregate LTCH PPS payments that would have 
been made without the classification and relative weight changes (RY 
2008 LTCH PPS final rule (72 FR 26882 through 26884)). Consistent with 
Sec.  412.517(b) and as we proposed, we applied a two-step budget 
neutrality methodology, which is based on the current year MS-LTC-DRG 
classifications and relative weights. (For additional information on 
the established two-step budget neutrality methodology, we refer 
readers to the FY 2008 IPPS final rule (72 FR 47295 through 47296).) 
Thus, for this final rule, the annual update to the MS-LTC-DRG 
classifications and relative weights for FY 2012 are based on the FY 
2011 MS-LTC-DRG classifications and relative weights established in the 
FY 2011 IPPS/LTCH PPS final rule (75 FR 50613 through 50627).
c. Data
    In this final rule, to calculate the MS-LTC-DRG relative weights 
for FY 2012, we obtained total charges from FY 2010 Medicare LTCH bill 
data from the March 2011 update of the FY 2010 MedPAR file, which are 
the best available data at this time, and used the Version 29.0 of the 
GROUPER to classify LTCH cases. For the proposed rule, we obtained 
total charges from FY 2010 Medicare LTCH bill data from the December 
2010 update of the FY 2010 MedPAR file, which were the best available 
data at that time, and used the proposed Version 29.0 of the GROUPER to 
classify LTCH cases. Consistent with our historical policy, we also 
proposed to use more recent data if available and the final version of 
the GROUPER to develop the FY 2012 MS-LTC-DRG relative weights for the 
final rule. (76 FR 25976)
    Consistent with our historical methodology and as we proposed, we 
excluded the data from LTCHs that are all-inclusive rate providers and 
LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 or section 222(a) 
of Public Law 92-603. In addition, as is the case with the IPPS, 
Medicare Advantage (Part C) claims are now included in the MedPAR files 
(74 FR 43808). Consistent with IPPS policy and as we proposed, we 
continued to exclude such claims in the calculations for the relative 
weights under the LTCH PPS that are used to determine payments for fee-
for-service Medicare claims. Specifically, we removed any claims from 
the MedPAR files that have a GHO Paid indicator value of ``1,'' which 
effectively removes Medicare Advantage claims from the relative weight 
calculations (73 FR 48532). Therefore, in the development of the FY 
2012 MS-LTC-DRG relative weights in this final rule, we excluded the 
data of 14 all-inclusive rate providers and the 2 LTCHs that are paid 
in accordance with demonstration projects that had claims in the March 
2011 update of the FY 2010 MedPAR file, as well as any Medicare 
Advantage claims.
d. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
This nonrandom distribution of cases with relatively high (or low) 
charges in specific MS-LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. As we proposed, to account for 
the fact that cases may not be randomly distributed across LTCHs, 
consistent with the methodology we have used since the implementation 
of the LTCH PPS, we used a hospital-specific relative value (HSRV) 
methodology to calculate the MS-LTC-DRG relative weights for FY 2012. 
We believe this method removes this hospital-specific source of bias in 
measuring LTCH average charges (67 FR 55985). Specifically, we reduced 
the impact of the variation in charges across providers on any 
particular proposed MS-LTC-DRG relative weight by converting each 
LTCH's charge for a case to a relative value based on that LTCH's 
average charge.
    Under the HSRV methodology, we standardize charges for each LTCH by 
converting its charges for each case to hospital-specific relative 
charge values and then adjust those values for the LTCH's case-mix. The 
adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average relative charge value by its 
case-mix. In this way, each LTCH's relative charge value is adjusted by 
its case-mix to an average that reflects the complexity of the cases it 
treats relative to the complexity of the cases treated by all other 
LTCHs (the average case-mix of all LTCHs).
    In accordance with our established methodology, as we proposed, we 
standardized charges for each case by first dividing the adjusted 
charge for the case (adjusted for SSOs under Sec.  412.529 as described 
below in section VII.B.3.g. (step 3) of the preamble of this final 
rule) by the average adjusted charge for all cases at the LTCH in which 
the case was treated. SSO cases are cases with a length of stay that is 
less than or equal to five-sixths the average length of stay of the MS-
LTC-DRG (Sec.  412.529 and Sec.  412.503). The average adjusted charge 
reflects the average intensity of the health care services delivered by 
a particular LTCH and the average cost level of that LTCH. The 
resulting ratio is multiplied by that LTCH's case-mix index to 
determine the standardized charge for the case (67 FR 55989).
    Multiplying the resulting ratio by the LTCH's case-mix index 
accounts for the fact that the same relative charges are given greater 
weight at a LTCH with higher average costs than they would at a LTCH 
with low average costs, which is needed to adjust each LTCH's relative 
charge value to reflect its case-mix relative to the average case-mix 
for all LTCHs. Because we standardize charges in this manner, we count 
charges for a Medicare patient at a LTCH with high average charges as 
less resource intensive than they would be at a LTCH with low average 
charges. For example, a $10,000 charge for a case at a LTCH with an 
average adjusted charge of $17,500 reflects a higher level of relative 
resource use than a $10,000 charge for a case at a LTCH with the same 
case-mix, but an average adjusted charge of $35,000. We believe that 
the adjusted charge of an individual case more accurately reflects 
actual resource use for an individual LTCH because the variation in 
charges due to systematic differences in the markup of charges among 
LTCHs is taken into account.
e. Treatment of Severity Levels in Developing the MS-LTC-DRG Relative 
Weights
    For purposes of determining the MS-LTC-DRG relative weights, under 
our historical methodology, there are three

[[Page 51739]]

different categories of DRGs based on volume of cases within specific 
MS-LTC-DRGs. MS-LTC-DRGs with at least 25 cases are each assigned a 
unique relative weight; low-volume MS-LTC-DRGs (that is, MS-LTC-DRGs 
that contain between 1 and 24 cases based on a given year's claims 
data) are grouped into quintiles (as described below) and assigned the 
relative weight of the quintile. No-volume MS-LTC-DRGs (that is, no 
cases in the given year's claims data were assigned to those MS-LTC-
DRGs) are cross-walked to other MS-LTC-DRGs based on the clinical 
similarities and assigned the relative weight of the cross-walked MS-
LTC-DRG (as described in greater detail below). In this final rule, as 
we proposed, we utilized these same three categories of MS-LTC-DRGs for 
purposes of determining the MS-LTC-DRG relative weights for FY 2012. 
(We provide in-depth discussions of our policy regarding weight-setting 
for low-volume MS-LTC-DRGs in section VII.B.3.f. of the preamble of 
this final rule and for no-volume MS-LTC-DRGs, under Step 5 in section 
VII.B.3.g. of the preamble of this final rule.)
    As also noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG relative weights for use in each payment system differs because the 
overall volume of cases in the LTCH PPS is much less than in the IPPS. 
In general, consistent with our existing methodology and as we 
proposed, we used the following steps to determine the FY 2012 MS-LTC-
DRG relative weights: (1) If an MS-LTC-DRG had at least 25 cases, it 
was assigned its own relative weight; (2) if an MS-LTC-DRG had between 
1 and 24 cases, it was assigned to a quintile for which we computed a 
relative weight for all of the MS-LTC-DRGs assigned to that quintile; 
and (3) if an MS-LTC-DRG had no cases, it was cross-walked to another 
MS-LTC-DRG based upon clinical similarities to assign an appropriate 
relative weight (as described below in detail in Step 5 of section 
VII.B.3.g. of this preamble). Furthermore, in determining the FY 2012 
MS-LTC-DRG relative weights, when necessary, we make adjustments to 
account for nonmonotonicity, as discussed in greater detail below in 
Step 6 of section VII.B.3.g. of this preamble. We refer readers to the 
discussion in the FY 2010 IPPS/RY LTCH PPS final rule for our rationale 
for including an adjustment for nonmonotonicity (74 FR 43953 through 
43954).
f. Low-Volume MS-LTC-DRGs
    In order to account for MS-LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), consistent with our existing methodology and 
as we proposed, for purposes of determining the FY 2012 MS-LTC-DRG 
relative weights, we employ the quintile methodology for low-volume MS-
LTC-DRGs, such that we group those ``low-volume MS-LTC-DRGs'' (that is, 
MS-LTC-DRGs that contained between 1 and 24 cases annually) into one of 
five categories (quintiles) based on average charges (67 FR 55984 
through 55995 and 72 FR 47283 through 47288). In determining the FY 
2012 MS-LTC-DRG relative weights in this final rule, in cases where the 
initial assignment of a low-volume MS-LTC-DRG to quintiles resulted in 
nonmonotonicity within a base-DRG, in order to ensure appropriate 
Medicare payments, consistent with our historical methodology and as we 
proposed, we made adjustments to the treatment of low-volume MS-LTC-
DRGs to preserve monotonicity, as discussed in detail below in section 
VII.B.3.g. (Step 6) in this preamble.
    In this final rule, using LTCH cases from the March 2011 update of 
the FY 2010 MedPAR file, we identified 277 MS-LTC-DRGs that contained 
between 1 and 24 cases. This list of MS-LTC-DRGs was then divided into 
one of the 5 low-volume quintiles, each containing a minimum of 55 MS-
LTC-DRGs (277/5 = 55 with 2 MS-LTC-DRG as the remainder). We assigned a 
low-volume MS-LTC-DRG to a specific low-volume quintile by sorting the 
low-volume MS-LTC-DRGs in ascending order by average charge in 
accordance with our established methodology. Furthermore, because the 
number of MS-LTC-DRGs with less than 25 cases is not evenly divisible 
by 5, the average charge of the low-volume quintile was used to 
determine which of the low-volume quintiles would contain the 2 
additional low-volume MS-LTC-DRGs. Specifically, after organizing the 
MS-LTC-DRGs by ascending order by average charge, we assigned the first 
fifth (1st through 55th) of low-volume MS-LTC-DRGs (with the lowest 
average charge) into Quintile 1. The MS-LTC-DRGs with the highest 
average charge cases would be assigned into Quintile 5. Because the 
average charge of the 166th low-volume MS-LTC-DRG in the sorted list is 
closer to the average charge of the 165th low-volume MS-LTC-DRG 
(assigned to Quintile 3) than to the average charge of the 167th low-
volume MS-LTC-DRG (assigned to Quintile 4), we assign it to Quintile 3 
(such that Quintile 3 contains 56 low-volume MS-LTC-DRGs before any 
adjustments for nonmonotonicity, as discussed below). This process was 
repeated through the remaining low-volume MS-LTC-DRGs so that 3 of the 
5 low-volume quintiles contain 55 MS-LTC-DRGs (Quintiles 1, 2, and 4) 
and the other 2 low-volume quintiles contain 56 MS-LTC-DRGs (Quintiles 
3 and 5). Table 13A, which is listed in section VI. of the Addendum to 
this final rule and is available via the Internet, lists the 
composition of the low-volume quintiles for MS-LTC-DRGs for FY 2012.
    Accordingly, in order to determine the FY 2012 relative weights for 
the MS-LTC-DRGs with low volume, as we proposed, we used the 5 low-
volume quintiles described above. The composition of each of the 5 low-
volume quintiles shown in Table 13A (listed in section VI. of the 
Addendum to this final rule and available via the Internet) was used in 
determining the FY 2012 MS-LTC-DRG relative weights (as shown in Table 
11 listed in section VI. of the Addendum to this final rule and 
available via the Internet). We determined a relative weight and 
(geometric) average length of stay for each of the 5 low-volume 
quintiles using the methodology that we applied to the MS-LTC-DRGs (25 
or more cases), as described in section VII.B.3.g. of the preamble of 
this final rule. We assigned the same relative weight and average 
length of stay to each of the low-volume MS-LTC-DRGs that made up an 
individual low-volume quintile. We note that, as this system is 
dynamic, it is possible that the number and specific type of MS-LTC-
DRGs with a low volume of LTCH cases will vary in the future. We use 
the most recent available claims data in the MedPAR file to identify 
low-volume MS-LTC-DRGs and to calculate the relative weights based on 
our methodology.
    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in the low-volume quintiles to ensure that our 
quintile assignments used in determining the MS-LTC-DRG relative 
weights result in appropriate payment for such cases and do not result 
in an unintended financial incentive for LTCHs to inappropriately admit 
these types of cases.
g. Steps for Determining the FY 2012 MS-LTC-DRG Relative Weights
    In the proposed rule, we proposed, in general, to determine the FY 
2012 MS-LTC-DRG relative weights based on our existing methodology. 
(For additional information on the original development of this 
methodology, and modifications to it since the adoption of

[[Page 51740]]

the MS-LTC-DRGs, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 55989 through 55995) and the FY 2010 IPPS/RY 2010 LTCH PPS 
final rule (74 FR 43951 through 43966).)
    Comment: One commenter expressed concern that the inclusion of the 
``low-volume'' MS-LTC-DRGs (MS-LTC-DRGs with between 1 and 24 cases in 
the data used to determine the relative weights) and the ``no volume'' 
MS-LTC-DRGs (MS-LTC-DRGs that have no LTCH cases in the data used to 
determine the relative weights) may inappropriately skew the relative 
weights. Based on the data from the proposed rule, there were 280 
``low-volume'' MS-LTC-DRGs and 237 ``no volume'' MS-LTC-DRGs, which 
represents approximately 68 percent of the 751 MS-LTC-DRGs proposed for 
FY 2012. The commenter stated that even though approximately 69 percent 
of the proposed MS-LTC-DRGs have few or no cases, they are still 
included in the relative weight calculations, and therefore may not 
accurately reflect the utilization of LTCH services.
    Response: The commenter may find it helpful to review our detailed 
explanation of the application of the MS-DRG patient classification 
system used by the IPPS to the LTCH PPS, which required the 
establishment of the categories of ``no-volume'' and ``low volume'' MS-
LTC-DRGs because LTCHs do not treat the full range of patients treated 
in IPPS hospitals (67 FR 55983 through 55995). We believe that the 
commenter may not fully understand how ``low-volume'' MS-LTC-DRGs and 
``no volume'' MS-LTC-DRGs are treated in our relative weight 
methodology. The MS-LTC-DRG relative weights are determined based on 
the ratio of the estimated cost of the cases assigned to each MS-LTC-
DRG (as proxied by total charges from the claims in the MedPAR data) to 
the cost of the all of the LTCH cases (for all MS-LTC-DRGs) in the 
database. Although the ``low-volume'' MS-LTC-DRGs represent 
approximately 37 percent of the 751 MS-LTC-DRGs proposed for FY 2012, 
the cases assigned to those the ``low-volume'' MS-LTC-DRGs only 
represented approximately 1.5 percent of the LTCH cases used to 
calculate the proposed relative weights. Similarly, while the ``no-
volume'' MS-LTC-DRGs represent approximately 32 percent of the 751 MS-
LTC-DRGs proposed for FY 2012, there were no cases assigned to the 
``no-volume'' MS-LTC-DRGs, and therefore, no data from any claims for 
those MS-LTC-DRGs was used to determine the proposed relative weights. 
As described in greater detail below in section VII.B.3.g. (step 5) of 
this preamble, the relative weights for the ``no-volume'' MS-LTC-DRGs 
are assigned based on clinical similarity and relative costliness, and 
therefore, have no effect on the calculation of the relative weights.
    For the reasons discussed above, we do not believe that inclusion 
of the ``low-volume'' MS-LTC-DRGs and the ``no volume'' MS-LTC-DRGs 
inappropriately skew the calculation of the relative weights such that 
the data do not accurately reflect the utilization of LTCH services. We 
continue to believe that our methodology for determining the relative 
weights for each MS-LTC-DRG appropriately account for the variations in 
cost per discharge and resource utilization among the payment groups in 
accordance with Sec.  412.515. Therefore, in this final rule, we are 
adopting our proposed methodology as final without modification. In 
summary, for FY 2012, to determine the FY 2012 MS-LTC-DRG relative 
weights, we grouped LTCH cases to the appropriate MS-LTC-DRG, while 
taking into account the low-volume quintile (as described above). After 
grouping the cases to the appropriate MS-LTC-DRG (or low-volume 
quintile), we calculated the FY 2012 relative weights by first removing 
statistical outliers and cases with a length of stay of 7 days or less 
(as discussed in greater detail below). Next, we adjusted the number of 
cases in each MS-LTC-DRG (or low-volume quintile) for the effect of SSO 
cases (step 3 below). After removing statistical outliers (step 1 
below) and cases with a length of stay of 7 days or less (step 2 
below), the SSO adjusted discharges and corresponding charges were then 
used to calculate ``relative adjusted weights'' for each MS-LTC-DRG (or 
low-volume quintile) using the HSRV method.
    Below we discuss in detail the steps for calculating the FY 2012 
MS-LTC-DRG relative weights. We note that, as we stated in section 
VII.B.3.c. of this preamble, we excluded the data of all-inclusive rate 
LTCHs, LTCHs that are paid in accordance with demonstration projects, 
and any Medicare Advantage claims in the March 2011 update of the FY 
2010 MedPAR file.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the FY 2012 MS-LTC-DRG 
relative weights is to remove statistical outlier cases. Consistent 
with our historical relative weight methodology, we define statistical 
outliers as cases that are outside of 3.0 standard deviations from the 
mean of the log distribution of both charges per case and the charges 
per day for each MS-LTC-DRG. These statistical outliers were removed 
prior to calculating the relative weights because we believe that they 
may represent aberrations in the data that distort the measure of 
average resource use. Including those LTCH cases in the calculation of 
the proposed relative weights could result in an inaccurate relative 
weight that does not truly reflect relative resource use among the MS-
LTC-DRGs. (For additional information on this step of the relative 
weight methodology, we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 2--Remove cases with a length of stay of 7 days or less.
    The MS-LTC-DRG relative weights reflect the average of resources 
used on representative cases of a specific type. Generally, cases with 
a length of stay of 7 days or less do not belong in a LTCH because 
these stays do not fully receive or benefit from treatment that is 
typical in a LTCH stay, and full resources are often not used in the 
earlier stages of admission to a LTCH. If we were to include stays of 7 
days or less in the computation of the FY 2012 MS-LTC-DRG relative 
weights, the value of many relative weights would decrease and, 
therefore, payments would decrease to a level that may no longer be 
appropriate. We do not believe that it would be appropriate to 
compromise the integrity of the payment determination for those LTCH 
cases that actually benefit from and receive a full course of treatment 
at a LTCH by including data from these very short-stays. Therefore, 
consistent with our historical relative weight methodology, in 
determining the FY 2012 MS-LTC-DRG relative weights, we removed LTCH 
cases with a length of stay of 7 days or less. (For additional 
information on this step of the relative weight methodology, we refer 
readers to 67 FR 55989 and 74 FR 43959.)
    Step 3--Adjust charges for the effects of SSOs.
    After removing cases with a length of stay of 7 days or less, we 
were left with cases that have a length of stay of greater than or 
equal to 8 days. As the next step in the calculation of the FY 2012 MS-
LTC-DRG relative weights, consistent with our historical relative 
weight methodology, we adjusted each LTCH's charges per discharge for 
those remaining cases for the effects of SSOs (as defined in Sec.  
412.529(a) in conjunction with Sec.  412.503).
    We made this adjustment by counting an SSO case as a fraction of a 
discharge based on the ratio of the length of stay of the case to the 
average length of stay for the MS-LTC-DRG for non-SSO cases. This has 
the effect of proportionately reducing the impact of the lower charges 
for the SSO cases in calculating the average charge for the

[[Page 51741]]

MS-LTC-DRG. This process produces the same result as if the actual 
charges per discharge of an SSO case were adjusted to what they would 
have been had the patient's length of stay been equal to the average 
length of stay of the MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the FY 2012 MS-LTC-DRG relative weights would lower the FY 
2012 MS-LTC-DRG relative weight for affected MS-LTC-DRGs because the 
relatively lower charges of the SSO cases would bring down the average 
charge for all cases within an MS-LTC-DRG. This would result in an 
``underpayment'' for non-SSO cases and an ``overpayment'' for SSO 
cases. Therefore, we adjusted for SSO cases under Sec.  412.529 in this 
manner because it results in more appropriate payments for all LTCH 
cases. (For additional information on this step of the relative weight 
methodology, we refer readers to 67 FR 55989 and 74 FR 43959.)
    Step 4--Calculate the FY 2012 MS-LTC-DRG relative weights on an 
iterative basis.
    Consistent with our historical relative weight methodology, we 
calculated the FY 2012 MS-LTC-DRG relative weights using the HSRV 
methodology, which is an iterative process. First, for each LTCH case, 
we calculated a hospital-specific relative charge value by dividing the 
SSO adjusted charge per discharge (see Step 3) of the LTCH case (after 
removing the statistical outliers (see Step 1)) and LTCH cases with a 
length of stay of 7 days or less (see Step 2) by the average charge per 
discharge for the LTCH in which the case occurred. The resulting ratio 
was then multiplied by the LTCH's case-mix index to produce an adjusted 
hospital-specific relative charge value for the case. An initial case-
mix index value of 1.0 was used for each LTCH.
    For each MS-LTC-DRG, we calculated the FY 2012 relative weight by 
dividing the average of the adjusted hospital-specific relative charge 
values (from above) for the MS-LTC-DRG by the overall average hospital-
specific relative charge value across all cases for all LTCHs. Using 
these recalculated MS-LTC-DRG relative weights, each LTCH's average 
relative weight for all of its cases (that is, its case-mix) was 
calculated by dividing the sum of all the LTCH's MS-LTC-DRG relative 
weights by its total number of cases. The LTCHs' hospital-specific 
relative charge values above were multiplied by these hospital-specific 
case-mix indexes. These hospital-specific case-mix adjusted relative 
charge values were then used to calculate a new set of MS-LTC-DRG 
relative weights across all LTCHs. This iterative process was continued 
until there was convergence between the weights produced at adjacent 
steps, for example, when the maximum difference was less than 0.0001.
    Step 5--Determine a FY 2012 relative weight for MS-LTC-DRGs with no 
LTCH cases.
    As we stated above, we determined the FY 2012 relative weight for 
each MS-LTC-DRG using total Medicare allowable total charges reported 
in the best available LTCH claims data (that is, the March 2011 update 
of the FY 2010 MedPAR file for this final rule). Using these data, we 
identified a number of MS-LTC-DRGs for which there were no LTCH cases 
in the database, such that no patients who would have been classified 
to those MS-LTC-DRGs were treated in LTCHs during FY 2010 and, 
therefore, no charge data were available for these MS-LTC-DRGs. Thus, 
in the process of determining the MS-LTC-DRG relative weights, we were 
unable to calculate relative weights for the MS-LTC-DRGs with no LTCH 
cases using the methodology described in Steps 1 through 4 above. 
However, because patients with a number of the diagnoses under these 
MS-LTC-DRGs may be treated at LTCHs, consistent with our historical 
methodology, we assigned a relative weight to each of the no-volume MS-
LTC-DRGs based on clinical similarity and relative costliness (with the 
exception of ``transplant'' MS-LTC-DRGs and ``error'' MS-LTC-DRGs, as 
discussed below). (For additional information on this step of the 
relative weight methodology, we refer readers to 67 FR 55991 and 74 FR 
43959 through 43960.)
    In general, we determined FY 2012 relative weights for the MS-LTC-
DRGs with no LTCH cases in the March 2011 update of the FY 2010 MedPAR 
file used in this final rule (that is, ``no-volume'' MS-LTC-DRGs) by 
cross-walking each no-volume MS-LTC-DRG to another MS-LTC-DRG with a 
calculated relative weight (determined in accordance with the 
methodology described above). Then, the ``no-volume'' MS-LTC-DRG was 
assigned the same relative weight (and average length of stay) of the 
MS-LTC-DRG to which it was cross-walked (as described in greater detail 
below).
    Of the 751 MS-LTC-DRGs for FY 2012, we identified 236 MS-LTC-DRGs 
for which there were no LTCH cases in the database (including the 8 
``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs). As stated 
above, we assigned relative weights for each of the 236 no-volume MS-
LTC-DRGs (with the exception of the 8 ``transplant'' MS-LTC-DRGs and 
the 2 ``error'' MS-LTC-DRGs, which are discussed below) based on 
clinical similarity and relative costliness to one of the remaining 515 
(751 - 236 = 515) MS-LTC-DRGs for which we were able to determine 
relative weights based on FY 2010 LTCH claims data using the steps 
described above. (For the remainder of this discussion, we refer to the 
``cross-walked'' MS-LTC-DRGs as the MS-LTC-DRGs to which we crosswalked 
one of the 236 ``no volume'' MS-LTC-DRGs for purposes of determining a 
relative weight.) Then, we assigned the no-volume MS-LTC-DRG the 
relative weight of the cross-walked MS-LTC-DRG. (As explained below in 
Step 6, when necessary, we made adjustments to account for 
nonmonotonicity.)
    For this final rule, as we proposed, we crosswalked the no-volume 
MS-LTC-DRG to an MS-LTC-DRG for which there were LTCH cases in the 
March 2011 update of the FY 2010 MedPAR file, and to which it was 
similar clinically in intensity of use of resources and relative 
costliness as determined by criteria such as care provided during the 
period of time surrounding surgery, surgical approach (if applicable), 
length of time of surgical procedure, postoperative care, and length of 
stay. We evaluated the relative costliness in determining the 
applicable MS-LTC-DRG to which a no-volume MS-LTC-DRG was cross-walked 
in order to assign an appropriate relative weight for the no-volume MS-
LTC-DRGs in FY 2012. (For more detail on our process for evaluating 
relative costliness, we refer readers to the FY 2010 IPPS/RY 2010 LTCH 
PPS final rule (73 FR 48543).) We believe in the rare event that there 
would be a few LTCH cases grouped to one of the no-volume MS-LTC-DRGs 
in FY 2012, the relative weights assigned based on the cross-walked MS-
LTC-DRGs would result in an appropriate LTCH PPS payment because the 
crosswalks, which are based on similar clinical similarity and relative 
costliness, generally require equivalent relative resource use.
    We then assigned the relative weight of the cross-walked MS-LTC-DRG 
as the relative weight for the no-volume MS-LTC-DRG such that both of 
these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and the cross-
walked MS-LTC-DRG) have the same relative weight for FY 2012. We note 
that if the cross-walked MS-LTC-DRG had 25 cases or more, its relative 
weight, which was calculated using the methodology described in Steps 1 
through 4 above, was assigned to the no-volume MS-

[[Page 51742]]

LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume 
MS-LTC-DRG was cross-walked had 24 or less cases and, therefore, was 
designated to one of the low-volume quintiles for purposes of 
determining the relative weights, we assigned the relative weight of 
the applicable low-volume quintile to the no-volume MS-LTC-DRG such 
that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and 
the cross-walked MS-LTC-DRG) have the same relative weight for FY 2012. 
(As we noted above, in the infrequent case where nonmonotonicity 
involving a no-volume MS-LTC-DRG results, additional adjustments as 
described in Step 6 were required in order to maintain monotonically 
increasing relative weights.)
    For this final rule, a list of the no-volume MS-LTC-DRGs and the 
MS-LTC-DRG to which it was cross-walked (that is, the cross-walked MS-
LTC-DRG) for FY 2012 is shown in Table 13B, which is listed in section 
VI. of the Addendum to this final rule and is available via the 
Internet.
    To illustrate this methodology for determining the relative weights 
for the FY 2012 MS-LTC-DRGs with no LTCH cases, we are providing the 
following example, which refers to the no-volume MS-LTC-DRGs crosswalk 
information for FY 2012 provided in Table 13B.
    Example: There were no cases in the FY 2010 MedPAR file used for 
this rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70 
(Nonspecific Cebrovascular Disorders with MCC) was similar clinically 
and based on resource use to MS-LTC-DRG 61. Therefore, we assigned the 
same relative weight of MS-LTC-DRG 70 of 0.8072 for FY 2012 to MS-LTC-
DRG 61 (Table 11, which is listed in section VI. of the Addendum to 
this final rule and is available via the Internet).
    Again, we note that, as this system is dynamic, it is entirely 
possible that the number of MS-LTC-DRGs with no volume of LTCH cases 
based on the system will vary in the future. We used the most recent 
available claims data in the MedPAR file to identify no-volume MS-LTC-
DRGs and to determine the relative weights in this final rule.
    Furthermore, for FY 2012, consistent with our historical relative 
weight methodology, we established MS-LTC-DRG relative weights of 
0.0000 for the following transplant MS-LTC-DRGs: Heart Transplant or 
Implant of Heart Assist System with MCC (MS-LTC-DRG 1); Heart 
Transplant or Implant of Heart Assist System without MCC (MS-LTC-DRG 
2); Liver Transplant with MCC or Intestinal Transplant (MS-LTC-DRG 5); 
Liver Transplant without MCC (MS-LTC-DRG 6); Lung Transplant (MS-LTC-
DRG 7); Simultaneous Pancreas/Kidney Transplant (MS-LTC-DRG 8); 
Pancreas Transplant (MS-LTC-DRG 10); and Kidney Transplant (MS-LTC-DRG 
652). This is because Medicare will only cover these procedures if they 
are performed at a hospital that has been certified for the specific 
procedures by Medicare and presently no LTCH has been so certified. At 
the present time, we include these eight transplant MS-LTC-DRGs in the 
GROUPER program for administrative purposes only. Because we use the 
same GROUPER program for LTCHs as is used under the IPPS, removing 
these MS-LTC-DRGs would be administratively burdensome. (For additional 
information regarding our treatment of transplant MS-LTC-DRGs, we refer 
readers to the RY 2010 LTCH PPS final rule (74 FR 43964).)
    Step 6--Adjust the FY 2012 MS-LTC-DRG relative weights to account 
for nonmonotonically increasing relative weights.
    As discussed earlier in this section, the MS-DRGs contain base DRGs 
that have been subdivided into one, two, or three severity of illness 
levels. Where there are three severity levels, the most severe level 
has at least one code that is referred to as an MCC (that is, major 
complication or comorbidity). The next lower severity level contains 
cases with at least one code that is a CC (that is, complication or 
comorbidity). Those cases without an MCC or a CC are referred to as 
``without CC/MCC.'' When data do not support the creation of three 
severity levels, the base DRG is subdivided into either two levels or 
the base DRG is not subdivided. The two-level subdivisions could 
consist of the DRG with CC/MCC and the DRG without CC/MCC. 
Alternatively, the other type of two-level subdivision may consist of 
the DRG with MCC and the DRG without MCC.
    In those base MS-LTC-DRGs that are split into either two or three 
severity levels, cases classified into the ``without CC/MCC'' MS-LTC-
DRG are expected to have a lower resource use (and lower costs) than 
the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or 
both the ``with CC'' and the ``with MCC'' MS-LTC-DRGs (in the case of a 
three-level split). That is, theoretically, cases that are more severe 
typically require greater expenditure of medical care resources and 
will result in higher average charges. Therefore, in the three severity 
levels, relative weights should increase by severity, from lowest to 
highest. If the relative weights decrease as severity increases (that 
is, if within a base MS-LTC-DRG, an MS-LTC-DRG with CC has a higher 
relative weight than one with MCC, or the MS-LTC-DRG without CC/MCC has 
a higher relative weight than either of the others), they are 
nonmonotonic. We continue to believe that utilizing nonmonotonic 
relative weights to adjust Medicare payments would result in 
inappropriate payments because the payment for the cases in the higher 
severity level in a base MS-LTC-DRG (which are generally expected to 
have higher resource use and costs) would be lower than the payment for 
cases in a lower severity level within the same base MS-LTC-DRG (which 
are generally expected to have lower resource use and costs). 
Consequently, in determining the FY 2012 MS-LTC-DRG relative weights in 
this final rule, consistent with our historical methodology we combined 
MS-LTC-DRG severity levels within a base MS-LTC-DRG for the purpose of 
computing a relative weight when necessary to ensure that monotonicity 
is maintained. For a comprehensive description of our existing 
methodology to adjust for nonmonotonicity, we refer readers to the FY 
2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43964 through 43966). Any 
adjustments for nonmonotonicity that were made in determining the FY 
2012 MS-LTC-DRG relative weights in this final rule by applying this 
methodology are denoted in Table 11, which is listed in section VI. of 
the Addendum to this final rule and is available via the Internet.
    Step 7--Calculate the FY 2012 budget neutrality factor.
    As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), 
under the broad authority conferred upon the Secretary to develop the 
LTCH PPS under section 123 of Public Law 106-113, as amended by section 
307(b) of Public Law 106-554, beginning with the MS-LTC-DRG update for 
FY 2008, the annual update to the MS-LTC-DRG classifications and 
relative weights is done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes (Sec.  412.517(b) in 
conjunction with Sec.  412.503). (For a detailed discussion on the 
establishment of the budget neutrality requirement for the annual 
update of the MS-LTC-DRG classifications and relative weights, we refer 
readers to the RY 2008 LTCH PPS final rule (72 FR 26881).)
    The MS-LTC-DRG classifications and relative weights are updated 
annually

[[Page 51743]]

based on the most recent available LTCH claims data to reflect changes 
in relative LTCH resource use (Sec.  412.517(a) in accordance with 
Sec.  412.503). Under the budget neutrality requirement at Sec.  
412.517(b), for each annual update, the MS-LTC-DRG relative weights are 
uniformly adjusted to ensure that estimated aggregate payments under 
the LTCH PPS would not be affected (that is, decreased or increased). 
Consistent with that provision, we updated the MS-LTC-DRG 
classifications and relative weights for FY 2012 based on the most 
recent available LTCH data, and to apply a budget neutrality adjustment 
in determining the FY 2012 MS-LTC-DRG relative weights.
    To ensure budget neutrality in the update to the MS-LTC-DRG 
classifications and relative weights under Sec.  412.517(b), we used 
our established two-step budget neutrality methodology. In this final 
rule, in the first step of our MS-LTC-DRG budget neutrality 
methodology, for FY 2012, we calculated and applied a normalization 
factor to the recalibrated relative weights (the result of Steps 1 
through 6 above) to ensure that estimated payments were not influenced 
by changes in the composition of case types or the changes to the 
classification system. That is, the normalization adjustment is 
intended to ensure that the recalibration of the MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
the average CMI.
    To calculate the normalization factor for FY 2012 (the first step 
of our budget neutrality methodology), in this final rule, as we 
proposed, we used the following three steps: (1.a.) we used the most 
recent available LTCH claims data (FY 2010) and grouped them using the 
FY 2012 GROUPER (Version 29.0) and the recalibrated FY 2012 MS-LTC-DRG 
relative weights (determined in steps 1 through 6 of the Steps for 
Determining the FY 2012 MS-LTC-DRG Relative Weights above) to calculate 
the average CMI; (1.b.) we grouped the same LTCH claims data (FY 2010) 
using the FY 2011 GROUPER (Version 28.0) and FY 2011 MS-LTC-DRG 
relative weights and calculated the average CMI; and (1.c.) we computed 
the ratio of these average CMIs by dividing the average CMI for FY 2011 
(determined in Step 1.b.) by the average CMI for FY 2012 (determined in 
step 1.a.). In determining the MS-LTC-DRG relative weights for FY 2012, 
each recalibrated MS-LTC-DRG relative weight was multiplied by 1.11520 
in the first step of the budget neutrality methodology, which produced 
``normalized relative weights.''
    In the second step of our MS-LTC-DRG budget neutrality methodology, 
we determined a budget neutrality factor to ensure that estimated 
aggregate LTCH PPS payments (based on the most recent available LTCH 
claims data) after reclassification and recalibration (that is, the FY 
2012 MS-LTC-DRG classifications and relative weights) are equal to 
estimated aggregate LTCH PPS payments before reclassification and 
recalibration (that is, the FY 2011 MS-LTC-DRG classifications and 
relative weights). Accordingly, consistent with our existing 
methodology, we used FY 2010 discharge data to simulate payments and 
compare estimated aggregate LTCH PPS payments using the FY 2011 MS-LTC-
DRGs and relative weights to estimate aggregate LTCH PPS payments using 
the FY 2012 MS-LTC-DRGs and relative weights. Furthermore, consistent 
with our historical policy of using the best available data, we also 
used updated data to determine the budget neutrality adjustment factor 
for FY 2012 in the final rule.
    For this final rule, as we proposed, we determined the FY 2012 
budget neutrality adjustment factor using the following three steps: 
(2.a.) we simulated estimated total LTCH PPS payments using the 
normalized relative weights for FY 2012 and GROUPER Version 29.0 (as 
described above); (2.b.) we simulated estimated total LTCH PPS payments 
using the FY 2011 GROUPER (Version 28.0) and the FY 2011 MS-LTC-DRG 
relative weights shown in Table 11 of the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50613 through 50626); and (2.c.) we calculated the ratio of 
these estimated total LTCH PPS payments by dividing the estimated total 
LTCH PPS payments using the FY 2011 GROUPER (Version 28.0) and the FY 
2011 MS-LTC-DRG relative weights (determined in step 2.b.) by the 
estimated total LTCH PPS payments using the FY 2012 GROUPER (Version 
29.0) and the normalized MS-LTC-DRG relative weights for FY 2012 
(determined in Step 2.a.). In determining the FY 2012 MS-LTC-DRG 
relative weights, each normalized relative weight was multiplied by a 
budget neutrality factor of 0.994649 in the second step of the budget 
neutrality methodology to determine the budget neutral FY 2012 relative 
weight for each MS-LTC-DRG.
    Accordingly, in determining the FY 2012 MS-LTC-DRG relative weights 
in this final rule, consistent with our existing methodology, we 
applied a normalization factor of 1.11520 and a budget neutrality 
factor of 0.994649 (computed as described above). Table 11, which is 
listed in section VI. of the Addendum to this final rule and is 
available via the Internet, lists the MS-LTC-DRGs and their respective 
relative weights, geometric mean length of stay, and five-sixths of the 
geometric mean length of stay (used in determining SSO payments under 
Sec.  412.529) for FY 2012. The FY 2012 MS-LTC-DRG relative weights in 
Table 11, which is listed in section VI. of the Addendum to this final 
rule and available via the Internet, reflect both the normalization 
factor of 1.11520 and the budget neutrality factor of 0.994649.

C. Quality Reporting Program for LTCHs

1. Background and Statutory Authority
    CMS seeks to promote higher quality and more efficient health care 
for Medicare beneficiaries, and our efforts are furthered by quality 
reporting programs coupled with public reporting of that information. 
Such quality reporting programs already exist for various settings such 
as hospital inpatient services via the Hospital Inpatient Quality 
Reporting (IQR) Program (formerly called the Reporting Hospital Quality 
Data for Annual Payment Update (RHQDAPU) Program), hospital outpatient 
services via the Hospital Outpatient Quality Reporting (OQR) Program 
(formerly called the Hospital Outpatient Quality Data Reporting Program 
(HOP QDRP)) and physicians' and other eligible professionals' services 
via the Physician Quality Reporting System (formerly called the 
Physician Quality Reporting Initiative, or PQRI). We have also 
implemented quality reporting programs for home health agencies and 
skilled nursing facilities that are based on conditions of 
participation, and an end-stage renal disease quality incentive program 
(ESRD QIP) that links payment to performance.
    Section 3004(a) of the Affordable Care Act authorizes an additional 
quality reporting program for LTCHs, by adding a new paragraph (5) to 
section 1886(m) of the Act. Section 1886(m)(5)(A)(i) of the Act 
requires that, for rate year 2014 and each subsequent rate year, the 
Secretary shall reduce any annual update to the standard Federal rate 
for discharges occurring during such rate year, by 2 percentage points 
for any LTCH that does not comply with quality data submission 
requirements with respect to an applicable rate year. We note that 
section 1886(m)(5) of the Act uses the term ``rate year.'' Beginning 
with the annual update to the LTCH PPS that took effect on October 1, 
2009, we consolidated the rulemaking cycle for the annual update of the 
LTCH PPS

[[Page 51744]]

Federal payment rates with the annual update of the MS-LTC-DRG 
classifications and relative weights so that the annual updates to the 
rates and factors have an October 1 effective date and occur on the 
same schedule. To reflect this change to the annual payment rate update 
cycle, we revised the regulations at Sec.  412.503 to specify that, 
beginning on or after October 1, 2009, the ``LTCH PPS rate year'' is 
defined as October 1 through September 30 (73 FR 26797 through 26798 
and 26838). Beginning October 1, 2010, we changed from using the term 
``rate year'' to ``fiscal year'' under the LTCH PPS in order to conform 
to the standard definition of the Federal fiscal year (October 1 
through September 30). For LTCH PPS purposes, the term ``rate year'' 
and the term ``fiscal year'' both refer to the time period beginning 
October 1 and ending September 30. For more information regarding this 
terminology change, we refer readers to the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50396 and 50397). For purposes of the discussion below, in 
order to eliminate any possible confusion that may be caused by using 
the term ``rate year'' with respect to the LTCH quality reporting 
program, we will use the term ``fiscal year'' rather than ``rate 
year.''
    As provided at section 1886(m)(5)(A)(ii) of the Act, depending on 
the amount of the annual update for a particular year, a reduction of 
2.0 percentage points may result in the annual update being less than 
0.0 percent for a fiscal year and may result in payment rates under the 
LTCH PPS being less than payment rates for the preceding fiscal year. 
In addition, as set forth at section 1886(m)(5)(B) of the Act, any 
reduction based on failure to comply with the reporting requirements, 
as required by section 1886(m)(5)(A) of the Act, shall apply only with 
respect to the particular fiscal year involved, and any such reduction 
shall not be taken into account in computing the payment rate for 
subsequent fiscal years.
    Section 1886(m)(5)(C) of the Act requires that, for fiscal year 
2014 and each subsequent fiscal year, each LTCH shall submit to the 
Secretary data on quality measures as specified by the Secretary. Such 
data must be submitted in a form and manner, and at a time, specified 
by the Secretary. Generally, any measures selected by the Secretary 
must have been endorsed by the entity with a contract under section 
1890(a) of the Act. This contract is currently held by the NQF. The NQF 
is a voluntary consensus standard-setting organization with a diverse 
representation of consumer, purchaser, provider, academic, clinical, 
and other health care stakeholder organizations. The NQF was 
established to standardize health care quality measurement and 
reporting through its consensus development process. We have generally 
adopted NQF-endorsed measures in our reporting programs.
    However, section 1886(m)(5)(D)(ii) of the Act provides that, in the 
case of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) of the Act 
(currently NQF), the Secretary may specify a measure(s) that is (are) 
not so endorsed, as long as due consideration is given to measures that 
have been endorsed or adopted by a consensus organization identified by 
the Secretary. Under section 1886(m)(5)(D)(iii) of the Act, the 
Secretary shall publish, by no later than October 1, 2012, measures 
which shall be applicable with respect to the FY 2014 payment 
determination.
    Section 1886(m)(5)(E) of the Act requires the Secretary to 
establish procedures for making data submitted under the LTCH quality 
reporting program available to the public. The Secretary must ensure 
that each LTCH has the opportunity to review the data that are to be 
made public with respect to that facility prior to such data being made 
public. The Secretary must also report quality measures that relate to 
services furnished in LTCHs on the CMS Web site.
2. Quality Measures for the LTCH Quality Reporting Program for FY 2014
a. Considerations in the Selection of the Quality Measures
    In implementing the LTCH quality reporting program, we believe that 
the development of a quality reporting program that is successful in 
promoting the delivery of high quality health care services in LTCHs is 
of paramount importance. As the statute provides in section 
1886(m)(5)(D) of the Act, in establishing the LTCH quality reporting 
program, we must publish quality measures to be reported with respect 
to the FY 2014 payment determination no later than October 1, 2012. In 
order to meet that mandate, we sought to develop a quality reporting 
program that incorporates overarching health care aims and goals 
intended to facilitate quality care in a manner that is effective and 
meaningful, while remaining mindful of reporting burden and feasibility 
of data collection by LTCHs, in order to reduce and avoid duplicative 
reporting efforts when possible. We seek to efficiently collect 
information on valid, reliable, and relevant measures of quality and to 
share this information with the public, as provided under section 
1886(m)(5)(E) of the Act.
    Several provisions of the Affordable Care Act, taken together, 
direct the Secretary to establish a national strategy to provide a 
comprehensive plan and priorities to improve the delivery of health 
care services, patient health outcomes, and population health through a 
transparent, collaborative process. This strategy, the National Quality 
Strategy, was released by the Secretary (available on the Web site at: 
http://www.healthcare.gov/center/reports/quality03212011a.html#es). We 
have used the priorities of the National Quality Strategy to guide 
identification of the proposed quality measures for LTCHs under section 
1886(m)(5) of the Act.
    We also applied the following additional considerations and 
criteria in selecting the quality measures for LTCHs: whether a measure 
is included in, or facilitates alignment with, other Medicare and 
Medicaid programs; whether a measure addresses HHS priorities, such as 
prevention, care of chronic illness, high prevalence conditions, 
patient safety, patient and caregiver engagement, and care 
coordination; and whether a measure is evidence-based and may drive 
quality improvement as well as has a low probability of causing 
unintended adverse consequences, such as reduced LTCH admissions of 
higher risk patients.
    Furthermore, at the Listening Session held on November 15, 2010, 
for the Affordable Care Act section 3004 quality reporting programs, we 
sought input, and invited comments and suggestions regarding quality 
reporting, quality measurement recommendations, prioritization, and 
feasibility. We sought additional input at a Special Open Door Forum 
held on December 16, 2010, for the Affordable Care Act section 3004 
quality reporting programs. Transcripts for both the Listening Session 
and the Open Door Forum can be found on the CMS Web site at: http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting.
    In addition, we invited suggestions and input regarding the section 
3004 quality reporting programs to be sent to us using the CMS Web site 
mail box LTCH-IRF-Hospice-Quality-ReportingComments@cms.hhs.gov found 
at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting. We also 
received suggestions and input from a LTCH technical expert panel 
(TEP), convened by the CMS measure development contractor on January 
31, 2011, that reviewed and prioritized the quality

[[Page 51745]]

measures identified by a LTCH environmental scan led by a CMS measure 
development contractor, Research Triangle Institute (RTI 
International), specifically for the LTCH quality reporting program. 
Specifically, this TEP reviewed measures found in the environmental 
scan and rated them for importance, scientific soundness, usability, 
and feasibility.
    In summary, in selecting the quality measures discussed below, with 
applicability for FY 2014 and subsequent years, our goal is to achieve 
several objectives. First, the measures should relate to the general 
aims of better care for the individual, better population health, and 
lower cost through better quality. Second, the measures should promote 
improved quality specifically with regard to the priorities that are of 
most relevance to LTCHs. These include: patient safety, such as 
avoiding healthcare-associated infections (HAIs) and adverse events; 
better coordination of care; and person-centered and family-centered 
care. Third, the measures should address improved quality for the 
primary role of LTCHs, which is to furnish extended medical care to 
individuals with clinically complex problems, such as multiple acute or 
chronic conditions, that need hospital-level care for relatively 
extended periods of greater than 25 days.
b. LTCH Quality Measures for the FY 2014 Payment Determination
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25983), we 
proposed that, for the FY 2014 payment determination, LTCHs submit data 
on three quality measures: (1) Urinary Catheter-Associated Urinary 
Tract Infections (CAUTI); (2) Central Line Catheter-Associated 
Bloodstream Infection (CLABSI); and (3) Pressure Ulcers that are New or 
Have Worsened.
    HAIs are a topic area widely acknowledged by HHS in the HHS Action 
Plan to Prevent HAIs (http://www.hhs.gov/ash/initiatives/hai/actionplan/), the Institute of Medicine, the National Priorities 
Partnership, and others as a high impact priority requiring measurement 
and improvement. Better care is one of the aims found in the National 
Quality Strategy, and patient safety is one of the priorities. 
Mitigating HAIs is essential in the improvement of patient safety, and, 
therefore, patient care. HAIs are among the leading causes of death in 
the United States and, therefore, are serious reportable events. CDC 
estimates that as many as 2 million infections are acquired each year 
in hospitals and result in approximately 90,000 deaths per year.\58\ 
HAIs not only put the patient at risk, but also increase the days of 
hospitalization required for patients and add considerable health care 
costs. Therefore, two of the three proposed quality measures, CAUTI and 
CLABSI, are HAI measures.
---------------------------------------------------------------------------

    \58\ McKibben L; Horan T: Guidance on public reporting of 
healthcare-associated infections: Recommendations of the Healthcare 
Infection Control Practices Advisory Committee. AJIC 2005;33:217 
through 226.
---------------------------------------------------------------------------

    Other HAIs included in the HHS Action Plan to Prevent HAIs were 
under consideration for the LTCH quality reporting program beginning 
October 1, 2012. However, the TEP convened by the measure development 
contractor recommended the two infection events, urinary catheter-
associated urinary tract infection and central line catheter-associated 
bloodstream infection (each an episode of an infection, such as CAUTI 
or CLABSI) as highly pertinent, and important for data collection as 
well as most ready and currently feasible for implementation in the 
LTCH setting. HAI quality measures are important for quality reporting, 
and we intend to propose additional HAI measures included in the HHS 
HAI Action Plan to Prevent HAIs through future rulemaking. These 
potential HAI quality measures are listed in our discussion of possible 
measures under consideration for future years. In the FY 2012 IPPS/LTCH 
PPS proposed rule (76 FR 25983 through 25985), we proposed the 
selection of the CAUTI and CAUTI events as the two initial HAI quality 
measures for the LTCH quality measure reporting program.
(1) FY 2014 LTCH Measure 1: Urinary Catheter-Associated 
Urinary Tract Infections (CAUTI)
    The first measure we proposed for LTCHs for purposes of the FY 2014 
payment determination is an application of the NQF-endorsed measure 
developed by CDC for hospital intensive care units (ICU) entitled (NQF 
0138) ``Urinary Catheter-Associated Urinary Tract Infection 
[CAUTI] rate per 1,000 urinary catheter days, for Intensive Care Unit 
Patients'' to all LTCH care units. This measure was developed by the 
CDC to measure the percentage of patients with CAUTIs in the ICU 
context. At the time we developed the proposed rule, the measure we 
proposed to apply, NQF 0138, was undergoing measure 
maintenance review by NQF. We indicated that this review may result in 
a change in how the CDC calculates the aggregated data from using a 
rate for CAUTI, to the use of a standardized infection ratio (SIR) of 
healthcare associated catheter-associated urinary tract infections. We 
proposed to adopt the current measure in this rulemaking cycle. 
However, we also indicated that we intend to propose the adoption of 
any modifications to this measure that may result from the NQF review 
process in future rulemaking.
    While it is fast becoming a medical best practice to avoid urinary 
catheter use whenever possible, this may not always be possible with 
the LTCH patient population, due to the severity of their primary 
illnesses as well as comorbidities. Patients who are exposed to 
indwelling urinary catheters have a significantly higher risk of 
developing urinary tract infections (UTIs).
    UTIs are a common cause of morbidity and mortality. The HHS Action 
Plan to Prevent HAIs identified catheter associated urinary tract 
infections as the leading type of HAI that is largely preventable, and 
the occurrence of which can be drastically reduced in order to reduce 
adverse health care related events and avoid excess costs.
    The urinary tract is the most common site of HAI, accounting for 
more than 30 percent of infections reported by acute care 
hospitals.\59\ Healthcare-associated UTIs are commonly attributed to 
catheterization of the urinary tract.
---------------------------------------------------------------------------

    \59\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
---------------------------------------------------------------------------

    CAUTI can lead to such complications as cystitis, pyelonephritis, 
gram-negative bacteremia, prostatitis, epididymitis, and orchitis in 
males and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI also include discomfort to the 
patient, prolonged hospital stay, and increased cost and mortality. 
Each year, more than 13,000 deaths are associated with UTIs.\2\ 
Prevention of CAUTIs is discussed in the CDC/HICPAC document, Guideline 
for Prevention of Catheter-associated Urinary Tract Infections.\60\
---------------------------------------------------------------------------

    \60\ Wong ES. Guideline for prevention of catheter-associated 
urinary tract infections. Infect Control 1981;2:126-30.
---------------------------------------------------------------------------

    The NQF-endorsed CAUTI measure we proposed is currently collected 
by the CDC via the National Healthcare Safety Network (NHSN) as part of 
State-mandated reporting and surveillance requirements for hospitals. 
CDC's NHSN is a secure Internet-based surveillance system that 
currently has data collection forms and data submission and reporting 
mechanism in place for

[[Page 51746]]

LTCHs. NHSN is currently used, in part, as one means by which certain 
State-mandated reporting and surveillance data are collected.
    We recognize that the NQF has endorsed this measure for the short 
term, acute care ICU setting, but believe that this measure is highly 
relevant to LTCHs, in that urinary catheters are commonly used in the 
LTCH care setting. As previously noted, NQF 0138 is undergoing 
measure maintenance review by NQF. This review may result in a change 
in how CDC calculates the aggregated data from using a rate for CAUTI 
to the use of a SIR. We proposed to adopt the current measure in this 
rulemaking cycle. However, we indicated that we intend to propose the 
adoption of any modifications to this measure that may result from the 
NQF review process in future rulemaking. The TEP convened by the our 
measure development contractor on January 31, 2011, identified CAUTI as 
a high priority quality issue for LTCHs, and there was agreement by 
this TEP that this particular infection rate is worthy of surveillance 
within LTCHs. This measure is applicable for surveillance in long-term 
care units (CDC/NHSN Manual, Device-Associated Module, CAUTI Event, 
which is available on the CDC Web site at: http://www.cdc.gov/nhsn/pdfs/pscManual/7pscCAUTIcurrent.pdf.
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We reviewed the NQF's consensus-endorsed measures and were unable to 
identify any NQF-endorsed measures for urinary catheter-associated 
urinary tract infections for the LTCH setting. We are unaware of any 
other measures for catheter-associated urinary tract infections that 
have been approved by voluntary consensus standards bodies and endorsed 
by NQF. We proposed to adopt an application of this NQF-endorsed (in 
the short-term acute care ICU setting) measure under the Secretary's 
authority to select non-NQF-endorsed measures.
    As previously noted, NQF 0138 is undergoing measure 
maintenance review by NQF. This review may result in changes to this 
measure's specifications in how CDC calculates the aggregated data from 
using a rate for CAUTI to the use of a SIR. We proposed to adopt the 
current measure in this rulemaking cycle. However, we indicated that we 
intend to propose the adoption of any modifications to this measure 
that may result from the NQF review process in future rulemaking. We 
note that we intend to ask NQF to formally extend its endorsement of 
the CAUTI measure to the LTCH setting.
    We solicited public comment on the proposed quality measure 
``Urinary Catheter-Associated Urinary Tract Infections'' (CAUTI) in the 
FY 2012 IPPS/LTCH PPS.
    Comment: The majority of commenters acknowledged that catheter-
associated urinary tract infections are an important issue and 
supported this measure for use in quality measurement and reporting 
given the clinical severity of some LTCH patients. A few commenters 
expressed concern related to the clinical relevance, lack of 
uniformity, and relative usefulness compared to other catheter 
associated urinary tract infection measures for LTCHs. One commenter 
believed that no data were provided to support the selection of this 
HAI for LTCH settings.
    Response: We appreciate the commenters' support in the use of this 
measure. We agree with the importance of catheter associated urinary 
tract infections. As an HAI, the CDC estimates that there are 449,334 
CAUTIs and 13,000 deaths per year with an estimated associated cost of 
$340,000,000.\61\ The catheter-associated urinary tract infection is 
the most common type of HAI, comprising some 30 percent of all HAIs. 
Furthermore and importantly, as indicated in the HHS National Action 
Plan to Prevent HAIs (http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html), catheter-associated urinary tract infection is 
also a leading type of HAI that is largely preventable.\62\
---------------------------------------------------------------------------

    \61\ Scott, RD. The Direct Medical Costs of Healthcare-
Associated Infections in U.S. Hospitals and the Benefits of 
Prevention. March 2009. Available at: http://www.cdc.gov/ncidod/dhqp/pdf/Scott_CostPaper.pdf.
    \62\ Klevens RM, Edwards JR, Richards CL, Horan TC, Gaynes RP, 
Pollock DA, Cardo DM. Estimating healthcare-associated infection and 
deaths in U.S. hospitals, 2002. Public Health Reports 2007: 122:160-
166. Available at http://www.cdc.gov/ncidod/dhqp/pdf/hicpac/infections_deaths.pdf.
---------------------------------------------------------------------------

    With respect to the other urinary tract infection measures 
referenced, we believe that the commenters are referring to other NQF 
endorsed measures that are based on urinary tract infections (not 
catheter-associated) or measured usage of a urinary catheters, not 
measures of Catheter Associated Urinary Tract Infection. As we have 
previously stated we are unaware of any other endorsed measure for 
Urinary Catheter Associated Urinary Tract Infection.
    As for data in support of the selection of CAUTI for the LTCH 
setting, each year, more than 13,000 deaths are associated with 
UTIs.\63\ Furthermore, CAUTI is included in the HHS National Action 
Plan to Prevent HAIs. LTCH patients often have medical complexities 
that necessitate the use of urinary catheters as an integral aspect of 
a patient's care, and the use of urinary catheters is common. 
Additionally, the TEP convened by the CMS measure developer contractor 
for LTCH measure development identified CAUTI as a high priority issue 
for LTCHs. Because the use of urinary catheters leads to risk of CAUTI, 
we believe that the CAUTI measure is appropriate for LTCHs and aligns 
with HHS priorities to reduce such infections.
---------------------------------------------------------------------------

    \63\ See note 2.
---------------------------------------------------------------------------

    Comment: Commenters commended the NQF endorsement process and 
suggested that the LTCH CAUTI measure undergo the same evaluation 
before being published in the final rule. Many commenters expressed 
concern that the CAUTI measure is not endorsed by the NQF for the LTCH 
setting. Some commenters suggested that CMS work with the CDC to test 
this measure and ``refine the measure'' prior to finalizing its use.
    Response: We agree with the value of the NQF endorsement process. 
We are using the NQF endorsed CAUTI measure for Hospital ICU's and 
applying it to the LTCH setting. With regard to the comment that we 
``refine the measure'' prior to the use of this measure, we interpret 
this to mean to further specify or specify the measure differently for 
LTCHs. Although the currently NQF endorsed CAUTI measure is not 
specifically NQF-endorsed for the LTCH setting, CAUTI events, from 
which the measure is calculated, are already being collected by some 
LTCHs through the use of the NHSN. We intend to use the same measure 
specifications as endorsed by NQF for Hospital ICUs as for LTCHs and 
collected through the NHSN.
    Comment: Several commenters highlighted the need to risk-adjust the 
CAUTI measure. These commenters stated that some LTCH patients are at 
much higher risk of developing CAUTI than other lower risk patients. 
Several commenters expressed concern that lack of risk adjustment could 
possibly lead to unintended consequences such as reduced access for 
higher risk patients.

[[Page 51747]]

    Response: The CAUTI measure as endorsed by NQF does include risk 
adjustment although not based on individual patient characteristics or 
comorbidities as suggested by commenters. Rather as endorsed by NQF, 
the CDC NHSN process uses facility type and location type information 
for risk adjustment by stratifying the results by facility and location 
type. The results are then reported as observed over expected based on 
the expected rate for the facility or location. In this case, measures 
would be calculated based on the expected rate for LTCHs, according to 
the data reported to the CDC. This is reported as a Standardized 
Infection Ratio (SIR). More information about the SIR can be found at 
the CDC Web site: http://www.cdc.gov/nhsn/PDFs/pscManual/
7pscCAUTIcurrent.pdf.
    Comment: Some commenters expressed concern with potential erroneous 
attribution of infections that may have resulted from catheter use in a 
previous setting. One commenter asked whether quality data related to 
CAUTI would be collected for all LTCH patients regardless of payer.
    Response: With respect to erroneous attribution, the CDC's 
guidelines for HAI NHSN event reporting include a Transfer Rule. Under 
the Transfer Rule, CAUTIs that develop within 48 hours of transfer from 
a patient's previous patient transferring location to the receiving or 
admitting location, are not attributable to the admitting patient 
location, such as the LTCH setting. Therefore such CAUTIs are not 
included in the admitting LTCH's HAI event reporting, and are not 
included in the LTCH's CAUTI measure. In the HAI NHSN event reporting, 
admitting and transferring locations are defined using a unit 
identifier on the CDC's NSHN. We believe this appropriately addresses 
the potential risk of erroneous attribution for transferred patients. 
Additional information related to the ``Transfer Rule'' can be found on 
the CDC Web site at: http://www.cdc.gov/nhsn/PDFs/slides/CAUTI.pdf.
    As stated in the proposed rule, the reporting of HAI events and 
meaningful HAI event surveillance by LTCHs using the CDC/NHSN requires 
the submission of HAI events, regardless of payer.
    Comment: One commenter expressed concern that patients who were 
``colonized'' with bacteria but without symptoms would be included as 
CAUTI and therefore opposed use of this measure.
    Response: We interpret the commenter's use of the term 
``colonized'' to mean a condition in which significant numbers of 
bacteria have colonized the urinary tract but there are no signs or 
symptoms of urinary tract infection. Patients with this condition do 
not meet CDC's current criteria for CAUTI. To meet CDC's criteria, 
asymptomatic patients must have a bacteremia involving at least one 
microorganism that is a uropathogen. Please refer to the CDC website 
for further information http://www.cdc.gov/nhsn/PDFs/pscManual/
7pscCAUTIcurrent.pdf
    After consideration of the public comments we received, we are 
finalizing the Urinary Catheter-Associated Urinary Tract Infection 
measure, as proposed, for the FY 2014 payment determination.
(2) FY 2014 Measure 2: Central Line Catheter-Associated 
Bloodstream Infection (CLABSI)
    The second measure we proposed for LTCHs for the FY 2014 payment 
determination is an application of a CDC-developed NQF-endorsed measure 
for hospital ICU and high-risk nursery patients; (NQF 0139) 
``Central Line Catheter-Associated Bloodstream Infection (CLABSI) Rate 
for ICU and High-Risk Nursery (HRN) Patients.'' This is a measure of 
the percentage of ICU and high-risk nursery patients who, over a 
certain amount of days, acquired central line catheter-associated 
bloodstream infections over a specified number of line days.
    A central line is a catheter that health care providers often place 
in a large vein in the neck, chest, or groin to give medication or 
fluids or to collect blood for medical tests. Many LTCH patients have 
been discharged from short-term acute care hospital ICUs or ICU step-
down units with these central lines already in place. In other 
situations, a central line IV may be inserted during the patient's stay 
at the LTCH. Bloodstream infections are usually serious infections 
typically causing a prolongation of hospital stay and increased cost 
and risk of mortality.\64\ An estimated 248,000 bloodstream infections 
occur in U.S. hospitals each year.\65\ Furthermore, CLABSIs result in 
thousands of deaths each year and billions of dollars in added costs to 
the U.S. healthcare system, yet these infections are preventable. The 
CDC is providing guidelines and tools to the health care community to 
help reduce central line catheter-associated bloodstream infections. 
Techniques to prevent CLABSI through proper central line management are 
addressed in CDC's Healthcare Infection Control Practices Advisory 
Committee Guidelines for the Prevention of Intravascular Catheter 
Related Infections.\66\
---------------------------------------------------------------------------

    \64\ CDC/NHSN Manual. Device-Associated Module, CLABSI Event. 
Available at http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf, accessed on January 20, 2011.
    \65\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
    \66\ O'Grady NP, Alexander M, Dellinger EP, Gerberding JL, Heard 
SO, Maki DG, et al. Guidelines for the prevention of intravascular 
catheter-related infections. MMWR 2002;51(No. RR-10:1-26.
---------------------------------------------------------------------------

    We recognize that NQF endorsement of this measure is limited to ICU 
and HRN patients in hospital settings, but believe that this measure is 
also highly relevant in the LTCH setting because intravascular, central 
venous catheters (also known as a ``central line'') are used frequently 
due to the fact that these types of hospitals care for patients with 
complex medical problems which require LTCH stays and intensive 
treatment.
    The CMS measure development contractor convened a TEP on January 
31, 2011, which identified CLASBIs as a high priority quality issue for 
LTCHs; there was agreement by the TEP that this particular infection 
rate is worthy of surveillance within LTCHs. This measure is applicable 
for surveillance in long-term hospital care units (CDC/NHSN Manual, 
Device-Associated Module, CLABSI Event, which is available at the CDC 
Web site at: http://www.cdc.gov/nhsn/PDFs/pscManual/4PSC_CLABScurrent.pdf).
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We reviewed the NQF's consensus-endorsed measures, and were unable to 
identify any NQF endorsed measures for central line catheter-associated 
bloodstream infections for the LTCH setting. We are unaware of any 
other measures for CLABSI that have been approved by voluntary 
consensus standards bodies and endorsed by NQF. Therefore, we proposed 
to adopt an application of this NQF-endorsed (for ICU and HRN) measure 
under the Secretary's authority provided in section 1886(m)(5)(D)(ii) 
of the Act.

[[Page 51748]]

    We proposed to apply the measure specifications as endorsed by NQF. 
We also intend to ask NQF to formally extend its endorsement of the 
CLABSI measure to all care settings within the LTCH (that is, beyond 
the LTCH ICU).
    We solicited public comment on the proposed quality measure 
``Central Line Catheter-Associated Bloodstream Infection'' (CLABSI) in 
the FY 2012 IPPS/LTCH PPS proposed rule for the quality reporting 
program for LTCHs.
    Comment: The majority of commenters supported the selection of 
CLABSI for use in quality measurement and reporting. One commenter 
believed that, of the three proposed measures, CLABSI is probably the 
best understood measure, and encouraged its adoption. Other commenters 
remarked positively on its clinical relevance given the clinical 
severity of some LTCH patients. However, one commenter questioned the 
clinical relevance of a CLABSI-based quality measure for LTCHs, and 
expressed concern that the majority of LTCH patients do not have 
central lines in LTCHs.
    Response: We appreciate the commenters' support for the use the 
CLABSI measure. We agree with the importance of CLABSIs. Specifically, 
we believe collecting data on this quality measure is clinically 
relevant because CLABSIs are preventable, and can lead to poor outcomes 
such as sepsis and death. Further, as indicated in the HHS National 
Action Plan to Prevent HAIs (http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html), CLABSI is a leading type of HAI.
    We also agree with commenter who stated that CLABSIs are clinically 
relevant to LTCHs. LTCH patients are often medically complex and 
central line catheters are used in the LTCH setting as part of patient 
care management. Therefore, as with other patients, LTCH patients are 
at risk for developing a CLABSI. For calendar year 2009, there were 
4,522 LTCH claims in CMS data with ICD-9 codes for this infection, 
supporting both the relevance of this measure and the presence of 
central line catheter usage.
    Comment: Some commenters commended the NQF endorsement process and 
some commenters expressed concern that the CLABSI measure is not NQF-
endorsed for the LTCH setting and suggested that the LTCH CLABSI 
measure undergo the same evaluation before being published in the final 
rule. One commenter suggested that CMS work with the CDC to test this 
measure and ``refine the measure'' and that CMS seek NQF endorsement 
for use in LTCHs prior to finalizing its use.
    Response: We agree with the value of the NQF endorsement process. 
We are using an NQF endorsed CLABSI measure for Hospital ICU's and 
applying it to the LTCH setting. With regard to the comment that we 
``refine the measure'' prior to the use of this measure, we interpret 
this to mean to further specify or specify the measure differently for 
LTCHs. Although the currently NQF endorsed CAUTI measure is not 
specifically NQF-endorsed for the LTCH setting, CLABSI events, from 
which the measure is calculated, are already being submitted by some 
LTCHs through the use of the NHSN. We intend to use the same measure 
specifications as endorsed by NQF for Hospital ICUs as for LTCHs and 
collected through the NHSN.
    Comment: Many commenters urged CMS to risk-adjust the CLABSI 
measure. These commenters stated that some LTCH patients were at much 
higher risk of developing CLABSI than other, lower risk, patients. Some 
commenters suggested that data for this measure be based upon the type 
of LTCH unit and that the measure consider those units associated with 
the highest risk of infection such as long-term care ventilator units 
that may utilize central line catheters more extensively. Some 
commenters noted that there are medical situations where an infection 
may be anticipated or occur despite best care efforts. Several 
commenters expressed concern that the perceived lack of risk adjustment 
could possibly lead to unintended consequences such as reduced access 
for higher risk patients. Some commenters appeared to express concern 
that the data provided were not at the individual level.
    Response: The CLABSI measure as endorsed by NQF does include risk 
adjustment although not based on individual patient characteristics or 
comorbidities as suggested by commenters. Rather, as suggested by 
others and endorsed by NQF for ICUs, the CDC NHSN process uses facility 
type and location type information for risk adjustment by stratifying 
the results by facility and location type. The results are then 
reported as observed over expected based on the expected rate for the 
facility or location. In this case, measures would be calculated based 
on the expected rate for LTCHs or locations within the facility, based 
on the data reported to the CDC. This is reported as a Standardized 
Infection Ratio (SIR), described in detail at http://www.cdc.gov/nhsn/
PDFs/pscManual/7pscCAUTIcurrent.pdf. The SIR is a summary statistic 
that risk adjusts by taking into account risk differences across 
patient population by stratifying by hospital location. This is the 
only type of summary statistic method that is used at this time, or 
that has historically been used by the CDC for the CLABSI and CAUTI 
measures. After extensive consultation with the CDC in this matter, we 
have determined that it is best to defer experts at CDC, who have 
recommended that SIR is the most appropriate method of summary 
statistic for taking risk differences in patient population into 
account. In addition, during a Technical Expert Panel (TEP) that was 
convened on July 7, 2011, many of the LTCH subject-matter experts 
opined that SIR is an appropriate and adequate method of taking risk 
differences in patient population into account for the CAUTI and CLABSI 
measures.
    After consideration of the public comments we received, we are 
finalizing the Central Line Catheter-Associated Bloodstream Infection 
measure, as proposed, for the FY 2014 payment determination.
(3) FY 2014 Measure 3: Pressure Ulcers
    The third measure we proposed for LTCHs for purposes of the FY 2014 
payment determination is an application of a CMS-developed NQF-endorsed 
measure for short-stay nursing home patients: (NQF 0678, 
formerly assigned as NQF  NH-012-10) ``Percent of Residents 
with Pressure Ulcers that Are New or Have Worsened.'' This measure 
includes the percentage of patients who have one or more stage 2-4 
pressure ulcers that are new or worsened from a previous assessment. 
Consistent in our support of the National Quality Strategy principles, 
mitigating the occurrence or worsening of pressure ulcers is essential 
in the improvement of patient safety and, therefore, patient care.
    We recognize NQF endorsement of this measure is limited to short-
stay nursing home patients, but believe that this measure is highly 
relevant and a high priority quality issue for the care of LTCH 
patients. Pressure ulcers are high-volume and high-cost adverse events 
across the spectrum of health care settings from acute hospitals to 
home health. Patients in the LTCH setting are medically complex, have 
functional limitations that often are severe, and, therefore, are at 
high risk for the development, or worsening, of pressure ulcers. 
Pressure ulcers are serious medical conditions and an important measure 
of quality. Pressure ulcers can lead to serious, life-threatening 
infections, which substantially increase the total cost of care. 
Furthermore, as we noted in the FY 2008 IPPS final rule with comment

[[Page 51749]]

period (72 FR 42705), in 2006 there were 322,946 reported cases of 
Medicare patients with a pressure ulcer as a secondary diagnosis--each 
case had an average charge of $40,381 for a hospital stay, for an 
annual total cost of 13 billion dollars. The prevalence of pressure 
ulcers in health care facilities is increasing, with some 2.5 million 
patients being treated annually for pressure ulcers in acute care 
facilities.67 68 In 2006, there were 503,300 acute hospital 
stays during which pressure ulcers were noted. This is a 78.9 percent 
increase from 1993 when there were approximately 281,300 hospital stays 
related to pressure ulcers.\69\
---------------------------------------------------------------------------

    \67\ Russo CA, Steiner C, Spector W.: Hospitalizations related 
to pressure ulcers among adults 18 years and older, 2006 (Healthcare 
Cost and Utilization Project Statistical Brief No. 64). December 
2008. Available at: http://www.hcup-us.ahrq.gov/reports/statbriefs/sb64.pdf.
    \68\ Institute for Healthcare Improvement: Relieve the pressure 
and reduce harm. May 21, 2007. Available at: http://www.ihi.org/IHI/Topics/PatientSafety/SafetyGeneral/ImprovementStories/FSRelievethePressureandReduceHarm.htm.
    \69\ MacLean DS.: Preventing & managing pressure sores. Caring 
for the Ages. March 2003;4(3):34-7. Available at: http://www.amda.com/publications/caring/march2003/policies.cfm.
---------------------------------------------------------------------------

    The CMS measure development contractor convened a TEP on January 
31, 2011, which identified this topic as highly relevant and a high 
priority quality issue for the care of LTCH patients, and the 
application of this measure (NQF 0678) as appropriate for 
LTCHs.
    Section 1886(m)(5)(D)(ii) of the Act provides that ``[i]n the case 
of a specified area or medical topic determined appropriate by the 
Secretary for which a feasible and practical measure has not been 
endorsed by the entity with a contract under section 1890(a) [of the 
Act], the Secretary may specify a measure that is not so endorsed as 
long as due consideration is given to measures that have been endorsed 
or adopted by a consensus organization identified by the Secretary.'' 
We reviewed the NQF-endorsed measures, and we were unable to identify 
any NQF-endorsed measures for the monitoring of pressure ulcers that 
are new or worsened, for the LTCH setting. We are unaware of any other 
measure for the LTCH setting of new or worsened pressure ulcers that 
are approved by voluntary consensus standards bodies and endorsed by 
NQF. Therefore, we proposed to adopt an application of this NQF-
endorsed (for short-stay nursing home patients) measure for the LTCH 
quality reporting program under the Secretary's authority set forth at 
section 1886(m)(5)(D)(ii) of the Act.
    We solicited public comment on the proposed quality measure Percent 
of Residents with Pressure Ulcers that Are New or Have Worsened in the 
FY 2012 IPPS/LTCH PPS proposed rule for the quality reporting program 
for LTCHs.
    Comment: Most commenters supported the selection of pressure ulcers 
for use in quality measurement and reporting. However, one commenter 
questioned the clinical relevance of this measure, and believed that 
there was a lack of supporting data in the proposed rule. Another 
commenter suggested that few studies have conclusively shown that 
``standard interventions implemented today have been proven beyond a 
reasonable doubt to do anything at all to prevent pressure ulcers.''
    Response: We appreciate the commenters' support of this measure.
    We believe, as the data provided in the proposed rule suggests, 
that the development of new or worsened pressure ulcers is a very 
relevant clinical quality issue in all clinical settings, including 
LTCHs. Our measure development contractor convened a TEP on January 31, 
2011, which identified this topic as highly relevant and a high 
priority quality issue for the care of LTCH patients, and the 
application of this measure (NQF 0678) as appropriate for LTCHs. 
Specifically, in LTCHs alone, claims submitted to CMS in 2009 included 
nearly 700 claims for stage one pressure ulcers; just over 2,600 claims 
for stage 2 pressure ulcers; just over 7,000 for stage 3 pressure 
ulcers; nearly 10,000 claims for stage 4 pressure ulcers and just over 
1,100 claims for both stage 3 and stage 4 pressure ulcers; as well as 
nearly 800 claims for unstageable pressure ulcers. LTCH patients are 
often at an increased risk of pressure ulcer formation given their 
medical complexities, and often lack of mobility.
    We disagree with the commenter who believed that few studies have 
conclusively shown that ``standard interventions implemented today have 
been proven beyond a reasonable doubt to do anything at all to prevent 
pressure ulcers.'' We believe that the evidence-based pressure ulcer 
prevention guidelines published by clinical experts, such as the 
National Pressure Ulcer Advisory Panel in conjunction with the European 
Pressure Ulcer Advisory Panel (NPUAP and EPUAP) (http://www.npuap.org/resources.htm) as well as the Institute for Clinical Systems 
Improvement, and others, suggest that pressure ulcer development and 
worsening can be reduced and mitigated through the application of such 
best practices.
    Comment: Many commenters agreed that pressure ulcers are an 
important issue, and are important for quality measurement in the LTCH 
setting. However, one commenter expressed concern that the proposed 
pressure ulcer measure was developed for short-stay nursing home 
patients and suggested that patients in LTCHs require hospital-level, 
physician-led, post acute care, while patients in nursing homes have 
far lower medical acuity and resource use. Some commenters recommended 
harmonizing the LTCH pressure ulcer measure with Hospital IQR Program 
pressure ulcer measure which includes only Stages III and IV, 
suggesting that this would facilitate cross-site data comparisons that 
would be helpful for policy work to reduce patient harm, improve 
transitions of care, reduce preventable readmissions and related 
delivery system reforms. Commenters suggested the involvement of 
albumin levels in wound improvement. Commenters also suggested that CMS 
work to test this measure, ``refine the measure,'' and seek NQF 
endorsement for use in LTCHs prior to finalizing its use.
    Response: We appreciate the many supportive comments as to the 
importance of the issues of pressure ulcers in the LTCH setting. 
Although we agree LTCHs are different than nursing homes in terms of 
patient types, we do not agree that the issue of pressure ulcers is 
substantially different in terms of preventability and treatment. With 
respect to harmonizing measures with the Hospital IQR Program, we 
believe that an assessment of patients as done for the nursing home 
measure is preferable for a pressure ulcer measure as opposed to a 
claims based measure relying on diagnosis codes. We believe the 
assessment provides more information particularly for worsening and 
improving pressure ulcers. As for the suggestion albumin levels are 
involved in wound improvement, this is not a risk factor as included in 
the NQF-endorsed measure we are adopting for application to the LTCH 
setting. Finally, as to the future refinement, we are applying the 
measure as endorsed by NQF for nursing homes.
    Comment: Many commenters believed that the term ``worsening'' 
pressure ulcers was ambiguous. These commenters noted that inter-rater 
reliability of wound staging may vary significantly, and suggested that 
the term ``worsening'' be defined. Commenters also suggested that 
``worsening'' be removed from the description and that CMS base the

[[Page 51750]]

quality measure solely on the appearance of ``new'' pressure ulcers. 
Many commenters also suggested that this measure include an indicator 
for when a pressure ulcer is ``present on admission'' (POA), as is done 
with the Hospital IQR Program measure, Pressure Ulcers Stages III and 
IV. Some commenters indicated that it is difficult to accurately 
differentiate between worsening pressure ulcers and pressure ulcers 
that appear to worsen as part of the healing process before they get 
better, such as pressure ulcers that undergo debridement, or in 
instances when the patient has an episode of sepsis or hemodynamic 
instability. These commenters suggested that debridement often improves 
the overall condition of the wound but it is expected that it initially 
will increase the measurement of the wound. In addition, some 
commenters recommended adding a measure to identify healing pressure 
ulcers. One commenter suggested that the pressure ulcer measure should 
be defined as the number of patients per 1000 days who suffered a 
pressure ulcer.
    Response: This proposed measure is an application of a measure that 
NQF-endorsed in the SNF setting. We do not agree that the measure is 
ambiguous or that it should be based solely on the appearance of new 
pressure ulcers. As specified for the LTCH setting, the measure, new or 
worsening pressure ulcers, is based on changes in skin integrity that 
occurs within the LTCH. With regard to the Hospital IQR Program, and 
the use of a present on admission (POA) indicator, it is important to 
note that the pressure ulcer measure in the Hospital IQR Program relies 
on claims codes to identify pressure ulcers. A POA indicator is 
necessary to avoid attributing to the hospital the development of a 
pressure ulcer when the pressure ulcer was present on admission. By 
contrast, the measure that we proposed for LTCHs is based on the direct 
assessment of patients, the first assessment of which is upon 
admission. The measure considers pressure ulcers that were present on 
admission based on the initial assessment in order to assess for any 
worsening of these pressure ulcers during the patients' stays.
    Unstageable wounds include deep tissue injuries and pressure ulcers 
covered by nonremovable dressings, slough or eschar. These are not 
currently included in this measure since unstageable wounds cannot be 
measured, and therefore the presence of worsening cannot be determined. 
For example, a pressure ulcer that presents with slough or eschar 
cannot be staged, and is not considered worsened. Only after, and if, 
debridement occurs, and the dead tissue is removed, can such a wound be 
properly staged. If after wound debridement, the wound is staged and 
subsequently evaluated to have increased in the stage, the wound is 
considered worsened. However, such a wound may not be considered 
worsened if the stage remains unchanged after debridement and staging.
    For additional information related to this measure, including 
definitions related to worsening, unstageable and the staging of the 
pressure ulcers, as well as topics such as the inability to stage 
pressure ulcers with eschar or slough, we refer readers to the Minimum 
Data Set 3.0 (MDS 3.0) Resident Assessment Instrument Manual, page 24 
of Section M, Skin Conditions, which describes the NPUAP approach. This 
information can be found on the CMS Web site for the MDS 3.0: http://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp#TopOfPage.
    Finally, with respect to the suggestion of a measure of healing 
pressure ulcers and measurement on the basis of 1000 patients, we will 
consider these suggestions for the future. However, as we have 
proposed, we are finalizing the application of the existing NQF 
endorsed specifications for pressure ulcers for the nursing home 
setting to LTCHs.
    After consideration of the public comments we received, we are 
finalizing the Percent of Residents with Pressure Ulcers that Are New 
or Have Worsened measure, as proposed, for the FY 2014 payment 
determination.
3. Possible LTCH Quality Measures under Consideration for Future Years
    As discussed below, we seek to achieve a comprehensive set of 
quality measures to be available for widespread use for informed 
decision-making and quality improvement. Therefore, as stated 
previously and as indicated in the proposed rule, we intend to propose, 
through future rulemaking, measures included in the HHS Action Plan to 
Prevent HAIs. As we also stated in the proposed rule, we intend to 
propose through future rulemaking measures related to ventilator care 
such as the NQF-endorsed Institute for Healthcare Improvement process 
measure, NQF 0302, Ventilator Bundle, which is a comprehensive 
ventilator care-bundle process measure that is designed to facilitate 
protocols such as weaning, and mitigate ventilator-related infections, 
such as ventilator-associated pneumonia, and other complications. We 
also intend to propose additional outcome measures such as those 
related to acute care rehospitalization. We are aware of the limits 
related to feasibility in data submission at the present time. For 
example, there is no feasible means to submit the ventilator bundle 
process measure at this at this time, and are therefore we are 
currently identifying the data elements necessary for this measure 
using a data subset from the Continuity Assessment Record and 
Evaluation (CARE) data set as well as a submission mechanism. We also 
intend to propose, through future rulemaking, additional measures, such 
as those related to symptom management, physical restraints, medication 
use, falls, infections, and function, using the data subsets of the 
CARE data set necessary for measure calculations.
    In the proposed rule, we invited public comment and suggestions on 
the implementation of a standardized assessment instrument for LTCHs 
that would similarly support the calculation of quality measures. We 
also invited public comment on the measures and measures topics under 
consideration for future years set out below. In addition, we invited 
other suggestions and rationale to support the adoption of measures and 
topics not listed below.

   Possible Measures and Measure Topics for the LTCH Quality Reporting
              Program Under Consideration for Future Years
------------------------------------------------------------------------
 
-------------------------------------------------------------------------
    Overarching Goal: Safety and Healthcare Acquired Conditions--HAIs
------------------------------------------------------------------------
HAI reporting for:
     Ventilator-associated Pneumonia.***
     Surgical site infection rate.***
     Multi-drug resistant organism infection.
------------------------------------------------------------------------

[[Page 51751]]

 
 Overarching Goal: Safety and Healthcare Acquired Conditions: Avoidable
              Adverse Events and Serious Reportable Events
------------------------------------------------------------------------
     Unplanned acute care hospitalizations.
     Mortality.***
     Blood Incompatibility.**
     Foreign object retained after surgery.**
     Manifestation of poor glycemic control.**
     Air Embolism.**
     Falls and trauma.**
     Venous Thromboembolism.*
     Injuries secondary to Poly-pharmacy.
     Injuries related restraint use.
     Medication errors.*
     Stage III and IV Pressure Ulcer.**
------------------------------------------------------------------------
  Overarching Goal: Safety and Improvement Practices for Adverse Event
                                Reduction
------------------------------------------------------------------------
     Central line bundle.***
     Ventilator bundle.***
     Patient Immunization for Influenza.***
     Patient Immunization for Pneumonia.***
     Staff immunization.***
------------------------------------------------------------------------
 Overarching Goal: Safety--NQF Endorsed Nursing Sensitive Care Measures
------------------------------------------------------------------------
     Patient Fall Rate.***
     Falls with Injury.***
     Pressure Ulcer Prevalence.***
     Restraint Prevalence (vest and limb only).***
     Skill mix (Registered Nurse [RN], Licensed Vocational/
     Practical Nurse [LVN/LPN], unlicensed assistive personnel [UAP],
     and contract)*** Nursing care hours per patient day (RN, LPN,
     UAP).***
     Voluntary turnover for RN, APN, LPN, UAP.***
     Practice Environment Scale-Nursing Work Index.***
------------------------------------------------------------------------
* Harmonizes with NQF Serious Reportable Events.
** Harmonizes with Hospital-Acquired Conditions-Present on Admission
  Program for IPPS hospitals.
*** Harmonizes with NQF-endorsed measures.

    We solicited public comment on possible LTCH quality measures under 
consideration for future years.
    Comment: Some commenters generally supported the future measures 
under consideration, and specifically supported several of the 
potential measures for LTCH quality reporting in future years, 
including: Staff immunization for influenza; measures for ventilator 
care and ventilator-associated pneumonia; surgical site infections; 
multi-drug resistant organism infections; readmissions; process 
measures related to reducing catheter-associated urinary tract 
infections and Stage III and IV pressure ulcers; glycemic control in 
diabetic patients; and MRSA bacteremia for multidrug-resistant 
organisms. Commenters also suggested adding to the list chronic 
obstructive pulmonary disease, C. Difficile SIR, process measures for 
management of cardiovascular conditions, including heart failure and 
atrial fibrillation, condition-specific readmissions, and a process 
measure for management of patient serum albumin levels as a replacement 
measure for pressure ulcers. In addition, commenters suggested that CMS 
use measures considered as ``best in class.'' Several commenters 
cautioned against the use of ventilator bundle process measure because 
of the burden related to this measure.
    Response: We appreciate the commenters' support of the listed 
measures and measure topics, as well as the cautions expressed, and we 
will take their comments into consideration in determining whether to 
adopt the measures for the LTCH quality reporting program in the 
future. We also thank the commenters for their suggested additional 
measures for potential use in future reporting program years.
    Comment: Commenters supported the use of the NHSN as a reporting 
system for future measure submission. Some commenters supported the use 
of the CARE data item set in collecting data in the future. Other 
commenters strongly recommended delaying implementation of the CARE 
data item set for future use until the PAC-PRD has been reported to 
Congress and undergone Congressional and public comments review. One 
commenter opposed the use of the data set used in the PAC-PRD.
    Response: We thank the commenters for their feedback and support in 
the future use of the CARE data item set. CMS concluded its PAC-PRD and 
data collection using CARE in December, 2010. We plan to submit our 
report to Congress with findings by the close of 2011.
4. Data Submission Methods and Timelines
    a. Method of Data Submission for HAIs
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25988 through 
25890), we proposed to adopt two HAI quality measures, Central Line 
Catheter-Associated Bloodstream Infection (CLABSI) Event: CLABSI rate 
per 1000 central line days, and Urinary Catheter-Associated Urinary 
Tract Infection (CAUTI) Event: CAUTI rate per 1000 urinary catheter 
days. We proposed to use CDC/NHSN for data collection and reporting for 
these two HAI measures (http://www.cdc.gov/nhsn/).
    As we noted above, the NHSN is a secure, Internet-based 
surveillance system. It is maintained by CDC, and can be utilized by 
all types of healthcare facilities in the United States, including

[[Page 51752]]

LTCHs, acute care hospitals that collect and report HAIs through the 
NHSN as part of our Hospital IQR Program, as well as psychiatric 
hospitals, rehabilitation hospitals, outpatient dialysis centers, and 
ambulatory surgery centers. The NHSN enables health care facilities to 
submit their HAI event data, and access their data for the purposes of 
internal infection-surveillance.
    Facilities can also use the NHSN to obtain information on clinical 
practices known to prevent HAIs, information on the incidence or 
prevalence of multidrug-resistant organisms within their organizations, 
and information on other adverse events. Some States use the NHSN as a 
means of collecting State law-mandated HAI reporting. NHSN collects 
data via a Web-based tool hosted by the CDC and available at: http://www.cdc.nhsn. This reporting service is provided free of charge to 
healthcare facilities. In addition, CDC may have the ability to receive 
NHSN measures data from electronic health records (EHRs) in the near 
future. Currently, the data reporting of these two HAI events is 
completed through the NHSN. More than 20 States require hospitals to 
report HAIs using NHSN, and CDC supports more than 4,000 hospitals that 
are using the NHSN. Over 200 LTCHs currently submit HAI data via the 
NHSN.
    HAI event reporting and meaningful HAI event surveillance by the 
LTCH, using the CDC/NHSN requires the submission of all HAI events, 
regardless of payer. We believe delivery of high quality care in the 
LTCH setting is imperative. Collecting such quality data on all 
patients in the LTCH setting supports CMS' mission to ensure high 
quality care for Medicare beneficiaries. This will provide us with the 
most robust and accurate reflection of quality in the LTCH setting. 
Therefore, in order to facilitate and ensure that high quality care is 
delivered to Medicare beneficiaries in the LTCH setting, we proposed 
that quality data related to HAIs be collected on all LTCH patients, 
regardless of payer.
    Currently the NHSN has data collection forms, data submission, and 
reporting mechanisms in place that are in use by LTCHs for both CLABSI 
and CAUTI measures. Details related to the procedures using the NHSN 
for data submission can be found at: http://www.cdc.gov/nhsn. 
Specifically, details related to the procedures of using the NHSN for 
data submission and information on definitions, numerator data, 
denominator data and data analyses for CLABSI Event: CLABSI rate per 
1000 central line days calculated by dividing the number of CLABSI by 
the number of central line days and multiplying the result by 1000 can 
be found at http://www.cdc.gov/nhsn/PatientSafety.html. Details related 
to the CLABSI SIR can be found at http://www.cdc.gov/hai/pdfs/stateplans/SIR_05_25_2010.pdf. Details related to the procedures of 
using the NHSN for data submission and information on definitions, 
numerator data, denominator data and data analyses for CAUTI Event: 
CAUTI rate per 1000 urinary catheter days calculated by dividing the 
number of CAUTIs by the number of catheter days and multiplying the 
result by 1000 can also be found at http://www.cdc.gov/nhsn/PatientSafety.html.
    The reporting procedures for these HAI events would not be affected 
by the use of the SIR instead of the current rate calculation. CDC 
performs those calculations. Further information related to the use of 
the SIRs can be found on the Web sites at: http://www.hhs.gov/ash/initiatives/hai/appendices.html and http://www.cdc.gov/HAI/surveillance/QA_stateSummary.html.
    We solicited public comment on the proposed methods of data 
submission for the CLABSI and CAUTI measures in the FY 2012 IPPS/LTCH 
PPS proposed rule for the quality reporting program for LTCHs.
    Comment: Several commenters supported the use of the NHSN for data 
reporting. However, some commenters questioned the readiness of the 
CDC's NHSN infrastructure to accept a greater volume of data by adding 
LTCH reporters. Several commenters expressed concerns with provider 
burden and resources required to enroll, train, and implement data 
reporting through the CDC's NHSN.
    Response: CDC has indicated that the NHSN has undergone a major 
architectural redesign over the last year in response to the need to 
scale up to more users and to improve its functionality. Based on the 
current number of facilities reporting, the small number of additional 
LTCHs that we proposed to add equates to only a 5 percent increase in 
usage, which is not an appreciable burden on the system. CDC is 
confident that the changes it is making will meet the challenges of the 
proposed increase in NHSN usage.
    Comment: One commenter suggested that the NHSN would create an 
additional burden as a new reporting system for the LTCHs that are not 
currently using NHSN for reporting.
    Response: At this time, nearly half of all certified LTCHs report 
HAI events using the NHSN. As we discuss in more detail in section 
IX.J.3.b. of Appendix A to this final rule, we believe that the burdens 
associated with submitting data to the CDC via NHSN will be modest 
because many LTCHs are NHSN-registered and trained and have experience 
using this system. For LTCHs that have not used this system, the 
registration and training are free and require only a small amount of 
time. Finally, we estimate that the costs for data submission for the 
LTCHs that are not currently using the NHSN for both measures will be 
modest.
    Comment: Several commenters supported the use of NHSN data for 
collection of data pertaining to CLABSI and CAUTI quality measures as 
well as additional future measures. One commenter suggested that CMS 
mandate the use of NHSN by making its use part of the Conditions of 
Participation (CoPs) for LTCHs. Several commenters recommended the use 
of existing data reporting mechanisms for data submission, including 
EHRs, in order to minimize burden, avoid duplication of efforts, 
improve accuracy, and align these quality-related data collection 
efforts with other quality assessment reporting efforts (for example, 
The Joint Commission). These commenters noted that introduction of a 
new data collection system could prove difficult for LTCHs not yet 
reporting information through this system, especially small or rural 
LTCHs, and some commenters suggested that CMS allow providers choice in 
submission systems.
    Response: We thank the commenters for their support of the use of 
the NHSN for the data collection of the CAUTI and CLABSI measure. We 
also thank the commenter for the suggestion that we integrate the use 
of the NHSN as a part of the LTCH CoPs. However, we do not believe it 
is necessary to add such a requirement to the LTCH CoPs in order to 
require submission of the applicable data through the NHSN for the LTCH 
quality reporting program.
    We wish to minimize any burdens associated with the LTCH quality 
reporting program. We intend to minimize burden where measures are 
already submitted through measure simplification, while still working 
to implement a quality reporting program that concentrates on providing 
safe, sound care for all patients receiving services in LTCHs. We chose 
the NHSN reporting system because implementation of this system has 
already been shown to be both feasible and useful in LTCH settings. The 
reporting of HAIs using the NHSN is provided free of charge by the CDC 
for acute and post acute settings. NHSN reporting for HAIs is already 
mandated or soon will be mandated in 11 States

[[Page 51753]]

and the District of Columbia. The CLABSI measure is already in place in 
11 States and the District of Columbia. At the time of this final rule, 
CDC indicated that over 200 LTCHs, out of 439 certified LTCHs, report 
HAI events using the CDC via NHSN. During the 12-month period from 
April 2010 to March 2011, 58 LTCHs reported CLABSI for at least one 
month, and the same number reported CAUTI for at least one month. Over 
4,000 hospitals currently submit safety reports to NHSN; and over 20 
States require acute-care hospitals to participate. The CDC/NHSN HAI 
event reporting, therefore, provides an opportunity for alignment 
across healthcare settings and alignment with definitions between 
various healthcare settings as well as among all LTCHs.
    Comment: Several commenters noted that data collected for NHSN does 
not include collection of individual patient level information, 
limiting the potential for more robust risk adjustment based on 
severity of illness and other patient-level risk factors. The 
commenters believed that the only real variables collected by NHSN for 
use in risk-adjustment for CAUTI and CLABSI are device days and device 
utilization.
    Response: As previously discussed in response to another comment on 
risk adjustment for the two proposed NHSN measures, the risk adjustment 
methodology of the CDC, as endorsed by NQF uses risk stratification by 
facility type and location calculating observed over expected for a 
particular facility or location and reported as a Standardized 
Infection Ratio. We believe that this risk adjustment is sufficient as 
endorsed by NQF, and avoids adding to the complexity and reporting 
burden of the measures that would arise should we require detailed 
information on patient co-morbidities and characteristics.
    After consideration of the public comments received, we are 
adopting as final our proposed method of data submission for HAIs using 
the CDC/NHSN, with the first reporting period to begin October 1, 2012, 
for the FY 2014 payment determination.
b. Timeline for Data Reporting Related to HAIs
    CDC recommends that HAI reporting occur closest in time to the 
event, and further recommends that reporting occur no later than 30 
days following the event. To facilitate HAI surveillance and reporting 
for these proposed measures for payment determination, we proposed an 
additional timeframe for reporting following the initial reporting 
period. We proposed a data submission timeframe for NHSN event 
reporting for these proposed LTCH quality reporting program HAI 
measures of October 1, 2012 through December 31, 2012 for the 
determination of FY 2014 annual payment update, and that LTCHs submit 
their data no later than May 15, 2013.
    In order to better align with the current Hospital IQR Program HAI 
reporting processes (75 FR 20223), we also proposed that all subsequent 
LTCH quality reporting cycles will be based on a calendar year cycle 
(for example, beginning January 1, 2013 through December 31, 2013) for 
determination of the update to the standard Federal rate for each LTCH 
in FY 2015 and subsequent years. We proposed that, beginning in CY 
2013, and for all subsequent years, LTCHs would submit HAI event data 
via the NHSN, for four consecutive quarters of the calendar year. For 
example, for the FY 2015 annual payment update to the standard Federal 
rate, LTCHs would submit HAI data collected in the first quarter of CY 
2013, the second quarter of CY 2013, the third quarter of CY 2013, and 
the fourth quarter of CY 2013.
    The timelines for submission of quality data on the CLABSI and 
CAUTI measures for the FY 2015 annual payment update that we proposed 
are set out below.

Timelines for Submission of Data on the Central Line Catheter-Associated
  Bloodstream Infections and Urinary Catheter-Associated Urinary Tract
   Infections (CAUTI & CLABSI) Measures for the FY 2015 Annual Payment
                                 Update
------------------------------------------------------------------------
                                                           Proposed
                                                          submission
                                       CDC-NHSN        deadlines for the
   CY 2013 Infection event(s)       Collection and       LTCH quality
                                   quarterly report    reporting program
                                    generation time     FY 2015 payment
                                                         determination
------------------------------------------------------------------------
Q1 (January-March 2013).........  January 31-August   August 15, 2013.
                                   15.
Q2 (April-June 2013)............  April 30-November   November 15, 2013.
                                   15.
Q3 (July-September 2013)........  July 31-February    February 15, 2014.
                                   15.
Q4 (October-December 2013)......  October 31-May 15.  May 15, 2014.
------------------------------------------------------------------------

    LTCHs would have until the final submission deadline for the LTCH 
quality reporting program to submit their quarterly data to the NHSN. 
After the final submission deadline has occurred for each CY 2013 
quarter, CMS will receive a file from the CDC with the aggregated 
measurement rates of the specific calculations that have been generated 
by the NHSN for the LTCH quality reporting program and we will use 
those results for purposes of determining whether the LTCH met the 
requirements for the LTCH quality reporting program.
    We invited public comments on the reporting cycle for LTCHs.
    Comment: Many commenters recommended a 1-year delay in the 
publication of the CLABSI and CAUTI quality measures. These commenters 
suggested that the delay would allow time for administrative processes 
and procedures, training, NQF endorsement, validation of data, and the 
strengthening of the NHSN system, and/or addition of a POA indicator, 
while still allowing for data to be submitted in time to meet the 
requirements of section 1886 (m)(5)(A)(iii) of the Act for measure 
publication by October 1, 2012. Several commenters suggested the 
initial roll out of one quality measure at a time, for use in testing 
and evaluation of benefit. One commenter recommended that the CLABSI 
quality measure be implemented only after site-based testing.
    Response: There is already current and successful use of the NHSN 
reporting infrastructure for HAI measures for over 200 of the 439 
certified LTCHs. We are announcing these measures at this time to 
provide ample notice for facilities for the purposes of administrative 
procedures such as enrollment and training. We intend to announce 
specifications related to the HAI measures' data collection, 
submission, and reporting procedures on or before January 31, 2012. 
Specifically, we note that data collection does not begin until October 
1, 2012. Therefore, there already exists a one year delay incorporated 
from the publication of these measures and when data collection begins 
for purposes of the FY 2014 payment determination. We also are working 
with the CDC for full implementation support.

[[Page 51754]]

    After consideration of the public comments we received, we are 
adopting as final the proposed reporting cycle for data submission for 
HAIs for FY 2014 payment determination.
    In alignment with the Hospital IQR Program, (75 FR 50223), we also 
proposed that once quarterly each LTCH will utilize an automated report 
function that will be made available to submitters in the NHSN, to 
generate a quarterly report containing individual LTCH-level numerator, 
denominator, and exclusion counts for these two HAI measures 
specifically. CDC will create an automated LTCH quality program report 
function and add it to NHSN's reporting functionalities. While LTCHs 
may be reporting other data elements to CDC for other reporting 
programs (that is, State-mandated surveillance programs), the quarterly 
LTCH quality program report that would be generated within NHSN would 
only contain those data elements needed to calculate the two measures 
currently being proposed for the LTCH quality reporting program. We 
would only receive this aggregated data from CDC.
    We also proposed that any further details regarding, data 
submission and reporting requirements for HAI measures to be reported 
via NHSN would be posted on the CMS Web site at: http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012.
    Requirements for NHSN participation, measure specifications, and 
data collection can be found on the CDC Web site at: http://www.cdc.gov/nhsn/. LTCHs are encouraged to visit this Web site in order 
to view the NHSN enrollment and reporting requirements. Training 
resources are available there. In order to allow adequate time for 
enrollment in the NHSN, and for training to take place, should these 
measures be finalized, additional details related to this reporting 
program's requirements, such as when enrollment is due to occur, will 
be announced by no later than January 31, 2012, on the CMS Web site at: 
http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/. In the 
announcement, we would propose to provide guidance on the 
specifications, definitions and reporting requirements.
    We sought comment on the alignment with the Hospital IQR Program 
reporting cycle.
    Comment: Commenters expressed appreciation for the alignment of 
LTCH quality reporting program's data submission timelines with those 
in the Hospital IQR Program. Commenters also expressed appreciation 
that the LTCH quality reporting program follows the basic structure of 
the Hospital IQR Program. Several commenters requested that, like the 
Hospital IQR Program, there also be procedures and methodology for data 
validation, an appeals process, and that LTCHs be permitted to review 
their data 30 days before it is made available to the public.
    Response: We appreciate the commenters' support. We will consider 
suggestions with regard to the procedures and processes that are to be 
put into place for the LTCH quality reporting program, and data 
validation methodology as well as an appeals processes in future 
rulemaking.
    After consideration of the public comments we received, we are 
adopting as final the proposed timeline for data submission for HAIs 
for FY 2014 payment determination.
c. Method of Data Collection and Submission for the Pressure Ulcer 
Measure Data
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25989 through 
25990), we proposed that the pressure ulcer data elements necessary to 
calculate the pressure ulcer measure would be identical to those data 
elements collected through the Minimum Data Set 3.0 (MDS 3.0), which is 
a reporting instrument used in nursing homes. The current MDS 3.0 
pressure ulcer items evolved as an outgrowth of CMS' work to develop a 
standardized patient assessment instrument, referred to as CARE. The 
current MDS 3.0 pressure ulcer items are also currently used in the 
calculation of the NQF-endorsed nursing home pressure ulcer measure, 
Percent of Residents with Pressure Ulcers That Are New or Worsened 
[Short Stay] (NQF 0678, formerly NQF  NH-012-10). We 
note that the MDS data elements were supported by the National Pressure 
Ulcer Advisory Panel (NPUAP).
    We believe that to support the standardized collection and 
calculation of the LTCH pressure ulcer quality measure will require the 
use of a subset of the standardized CARE instrument, and thus we 
proposed the use of a subset of the CARE instrument's assessment items 
for data collection. We will be using specifically the pressure ulcer 
data elements necessary to calculate the pressure ulcer measure, and 
those data items are identical to those data elements collected through 
the Minimum Data Set 3.0 (MDS 3.0). The current MDS 3.0 pressure ulcer 
data items can be found at the CMS Web site at: https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp.\70\ This 
data assessment subset will allow identical data elements to be 
collected in LTCHs and in nursing homes.
---------------------------------------------------------------------------

    \70\ https://www.cms.gov/NursingHomeQualityInits/45_NHQIMDS30TrainingMaterials.asp (Look for Downloads. Select MDS 3.0 
Item Subsets v1.002. Click on MDS 3.0 ALL Items. Scroll down to 
Section M, Skin Conditions, items M0100-M0900.)
---------------------------------------------------------------------------

    The CARE assessment instrument, was developed and tested in the 
post-acute care payment reform demonstration (which included LTCHs) as 
required by section 5008 of the Deficit Reduction Act (DRA), Public Law 
109-171. It is a standardized assessment instrument that can be used 
across all post acute care sites to measure functional status and other 
factors during treatment and at discharge from each provider. (For more 
information, we refer readers to the following Web site: http://www.pacdemo.rti.org.) CARE was tested over the last 2 years in 199 
providers, of which 28 were LTCHs. Participant feedback suggested most 
of these items are already collected by LTCHs during their intake 
process and in monitoring the patients' health status during the stay. 
Importantly, the CARE items meet Federal interoperable data standards 
and should be transferable by most data systems. A data reporting 
mechanism for transferring the data to CMS is currently under 
development. We anticipate that it will be similar to the current 
systems used to report assessment data for payment and quality 
monitoring in the other post acute care sites.
    We believe that, for the collection of data necessary to calculate 
this pressure ulcer measure, using a CARE subset of standardized data 
elements to collect, report, and calculate the pressure ulcer quality 
measure will drive uniformity across settings which will lead to better 
quality of care in LTCHs and, ultimately, across the continuum of care 
settings. We also believe that the use of a standardized method of 
communication will lead to better informed decision making.
    We stated in the proposed rule that if this proposal is finalized, 
additional details regarding the data elements needed to calculate this 
measure, submission requirements and specifications used for these data 
elements to calculate the pressure ulcer quality measure using a subset 
of CARE instrument will be published on the CMS Web site at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than 
January 31, 2012.
    We solicited public comment on the proposed methods of data 
submission for the pressure ulcer data in the FY

[[Page 51755]]

2012 IPPS/LTCH PPS proposed rule for the LTCH quality reporting 
program.
    Comment: Commenters suggested that CMS consider existing mechanisms 
for LTCHs to collect and report data on quality measures with the input 
of the LTCH provider community, and avoid any unnecessary duplication 
of reporting for other purposes.
    Response: We are working with other reporting agencies toward 
measure simplification and reductions in potentially duplicative 
reporting.
    After consideration of the public comments we received, we are 
adopting as final our mechanism for data submission to be similar to 
the current systems used to report assessment data for payment and 
quality monitoring in the other post acute care sites for the data 
submission mechanism for the pressure ulcer measure data elements as 
used in the NQF 0678, Percent of Residents with Pressure 
Ulcers that Are New or Worsened. As stated in the proposed rule, 
additional details regarding the data elements needed to calculate this 
measure, submission requirements and specifications used for these data 
elements to calculate the pressure ulcer quality measure will be 
published on the CMS Web site at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012.
    We proposed to use standardized assessment data elements for data 
collection that would support the calculation of quality measures in 
the LTCHs. Specifically, we proposed to use a subset of data items from 
the CARE data set instrument for the collection of the data elements 
necessary to calculate the proposed quality measure, the Percent of New 
or Worsened Pressure Ulcers. This data subset is identical to the MDS 
3.0 data elements for pressure ulcers, which constitute the 
specification for the NQF-endorsed pressure ulcer measure 0678 
that we finalized earlier to apply to the LTCH setting.
    We invited public comment on the use of a subset of CARE data items 
for the purposes data collection for this measure: Percent of Residents 
with Pressure Ulcers that Are New or Worsened. We also invited public 
comment on this proposal for the calculation of the quality measure for 
pressure ulcers.
    Comment: Many commenters expressed concern about the use of CARE 
data elements for collecting data elements on new or worsening pressure 
ulcers in the LTCHs, asserting the data element set was not tested in 
the LTCH environment or approved by NQF.
    Response: The proposed pressure ulcer measure is an NQF-endorsed 
measure when used in the nursing home setting. The data elements are 
identical to MDS 3.0 which constitutes the specifications of the 
proposed pressure ulcer measure for the LTCH setting. The measure uses 
data elements that have been tested in LTCHs during the PAC-PRD. The 
CARE data item set was also tested for reliability and validity in the 
LTCH environment during the PAC-PRD. The CARE data item set was used to 
collect over 8,500 assessments on patients in 28 LTCHs in different 
parts of the country. The items used to populate this measure have been 
tested for reliability in the LTCH setting, and have shown to have very 
high agreement. Furthermore, the data elements used to populate the 
pressure ulcer assessment are based on input from the National Pressure 
Ulcer Advisory Panel and the Wound Ostomy and Continence Nurses 
Society, two professional groups that set the standards used in all 
settings to measure pressure ulcer severity. As a result, we believe 
that the items are familiar to LTCH staff that assess patients for 
pressure ulcers.
    Comment: One commenter expressed disappointment that these 
specifications of the CARE tool were not made public prior to the 
comment period.
    Response: We proposed the use of data elements that are included in 
the CARE data item set and are included in the MDS 3.0. The MDS 
specifications are free and are available to the public through the CMS 
Web site: http://www.cms.gov/NursingHomeQualityInits/30_NHQIMDS30TechnicalInformation.asp#TopOfPage. As specified, additional 
details regarding the submission requirements for the data elements 
needed to calculate this measure will be published on the CMS Web site 
at http://www.cms.gov/LTCH-IRF-HOSPICE-Quality-Reporting/ no later than 
January 31, 2012. We are developing draft technical specifications and 
anticipate publication in the fall of 2011 with final technical 
specifications on or before January 31, 2012.
    Comment: One commenter asked when and how often would the quality 
measure regarding new or worsening pressure ulcers be applied.
    Response: We interpret the commenter's question regarding how often 
would the quality measure be applied to be referencing the number of 
assessments necessary to calculate the measure. There will be two 
assessments needed to calculate the measure. The data collected for 
this measure includes an initial assessment, obtained at the time of 
the admission, and a subsequent assessment. We expect to provide 
further details related to measure specifications and submission 
requirements on or before January 31, 2012.
    After consideration of the public comments we received, we are 
adopting as final our method of data submission for the pressure ulcer 
measure, the use of the quality data elements as used in the NQF-
endorsed pressure ulcer measure 0678, Percent of Residents 
with Pressure Ulcers that Are New or Worsened as required to calculate 
this measure.
d. Timeline for Data Reporting Related to Pressure Ulcers
    The delivery of high quality care in the LTCH setting is 
imperative. We believe that collecting quality data on all patients in 
the LTCH setting supports CMS' mission to ensure quality care for 
Medicare beneficiaries. Collecting data on all patients provides the 
most robust and accurate reflection of quality in the LTCH setting. 
Accurate representation of quality provided in LTCHs is best conveyed 
using data related to pressure ulcers on all LTCH patients, regardless 
of payer. Thus, in order to facilitate and ensure this effort, in the 
FY 2012 IPPS/LTCH PPS proposed rule, we proposed that quality data 
related to pressure ulcers shall be collected on all LTCH patients, 
regardless of payer, using a subset of the CARE data collection 
instrument in accordance with the timetable and schedule set forth in 
section VII.C.4.b. of the preamble to the proposed rule. We stated in 
the proposed rule that we will provide further details about the data 
collection instrument on the CMS Web site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ as these details become available.
    We invited public comments on the proposed reporting cycle for 
LTCHs.
    Comment: The majority of commenters, including those who supported 
use of pressure ulcers as a quality measure, strongly recommended 
delaying the implementation of the CARE data item set as part of 
regulatory mechanism for pressure ulcer until: results from CARE data 
item set demonstration have been reported to Congress and undergone 
Congressional and public comment review; the data items are validated 
in collaboration with experts in the field, and the tool has been NQF-
endorsed. Many commenters suggested a 1-year delay. Other commenters 
suggested postponing the measure ``indefinitely'' or did not specify a 
desired timeframe.
    Response: We concluded our PAC-PRD and data collection using CARE 
in

[[Page 51756]]

December 2010. We plan to submit its report to Congress with findings 
by the end of 2011. We did not propose the implementation of the entire 
data instrument, but rather a subset of tested, and reliable data 
elements. Further, the pressure ulcer measure data elements that 
populate this measure belong to an already NQF-endorsed measure for 
which testing was necessary for endorsement. These data elements are 
currently successfully submitted to CMS by over 16,000 nursing 
facilities. We are developing draft technical submission requirements 
and we expect to publish them in August 2011. We anticipate that we 
will announce final technical specifications related to the pressure 
ulcer measure data elements on or before January 31, 2012.
    After consideration of the public comments we received, we are 
adopting as final the proposed timeline for data submission for the New 
or Worsened Pressure Ulcers measure and in accordance with the 
timetable and schedule set forth in section VII.C.4.b. of this 
preamble, with data collection to begin October 1, 2012 for the FY 2014 
payment determination.
5. Public Reporting and Availability of Data Submitted
    Under section 1886(m)(5)(E) of the Act, the Secretary is required 
to establish procedures for making any quality data submitted by LTCHs 
available to the public. Such procedures will ensure that a LTCH has 
the opportunity to review the data that is to be made public with 
respect to the LTCH prior to such data being made public. The Secretary 
will report quality measures that relate to services furnished in LTCHs 
on the CMS Web site. Currently, the agency is developing plans 
regarding the implementation of this provision. Procedures for public 
reporting will be proposed through future rule making. At this time, we 
have not established procedures or timelines for public reporting of 
data.
    Comment: Several commenters requested the addition and 
specification of a standardized appeals process for all providers to 
ensure that any issues that arise in data aggregation and validation 
can be addressed. With respect to all three measures, commenters 
suggested that LTCHs should be permitted a 30-day window to review 
their data before the data are released to the public. Several 
commenters stated that there should be a data validation methodology 
procedure applied. Another commenter believed that measures required 
for public reporting should be endorsed by the NQF, and ideally by the 
Measures Application Partnership as well. For CAUTI and CLABSI, one 
commenter encouraged NQF, CMS, and the CDC to determine how best to 
educate the public with regard to SIRs, in order to make sure that 
consumers understand the meaning of SIRs prior to the start of public 
reporting. With respect to reporting of the pressure ulcer measure, one 
commenter wanted assurance that the CARE-based pressure ulcer measure 
was validated and viewed as appropriate by LTCHs before the information 
is shared with the public.
    Response: We intend to adopt procedures that will ensure that an 
LTCH has the opportunity to review the data to be made public prior to 
the data being made public, and will such announce details related to 
such procedures in the future. Additionally, as required under section 
1886(m)(5)(E) of the Act, we will report quality measures that relate 
to services furnished in LTCHs on a CMS Web site. Specifically, with 
regard to the comment suggesting that, prior to public reporting of the 
pressure ulcer measure, the agency ensure the measure was appropriately 
validated, we note that ongoing review to ensure appropriateness, 
validity and risk adjustment are integral aspects of quality measure 
maintenance, and we intend to ensure appropriate measure maintenance of 
all quality measures.
    Comment: One commenter expressed appreciation that NHSN will be 
providing a separate reporting function that will automatically 
generate LTCH quality program reports.
    Response: We appreciate the commenter's support.

D. Rebasing and Revising of the Market Basket Used Under the LTCH PPS

1. Background
    The input price index (that is, the market basket) that was used to 
develop the LTCH PPS for FY 2003 was the ``excluded hospital with 
capital'' market basket. That market basket was based on 1997 Medicare 
cost report data and included data for Medicare-participating IRFs, 
IPFs, LTCHs, cancer hospitals, and children's hospitals. Although the 
term ``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 section, 
refers to an input price index.
    Beginning with RY 2007, LTCH 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 paid under a PPS. Also, the FY 2002 cost 
structures for cancer and children's hospitals are noticeably different 
than the cost structures of the freestanding IRFs, freestanding IPFs, 
and LTCHs. A complete discussion of the FY 2002-based RPL market basket 
appears in the RY 2007 LTCH PPS final rule (71 FR 27810 through 27817).
    In the FY 2010 IPPS/RY 2010 LTCH PPS proposed rule (74 FR 21062), 
we expressed our interest in exploring the possibility of creating a 
stand-alone LTCH market basket that reflects the cost structures of 
only LTCH providers. However, as we discussed in the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 43967 through 43968), we are conducting 
further research to assist us in understanding the reasons for the 
variations in costs and cost structure between freestanding IRFs and 
hospital-based IRFs. We also are researching the reasons for similar 
variations in costs and cost structure between freestanding IPFs and 
hospital-based IPFs. We remain unable to sufficiently understand the 
observed differences in costs and cost structures between hospital-
based IRFs and freestanding IRFs and between hospital-based IPFs and 
freestanding IPFs. Therefore, we do not believe it is appropriate at 
this time to establish stand-alone market baskets for IRFs, IPFs, and 
LTCHs.
    We are currently exploring the viability of creating two separate 
market baskets from the current RPL market basket: One market basket 
would include freestanding IRFs and freestanding IPFs and would be used 
to update payments under both the IPF and IRF payment systems. The 
other market basket would be a stand-alone LTCH market basket. 
Depending on the outcome of our research, we may propose a stand-alone 
LTCH market basket in the next LTCH PPS update cycle.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25990), we 
invited public comment on the possibility of using this type of market 
basket to update LTCH payments in the future.
    Comment: Several commenters stated that CMS' ongoing work to 
develop a

[[Page 51757]]

market basket that is distinct to the LTCH PPS, and that recognizes the 
differences among LTCHs, IRFs, and IPFs, is worthwhile, given the 
unique role LTCHs play in treating high complexity, long-stay patients. 
Further, one commenter stated that there are a sufficient number of 
LTCHs to support a separate market basket, and CMS should have 
confidence that an LTCH-specific market basket would be a reflection of 
real inflationary changes to the costs of LTCH goods and services. 
Several commenters encouraged CMS to create a separate LTCH market 
basket for the FY 2013 LTCH PPS.
    Response: We appreciate the commenters' support as we continue to 
investigate the feasibility of developing a LTCH-specific market 
basket.
    Under the LTCH PPS for FY 2012, we proposed to rebase and revise 
the FY 2002-based RPL market basket by creating a 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 proposed (and are adopting in this final rule) to use for purposes 
of determining the operating and capital portions of the FY 2008-based 
RPL market basket.
2. Overview of the FY 2008-Based RPL Market Basket
    The 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 the proposed rule, we proposed to use FY 2008 as 
the base period) 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 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 of the provider's inputs 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.
3. Rebasing and Revising of the RPL Market Basket
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25991), we 
invited 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 the proposed rule, we proposed 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. For FY 2012, 
we proposed to rebase and revise the market basket used to update the 
LTCH PPS. A summary of the public comments we received and any changes 
we have made as a result of these public comments are included in the 
applicable areas of this section.
a. Development of Cost Categories
(1) Medicare Cost Reports
    As we proposed and are adopting in this final rule, the 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 Medicare cost reports include providers whose 
cost report begin date is on or between October 1, 2007, and September 
30, 2008. We used 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 because 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. However, because 
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 developed 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). We provide 
additional detail on this approach later in this section.
    Because our goal is to measure cost shares that are reflective of 
case-mix and practice patterns associated with providing services to 
Medicare beneficiaries, we limited our selection of Medicare cost 
reports to those from hospitals that have a Medicare average length of 
stay that is within a comparable range of their total facility average 
length of stay. We believe this provides a more accurate reflection of 
the structure of costs for Medicare covered days. We used the cost 
reports of LTCHs and IRFs with Medicare average lengths of stay within 
15 percent (that is, 15 percent higher or lower) of the total facility 
average length of stay for the hospital. This is the same edit we 
applied to derive the FY 2002-based RPL market basket and generally 
includes those LTCHs and IRFs with Medicare average length of stay 
within approximately 5 days of the facility average length of stay of 
the hospital.

[[Page 51758]]

    As we proposed, we used a less stringent measure of Medicare 
average length of stay for IPFs. For this provider type, and in order 
to produce a robust sample size, we used those facilities' Medicare 
cost reports whose average length of stay is within 30 or 50 percent 
(depending on the total facility average length of stay) of the total 
facility average length of stay. This is the same edit we applied to 
derive the FY 2002-based RPL market basket.
    We applied these length-of-stay edits to first obtain a set of cost 
reports for facilities that have a Medicare length of stay within a 
comparable range of their total facility length of stay. Using this set 
of Medicare cost reports, we then calculated cost weights for four cost 
categories and a residual as represented by all other costs directly 
from the FY 2008 Medicare cost reports for freestanding IRFs, 
freestanding IPFs, and LTCHs (found in Table VII.D-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 FY 2008-based RPL market basket cost weights.

 Table VII.D-1--Major Cost Categories and Their Respective Cost Weights
        as Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
                                                       FY 2008-Based RPL
                                                         market basket
                Major cost categories                     cost weights
                                                           (percent)
------------------------------------------------------------------------
Wages and Salaries...................................             47.371
Professional Liability Insurance (Malpractice).......              0.764
Pharmaceuticals......................................              6.514
Capital..............................................              8.392
All other............................................             36.959
------------------------------------------------------------------------

    Comment: One commenter expressed concern with CMS' proposal 
regarding length-of-stay edits associated with LTCHs and IRFs, which is 
to use only the cost reports of those facilities whose Medicare average 
lengths of stays are within 15 percent (that is, 15 percent higher or 
lower) of the total facility length of stay, and asked if CMS could 
identify the number of facilities that would fall out of these 
categories. The commenter based this request on the fact that there are 
only 440 LTCHs, and this exclusion could adversely impact the industry.
    Response: As stated above, we proposed to limit our selection of 
Medicare cost reports to those cost reports from hospitals that have a 
Medicare average length of stay that is within a comparable range of 
their total facility average length of stay in order to measure the 
cost shares that are reflective of case-mix and practice patterns 
associated with providing services to Medicare beneficiaries.
    The length-of-stay edits utilized were developed specifically for 
each provider type (that is, IRFs, LTCHs, and IPFs). For LTCHs and 
IRFs, we used the cost reports with Medicare average lengths of stay 
within 15 percent (that is, 15 percent higher or lower) of the total 
facility average length of stay for the hospital. Applying this edit 
resulted in excluding about 12 percent of IRFs and LTCHs that, in the 
aggregate, had a facility length of stay that was 80 percent higher 
than their Medicare length of stay. The resulting sample of LTCHs and 
IRFs after the length-of-stay edit, in the aggregate, had a facility 
length of stay that was 2 percent higher than their Medicare length of 
stay. We believe applying this edit allows us to achieve our goal of 
creating a market basket that is reflective of case-mix and practice 
patterns associated with providing services to Medicare beneficiaries.
    Comment: One commenter suggested that, because only a small number 
of providers (less than 30 percent) reported data for benefits and 
contract labor on their cost reports, CMS consider requiring all LTCHs 
to submit this information.
    Response: Effective for cost reports beginning on or after May 1, 
2010, CMS finalized a revised Hospital and Hospital Health Care Complex 
Cost Report, Form CMS 2552-10, which is available for download from the 
CMS Web page at http://www.cms.gov/Transmittals/2010Trans/list.asp?intNumPerPage=10 by clicking on the link to CMS Transmittal 
R1P240. Form CMS 2552-10 includes a new worksheet (Worksheet 
S-3, part V) which identifies the contract labor costs and benefit 
costs for the hospital complex and is applicable to subproviders and 
units. CMS anticipates that all providers will report these data so we 
are able to include the data in future market basket rebasings.
(2) Other Data Sources
    In addition to the IRF, IPF and LTCH Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs, the other data sources 
we used to develop the FY 2008-based RPL market basket cost weights 
were the FY 2008 IPPS Medicare cost reports and the 2002 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 between October 
1, 2007, and September 30, 2008.
    As noted above, the 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,'' ``Employee Benefits,'' and ``Contract 
Labor'' for IPPS hospitals for FY 2008. For the Employee 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 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 VII.D-1 that are attributable to the 
benefits and contract labor cost categories. The BEA Benchmark I-O data 
are generally 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. For the FY 2002-based RPL market basket, we used the 
1997 Benchmark I-O data. As we proposed, we used the 2002 Benchmark I-O 
data for 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'' 
expenditures based on 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 ``all other'' cost category 
of the RPL market basket.
    Comment: One commenter supported our continued use of general acute 
hospital cost reports along with the

[[Page 51759]]

LTCH cost reports to develop the FY 2008-based RPL market basket.
    Response: As stated above, we are finalizing our proposed methods 
for rebasing and revising the RPL market basket in this final rule, 
including the incorporation of cost report data from LTCHs and general 
acute care hospitals.
b. Final Cost Category Computation
    As stated previously, for the FY 2012 rebasing proposal, we used 
the Medicare cost reports for IRFs, IPFs, and LTCHs to derive four 
major cost categories. The 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 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 below in section VII.D.3.f. 
of this final rule. Also, the FY 2008-based RPL market basket excludes 
one cost category: ``Photographic 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 include 
the photographic supplies costs in the ``Chemicals'' cost category 
weight with other similar chemical products.
    We did not propose to change our definition of the labor-related 
share. However, we did propose 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 are classifying 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 new labels more 
accurately reflect the concepts that they are intended to convey. We 
did not propose 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.
    We did not receive any public comments that addressed our proposal 
to rename our aggregate cost categories from ``Labor-intensive'' and 
``Nonlabor-intensive'' to ``Labor-related'' and ``Nonlabor-related'' 
services. Therefore, in this final rule, we are adopting our proposal 
to rename our aggregate cost categories without modification.
c. Selection of Price Proxies
    After computing the FY 2008 cost weights for the 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 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 encountered by hospitals. For example, we are using a 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 encountered 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 PPIs, CPIs, and ECIs selected meet these criteria.
    Table VII.D-2 below sets forth the 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 also are listed. For example, ``Wages and 
Salaries'' are 49.447 percent of total costs in the 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 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 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 VII.D-2 is a summary outlining the choice of the 
proxies we proposed (and are adopting in this final rule) to use for 
the operating portion of the FY 2008-based RPL market basket. The price 
proxies for the capital portion are described in more detail in the 
capital methodology section below in section VII.D.3.d. of this final 
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, we refer readers to the discussion in the FY 2010 IPPS/RY 2010 
LTCH PPS final rule (74 FR 43843).

[[Page 51760]]

  Table VII.D-2--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 2002-Based   FY 2008-Based
                                                  RPL market      RPL market     FY 2008-Based RPL market basket
                Cost categories                   basket cost     basket cost             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 and 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 and
                                                                                 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 \2\................           0.096  ..............  --
(7.) Rubber and Plastics......................           1.052           1.131  PPI for Rubber and Plastic
                                                                                 Products.
(8.) Paper and Printing Products..............           1.000           1.021  PPI for Converted Paper and
                                                                                 Paperboard Products.
(9.) Apparel..................................           0.207           0.210  PPI for Apparel.
(10.) Machinery and Equipment.................           0.297           0.106  PPI for Machinery and 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 \4\....           2.219           2.145  ECI for Compensation for Private
                                                                                 Service Occupations.
(2.) Nonlabor-Related Services................           3.722           6.733  --
(a.) Professional Fees: Nonlabor-Related \3\..             n/a           4.211  ECI for Compensation for
                                                                                 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\5\..           2.800           0.623  CPI-U for All Items less Food
                                                                                 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).
(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 are using 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, we
  refer readers to section VII.D.3.c.(10) of the preamble of this final rule. In addition, we now include
  expenses related to Photographic Supplies in the Chemicals cost category due to the small cost weight
  associated with these expenses. We note that, although we are eliminating the specific cost category, these
  costs are still accounted for within the RPL market basket.
\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 section VII.D.3.f. of the preamble of
  this final rule on the labor-related share.
\4\ The Administrative and Business Support Services cost category was contained within the ``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.

[[Page 51761]]

 
\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.

(1) Wages and Salaries
    We are using 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.
(2) Employee Benefits
    We are using 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.
(3) Electricity
    We are using the PPI for Commercial Electric Power (BLS series code 
WPU0542). This same proxy was used in the FY 2002-based RPL market 
basket.
(4) 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 used the PPI for 
Commercial Natural Gas (BLS series code WPU0552) as a proxy for this 
cost category. For the FY 2008-based market basket, we added 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 using the PPI for Petroleum Refineries (BLS 
series code PCU324110324110) as the proxy for this cost category.
(5) Water and Sewage
    We are using 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.
(6) Professional Liability Insurance
    We 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.
(7) Pharmaceuticals
    We are using 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 did not make a change to the PPI 
that is used to proxy this cost category. Although there was a recent 
change to the BLS naming convention for this series, this is the same 
proxy that was used in the FY 2002-based RPL market basket.
(8) Food: Direct Purchases
    We are using 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.
(9) Food: Contract Services
    We are using 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.
(10) Chemicals
    We are using 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 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 using 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 VII.D-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 VII.D-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..........................
------------------------------------------------------------------------

(11) Medical Instruments
    We are using 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

[[Page 51762]]

surgical appliance and supplies manufacturing (corresponding to BLS 
series code WPU1563). Due to this reallocation of costs over time, we 
are changing the price proxy for this cost category to the more 
aggregated PPI for Medical, Surgical, and Personal Aid Devices.
(12) Photographic Supplies
    We are eliminating the cost category specific to photographic 
supplies for the FY 2008-based RPL market basket. These costs are now 
included in the Chemicals cost category because the costs are presently 
reported as all other chemical products. Notably, although we are 
eliminating the specific cost category, these costs are still accounted 
for within the RPL market basket.
(13) Rubber and Plastics
    We are using 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.
(14) Paper and Printing Products
    We are using 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.
(15) Apparel
    We are using 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.
(16) Machinery and Equipment
    We are using 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.
(17) Miscellaneous Products
    We are using 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 avoids the double-counting of food and 
energy prices, which is already captured elsewhere in the market 
basket. This same proxy was used in the FY 2002-based RPL market 
basket.
(18) Professional Fees: Labor-Related
    We are using 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.
(19) Administrative and Business Support Services
    We are using 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.
(20) All Other: Labor-Related Services
    We are using 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.
(21) Professional Fees: Nonlabor-Related
    We are using 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 using for the Professional Fees: Labor-related cost 
category.
(22) Financial Services
    We are using 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 
financial services and its incorporation represents a technical 
improvement to the market basket.
(23) Telephone Services
    We are using 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.
(24) Postage
    We are using 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.
(25) All Other: Nonlabor-Related Services
    We are using 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 avoids 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 represents a technical improvement to the market basket.
    We did not receive any public comments that addressed our proposed 
selection of price proxies to reflect the rate of price change for each 
expenditure category. Therefore, we are adopting our proposal as final 
without modification.
d. Methodology for Capital Portion of the RPL Market Basket
    In the FY 2002-based RPL market basket, we did not have 
freestanding IRF, freestanding IPF, and LTCH 2002 Medicare cost report 
data for the capital-related 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 FY 2008-based RPL market basket, as we proposed, we 
calculated weights for the 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 total capital cost 
weight, we first applied the same length-of-stay edits as applied when 
calculating the operating cost weights as described above in section 
VII.D.3.a. of this preamble. The resulting Capital-Related 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

[[Page 51763]]

Depreciation, Interest, and Other Capital-related Costs, 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-related Costs not including 
lease expenses.
    Depreciation contains two subcategories: (1) Building and Fixed 
Equipment (or Fixed Assets); and (2) Movable Equipment. The 
apportionment between building and fixed equipment and movable 
equipment was determined using the FY 2008 Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs. This methodology was 
also used to compute the apportionment used in the FY 2002-based RPL 
market basket (71 FR 27815).
    The total Interest 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 freestanding 
IRFs, freestanding IPFs, and LTCHs. For the FY 2008-based RPL market 
basket, as we proposed, we derived the split using the FY 2008 Medicare 
cost report data on interest expenses for government/nonprofit and for-
profit freestanding IRFs, freestanding IPFs, and LTCHs. Based on these 
data, we calculated a 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 applied the average length of stay 
edits (as described in section VII.D.3.a. of this preamble) prior to 
calculating this split. Therefore, we used 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 freestanding IRFs, freestanding IPFs, and 
LTCHs as well as the application of these length of stay 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 and fixed 
equipment, movable equipment, and interest. We used the vintage weights 
to compute vintage-weighted price changes associated with depreciation 
and interest expense.
    Vintage weights are an integral part of the 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 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 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 and 
fixed equipment and movable equipment. We found no single source that 
provides an appropriate 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 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 and 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 freestanding IRFs, 
freestanding IPFs, and LTCHs, we used 2001 Medicare cost reports for 
IPPS hospitals to determine the expected life of building and fixed 
equipment and movable equipment (71 FR 27816). The FY 2002-based RPL 
market basket was based on an expected average life of building and 
fixed equipment of 23 years. It used 11 years as the average expected 
life for moveable 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 freestanding IRFs, 
freestanding IPFs, and LTCHs.
    The expected life of any asset 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 used 
the average expected life of building and fixed equipment to be equal 
to 26 years, and the average 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 and fixed equipment 
and movable equipment using the Medicare cost reports from freestanding 
IRFs, freestanding IPFs, and LTCHs.
    As we proposed, we also used the building and fixed equipment and 
movable equipment weights derived from FY 2008 Medicare cost reports 
for freestanding IRFs, freestanding IPFs, and LTCHs to separate the 
depreciation expenses into annual amounts of building and fixed 
equipment depreciation and movable equipment depreciation. Year-end 
asset costs for building and fixed equipment and

[[Page 51764]]

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 and fixed equipment and for 
movable equipment. Each of these sets of vintage weights is explained 
in more detail below.
    For the building and fixed equipment vintage weights, we used the 
real annual capital purchase amounts for building and 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 and fixed equipment was produced by deflating the nominal 
annual purchase amount by the building and fixed equipment price proxy, 
BEA's chained price index for nonresidential construction for hospitals 
and special care facilities. Because building and fixed equipment have 
an expected life of 26 years, the vintage weights for building and 
fixed equipment are deemed to represent the average purchase pattern of 
building and fixed equipment over 26-year periods. With real building 
and fixed equipment purchase estimates available from 2008 back to 
1963, we averaged twenty 26-year periods to determine the average 
vintage weights for building and fixed equipment that are 
representative of average building and fixed equipment purchase 
patterns over time. Vintage weights for each 26-year period are 
calculated by dividing the real building and 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 and fixed equipment vintage weights for the FY 2008-based RPL 
market basket.
    For the 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 interest vintage weights, the nominal annual capital 
purchase amounts for total equipment (building and 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 
VII.D-4 below.

                                  Table VII.D-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

[[Page 51765]]

 
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 use the same price proxies 
for the capital portion of the 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 Capital Input Price Index (CIPI) as described in the FY 2010 
IPPS/RY 2010 LTCH PPS final rule (74 FR 43857).
e. FY 2012 Market Basket Update for LTCHs
    For FY 2012 (that is, October 1, 2011 through September 30, 2012), 
as we proposed, we are using an estimate of the FY 2008-based RPL 
market basket update based on the best available data. Consistent with 
historical practice, we estimate the RPL market basket update for the 
LTCH PPS based on IHS Global Insight, Inc.'s (IGI's) forecast using the 
most recent available data. IGI is a nationally recognized economic and 
financial forecasting firm that contracts with CMS to forecast the 
components of the market baskets.
    Based on IGI's first quarter 2011 forecast with history through the 
fourth quarter of 2010, the projected market basket update for FY 2012 
was 2.8 percent. Therefore, consistent with our historical practice of 
estimating market basket increases based on the best available data, we 
proposed a market basket update of 2.8 percent for FY 2012. We also 
proposed that if more recent data became subsequently available (for 
example, a more recent estimate of the market basket), we would use 
such data, if appropriate, to determine the FY 2012 annual update in 
the final rule. For this final rule, we are incorporating a more recent 
estimate of the market basket update and MFP adjustment. Based on IGI's 
second quarter 2011 forecast with history through the first quarter of 
2011, the projected market basket update for FY 2012 is 2.9 percent. 
Therefore, consistent with our historical practice of estimating market 
basket increases based on the best available data, we are finalizing a 
market basket update of 2.9 percent for FY 2012. (As discussed in 
greater detail in section V.A.2. of the Addendum to this final rule, we 
are providing for an annual update of 1.8 percent to the LTCH PPS 
standard Federal rate for FY 2012 under Sec.  412.523(c)(3)(viii) of 
the regulations.)
    Using the FY 2002-based RPL market basket and IGI's second quarter 
2011 forecast for the market basket components, the FY 2012 market 
basket update would be 3.0 percent (before taking into account any 
statutory adjustment). Table VII.D-5 below compares the FY 2008-based 
RPL market basket and the FY 2002-based RPL market basket percent 
changes.

    Table VII.D-5--FY 2002-Based and FY 2008-Based RPL Market Basket Percent Changes; FY 2006 Through FY 2014
----------------------------------------------------------------------------------------------------------------
                                                              FY 2002-Based RPL market  FY 2008-Based RPL market
                      Fiscal year (FY)                          basket index  percent     basket index  percent
                                                                       change                    change
----------------------------------------------------------------------------------------------------------------
Historical data:
    FY 2006.................................................                      3.9                       3.7
    FY 2007.................................................                      3.4                       3.4
    FY 2008.................................................                      3.8                       3.7
    FY 2009.................................................                      2.5                       2.7
    FY 2010.................................................                      2.3                       2.2
    Average 2006-2010.......................................                      3.2                       3.1
Forecast:
    FY 2011.................................................                      2.7                       2.7
    FY 2012.................................................                      3.0                       2.9
    FY 2013.................................................                      3.0                       2.9
    FY 2014.................................................                      3.0                       3.0
    Average 2011-2014.......................................                      2.9                       2.9
----------------------------------------------------------------------------------------------------------------
Note that these market basket percent changes do not include any further adjustments as may be statutorily
  required.
Source: IHS Global Insight, Inc. second quarter 2011 forecast.

[[Page 51766]]

    For FY 2012, the FY 2008-based RPL market basket update (2.9 
percent) is slightly lower than the market basket update based on the 
FY 2002-based RPL market basket. The lower total compensation weight in 
the 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. However, this impact is partially 
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 FY 2008-based RPL market 
basket. The net effect is that the market basket update is slightly 
lower for FY 2012 based on the FY 2008-based RPL market basket relative 
to the FY 2002-based RPL market basket.
f. Labor-Related Share
    As discussed in section V.B. of the Addendum to this final rule, 
under the authority of section 123 of the BBRA as amended by section 
307(b) of the BIPA, we established an adjustment to the LTCH PPS 
payments to account for differences in LTCH area wage levels (Sec.  
412.525(c)). The labor-related portion of the LTCH PPS standard Federal 
rate, hereafter referred to as the labor-related share, is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index.
    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 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 RY 2007 LTCH PPS final rule (71 FR 27829), the 
labor-related share was defined as the sum of the relative importance 
of the labor-related share of operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees, and All Other: Labor-intensive 
Services), and a portion of Capital costs of the RPL market basket 
based on FY 2002 data. Therefore, to determine the labor-related share 
for the LTCH PPS for FY 2011, we used the FY 2002-based RPL market 
basket cost weights relative importance to determine the labor-related 
share for the LTCH PPS.
    For the FY 2008-based RPL market basket rebasing, the 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 established 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.
    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.
    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 LTCHs as they are also institutional providers of health care 
services. Using data on full-time equivalents (FTEs) to allocate 
responding hospitals across strata (region of the country and urban/
rural status), we calculated post-stratification 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 to 
determine the Professional Fees: Nonlabor-related costs. The 
Professional Fees: Labor-related costs were determined to be the 
difference between the total costs for each Benchmark I-O category and 
the Professional Fees: Nonlabor-related costs. 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

[[Page 51767]]

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, freestanding 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 apportion the NAICS 55 expense data by this percentage. Thus, 
we classified 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.
    Using this method and the IGI's forecast for the first quarter 2011 
of the FY 2008-based RPL market basket, the proposed LTCH labor-related 
share for FY 2012 was the sum of the FY 2012 relative importance of 
each labor-related cost category. Consistent with our policy for 
updating the labor-related share with the most recent available data, 
the labor-related share for this final rule reflects IGI's second 
quarter 2011 forecast of the FY 2008-based RPL market basket. Table 
VII.D-6 below shows the FY 2012 relative importance labor-related share 
using the FY 2008-based RPL market basket and the FY 2011 relative 
importance labor-related share using the FY 2002-based RPL market 
basket.

   Table VII.D-6--Comparison of the FY 2011 Relative Importance Labor-
  Related Share Based on the FY 2002-Based RPL Market Basket and the FY
 2012 Relative Importance Labor-Related Share Based on the FY 2008-Based
                            RPL Market Basket
------------------------------------------------------------------------
                                   FY 2011 Relative    FY 2012 Relative
                                   importance labor-   importance labor-
                                   related share \1\   related share \2\
------------------------------------------------------------------------
Wages and Salaries..............              52.449              48.984
Employee Benefits...............              13.971              12.998
Professional Fees: Labor-Related               2.855               2.072
Administrative and Business       ..................               0.416
 Support Services...............
All Other: Labor-Related                       2.109               2.094
 Services.......................
                                 ---------------------------------------
    Subtotal....................              71.384              66.564
Labor-Related Portion of Capital               3.887               3.635
 Costs (46%)....................
                                 ---------------------------------------
    Total Labor-Related Share...              75.271              70.199
------------------------------------------------------------------------
\1\ Published in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50391) and
  based on the second quarter 2010 IGI forecast.
\2\ Based on the second quarter 2011 IGI forecast.

    The labor-related share for FY 2012 is the sum of the FY 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 FY 2012. The sum of the relative 
importance for FY 2012 for operating costs (Wages and Salaries, 
Employee Benefits, Professional Fees: Labor-Related, Administrative and 
Business Support Services, and All Other: Labor-related Services) is 
66.564 percent, as shown in Table VII.D-6 above. We are providing 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. Because the relative importance for 
Capital-Related Costs is 7.903 percent of the FY 2008-based RPL market 
basket in FY 2012, we multiplied 46 percent by 7.903 percent to 
determine the labor-related share of Capital for FY 2012. The result is 
3.635 percent, which we added to 66.564 percent for the operating cost 
amount to determine the total labor-related share for FY 2012. Thus, 
the labor-related share that we are using for the LTCH PPS in FY 2012 
is 70.199 percent. This labor-related share is determined using the 
same methodology as employed in calculating all previous LTCH labor-
related shares.
    Comment: Several commenters questioned the 5-percentage point 
reduction in the labor-related share

[[Page 51768]]

(from approximately 75 to approximately 70 percent) for the LTCH PPS, 
after the labor-related share has been relatively constant over the 
last several years. One commenter stated that this 5-percentage point 
reduction in the labor-related share, at one time, will have a 
substantial adverse impact. The commenters requested that CMS not use 
limited size data that result in the revision of the FY 2012 labor-
related share by nearly 5 percentage points. One commenter remarked 
that the reduction reflects a dramatic change in the labor-related 
share from one year to the next.
    Response: The reduction in the labor-related share from FY 2011 to 
FY 2012 is primarily the result of rebasing the RPL market basket from 
a FY 2002 base year to a FY 2008 base year, and reflects use of a more 
recent cost structure of freestanding IRFs, freestanding IPFs, and 
LTCHs. As displayed in Table VII.D-2, the rebasing of the RPL market 
basket from a FY 2002 base year to a FY 2008 base year resulted in a 
decrease in the compensation cost weight of approximately 3.6 
percentage points from 65.877 percent to 62.278 percent. We found 
during our most recent rebasing process that the compensation cost 
weight had begun to gradually decrease over the time period from 2003 
to 2008.
    The decrease in the base year compensation cost weight is 
accounting for over three-quarters of the total decrease from the FY 
2011 labor-related share and the FY 2012 labor-related share (of 
approximately 5 percentage points). The remaining decrease in the 
labor-related share is primarily the result of the treatment of 
professional fees as labor-related or nonlabor-related.
    The FY 2012 labor-related share reflects the most recently 
available and complete set of Medicare cost reports, and thus reflects 
the updated and appropriate proportion of costs that are related to, 
influenced by, or vary with the local labor market for IRFs, IPFs, and 
LTCHs.
    Comment: One commenter specifically called into question the 
methodology used for estimating the allocation of professional fees; 
specifically stating concerns that the sample size used was too small 
(108 hospitals), the survey results may be old and no longer valid, 
that there is no indication that CMS conducted a statistically valid 
sample for estimating the allocation of professional fees, and that it 
would have been more appropriate for CMS to survey LTCH's for this 
information.
    Response: We disagree with the commenter's rationale in regard to 
the calculation of the labor-related share for FY 2012. A method that 
distributes professional fees based on empirical research and data 
represents a technical improvement to the construction of the market 
basket, where previously 100 percent of professional fees were assumed 
to vary with the local labor market. The actual survey results are for 
the year 2008, and are the most recent data available at the time of 
this final rule. In response to the concerns about the sample size of 
108 hospitals and the validity of the survey results, we provide more 
detail on the survey conducted below. We note that these same survey 
results were used in the IPPS market basket rebasing for the FY 2010 
IPPS final rule (74 FR 43853) and the RPL market basket rebasing for 
the FY 2012 IPF final rule (76 FR 26445 through 26447).
    The survey's methods unfolded in the following manner: Through an 
independent contractor, a small sample of 12 hospitals were initially 
pre-tested in order to ensure the understandability of the survey 
questions. The survey prompted sample institutions to select from 
multiple choice answers the proportions of their professional fees that 
are purchased from firms located outside of their respective local 
labor market. The multiple choice answers for each type of professional 
service included the following options: 0 percent of fees; 1-20 percent 
of fees; 21-40 percent of fees; 41-60 percent of fees; 61-80 percent of 
fees; 81-99 percent of fees; and 100 percent of fees. All respondents 
were assured that the information they provided would be kept strictly 
confidential.
    Understanding that larger, urban-based hospitals (and those located 
in areas with area wage indexes greater than 1.0) are most likely to be 
impacted by the survey's results, we used data on full-time equivalents 
(FTEs) to represent the sizes of hospitals and selected hospitals with 
probability proportional to their sizes across strata when drawing the 
full sample. Strata were formed by Census Region and Urban/Rural 
Status. The distributions of the hospital population, as well as 
weighted distributions for the responders, by Urban/Rural Status 
(including data on hospital size) and Census Region were as follows:

------------------------------------------------------------------------
                                     All hospitals        Responding
                                        percent        hospitals percent
                                   distribution and    distribution and
                                   average FTE size    average FTE size
------------------------------------------------------------------------
Total...........................            100%/994          100%/1,156
Total Rurals....................             30%/388             25%/449
Total Urbans....................           70%/1,255           75%/1,460
Total Northeast Region..........           15%/1,442           20%/1,078
Total Mid-West Region...........           23%/1,062           24%/1,656
Total South Region..............             42%/843             37%/944
Total West Region...............             20%/899           19%/1,081
------------------------------------------------------------------------

    Sample weights were calculated as the inverse of the selection 
probability and were subsequently adjusted for nonresponse bias by 
strata and post-stratified to derive final weights. This type of 
application represents a common survey approach and is based on valid 
and widely-accepted statistical techniques.
    For the estimates of the nationwide proportion of nonmedical 
professional services fees purchased outside of the local labor market, 
we first examined the data on multiple levels. First, we found that 
fewer than 30 percent of the responding hospitals paid 100 percent of 
their professional fees to vendors located within their local labor 
market. Conversely, we found that roughly 20 percent of responding 
hospitals reported that 81 percent or more of their professional 
services fees are paid to vendors located outside of their local labor 
market.
    In determining the specific and appropriate proportions of 
professional fees to consider labor-related and nonlabor-related, we 
generated weighted averages from the data in the following manner:
     For any multiple choice answer where the standard error 
associated with the weighted counts for that

[[Page 51769]]

answer was less than 30 percent, we multiplied the weighted counts 
associated with that answer by the midpoint of the range within that 
answer. For example, for Accounting and Auditing services, if a 
weighted count of 500 hospitals responded that they pay ``1 to 20 
percent'' of their professional fees for these services to firms 
located outside of their local labor market, we would multiply 500 
times 10 percent. We repeat this for each possible multiple choice 
answer.
     For any multiple choice answer where the standard error 
associated with the weighted counts for that answer exceeded 30 
percent, we multiplied the weighted hospital counts by the low point of 
the range. Using a similar example as above, if a weighted count of 300 
hospitals responded that they pay ``1 to 20 percent'' of their 
professional fees for these services to firms located outside of their 
local labor market, and the standard error on that estimate was greater 
than 30 percent, we would multiply 300 times 1 percent.
     After applying one of these two techniques to each answer, 
dependent on its associated standard error, we took a weighted average 
of the results to determine the final proportion to be excluded from 
the labor-related share for each of the four types of professional 
services surveyed.
    Given the information provided above, we believe that the estimates 
based on this survey are valid.
    Comment: One commenter recommended that CMS phase in this change in 
the labor-related share over a 2- to 3-year period to allow LTCHs a 
longer period of time to absorb the impact of this reduction to the 
labor-related share.
    Response: We do not agree with this recommendation. In this final 
rule we are finalizing our methodology for calculating the labor-
related share for FY 2012 using the FY 2008-based RPL market basket and 
the most recent forecast data available (which is IHS Global Insight 
Inc.'s second quarter 2011 forecast). This is also the same forecast we 
are using to derive the FY 2012 market basket update for this final 
rule. As the updated labor-related share reflects the current 
proportion of costs that are related to, vary with, or influenced by 
the local labor market, we believe it is appropriate to incorporate the 
results in full into the FY 2012 payment update.

E. Changes to the LTCH Payment Rates and Other Changes to the FY 2012 
LTCH PPS

1. Overview of Development of the LTCH Payment Rates
    The LTCH PPS was effective beginning with a LTCH's first cost 
reporting period beginning on or after October 1, 2002. Therefore, 
beginning with their FY 2003 cost reporting period, LTCHs were paid, 
during a 5-year transition period, a total LTCH prospective payment 
that was comprised of an increasing proportion of the LTCH PPS Federal 
rate and a decreasing proportion based on reasonable cost-based 
principles, unless the hospital made a one-time election to receive 
payment based on 100 percent of the Federal rate, as specified in Sec.  
412.533. New LTCHs (as defined at Sec.  412.23(e)(4)) were paid based 
on 100 percent of the Federal rate, with no phase-in transition 
payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.536. In 
this section, we discuss the factors that we use to update the LTCH PPS 
standard Federal rate for FY 2012, that is, effective for LTCH 
discharges occurring on or after October 1, 2011 through September 30, 
2012.
    For further details on the development of the FY 2003 standard 
Federal rate, we refer readers to the August 30, 2002 LTCH PPS final 
rule (67 FR 56027 through 56037). For subsequent updates to the LTCH 
PPS Federal rate, we refer readers to the following final rules: RY 
2004 LTCH PPS final rule (68 FR 34134 through 34140); RY 2005 LTCH PPS 
final rule (68 FR 25682 through 25684); RY 2006 LTCH PPS final rule (70 
FR 24179 through 24180); RY 2007 LTCH PPS final rule (71 FR 27819 
through 27827); RY 2008 LTCH PPS final rule (72 FR 26870 through 
27029); RY 2009 LTCH PPS final rule (73 FR 26800 through 26804); RY 
2010 LTCH PPS final rule (74 FR 44021 through 44030); and FY 2011 IPPS/
LTCH PPS final rule (75 FR 50443 through 50444).
    The update to the LTCH PPS standard Federal rate for FY 2012 is 
presented in section V.A. of the Addendum to this final rule. The 
components of the annual market basket update to the LTCH PPS standard 
Federal rate for FY 2012 are discussed below. In addition, as discussed 
below in section VII.E.3. of this preamble, beginning in FY 2012, in 
addition to the update factor, we make an adjustment to the standard 
Federal rate to account for the estimated effect of any changes to the 
area wage level adjustment on estimated aggregate LTCH PPS payments.
2. FY 2012 LTCH PPS Annual Market Basket Update
a. Overview
    Historically, the Medicare program has used a market basket to 
account for price increases in the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. With the 
initial implementation of the LTCH PPS for FY 2003, we established the 
use of the excluded hospital with capital market basket as the LTCH PPS 
market basket (67 FR 56016 through 56017). (For further details on the 
development of the excluded hospital with capital market basket, we 
refer readers to the RY 2004 LTCH PPS final rule (68 FR 34134 through 
34137).) The development of the initial LTCH PPS standard Federal rate 
for FY 2003, using the excluded hospital with capital market basket, is 
discussed in further detail in the August 30, 2002 LTCH PPS final rule 
(67 FR 56027 through 56033).
    Beginning in RY 2007, we adopted the rehabilitation, psychiatric, 
long-term care (RPL) hospital market basket based on FY 2002 data as 
the appropriate market basket of goods and services under the LTCH PPS 
for discharges occurring on or after July 1, 2006. As discussed in the 
RY 2007 LTCH PPS final rule (71 FR 27810), based on our research, we 
did not develop a market basket specific to LTCH services. We were 
unable to create a separate market basket specifically for LTCHs at 
that time due to the small number of facilities and the limited amount 
of data that was reported. (For further details on the development of 
the FY 2002-based RPL market basket, we refer readers to the RY 2007 
LTCH PPS final rule (71 FR 27810 through 27817).)
    As discussed in greater detail in section VII.D. of this preamble, 
we are revising and rebasing the market basket used under the LTCH PPS 
for FY 2012. Specifically, we are adopting a newly created FY 2008-
based RPL market basket (described in section VII.D. of this preamble). 
Also, in section VII.D. of this preamble, we discuss our continued 
interest in exploring the possibility of creating a stand-alone LTCH 
market basket that reflects the cost structures of only LTCH providers.

[[Page 51770]]

b. Revision of Certain Market Basket Updates as Required by the 
Affordable Care Act
    Several provisions of the Affordable Care Act affect the policies 
and payment rates under the LTCH PPS. Section 1886(m)(3)(A) of the Act, 
as added by section 3401(c) of the Affordable Care Act, specifies that, 
for rate year 2010 and each subsequent rate year through 2019, any 
annual update to the standard Federal rate shall be reduced:
     For rate year 2010 through 2019, by the other adjustment 
specified in sections 1886(m)(3)(A)(ii) and (m)(4) of the Act; and
     For rate year 2012 and each subsequent year, by the 
productivity adjustment (which we refer to as ``the multifactor 
productivity (MFP) adjustment'' as discussed in section VII.E.2.d. of 
this preamble) described in section 1886(b)(3)(B)(xi)(II) of the Act.
    Section 1886(m)(3)(B) of the Act provides that the application of 
paragraph (3) of section 1886(m) of the Act may result in the annual 
update being less than zero for a rate year, and may result in payment 
rates for a rate year being less than such payment rates for the 
preceding rate year. We note that because the annual update to the LTCH 
PPS policies, rates, and factors now occurs on October 1, we have 
adopted the term ``fiscal year'' (FY) rather than ``rate year'' (RY) 
under the LTCH PPS beginning October 1, 2010, to conform with the 
standard definition of the Federal fiscal year (October 1 through 
September 30) used by other PPSs, such as the IPPS (75 FR 50396 through 
50397). Although the language of sections 3401(c), 10319, and 1105(b) 
of the Affordable Care Act refers to years 2010 and thereafter under 
the LTCH PPS as ``rate year,'' consistent with our change in the 
terminology used under the LTCH PPS from ``rate year'' to ``fiscal 
year,'' for purposes of clarity, when discussing the annual update for 
the LTCH PPS, including the provisions of the Affordable Care Act, we 
employ ``fiscal year'' rather than ``rate year'' for 2011 and 
subsequent years.
c. Market Basket Under the LTCH PPS for FY 2012
    As noted above and as discussed in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50389), when we initially created the FY 2002-based RPL 
market basket, we were unable to create a separate market basket 
specifically for LTCHs due, in part, to the small number of facilities 
and the limited data that were provided in the Medicare cost reports. 
Over the last several years, however, the number of LTCHs submitting 
valid Medicare cost report data has increased. Based on this 
development, as well as our desire to move from one RPL market basket 
to three stand-alone and provider-specific market baskets (for IRFs, 
IPFs, and LTCHs, respectively), we have begun to explore the viability 
of creating these market baskets for future use. However, as we 
discussed in the RY 2010 LTCH PPS final rule (74 FR 43967 through 
43968), we are conducting further research to assist us in 
understanding the reasons for the variations in costs and cost 
structure between freestanding IRFs and hospital-based IRFs. We also 
are researching the reasons for similar variations in costs and cost 
structure between freestanding IPFs and hospital-based IPFs. Therefore, 
we do not believe it is appropriate at this time to propose stand-alone 
market baskets for IRFs, IPFs, and LTCHs, and we believe that it is 
appropriate to continue to use the RPL market basket for LTCHs, IRFs, 
and IPFs under their respective PPSs.
    We continue to believe that the RPL market basket appropriately 
reflects the cost structure of LTCHs, for the reasons discussed when we 
adopted the RPL market basket for use under the LTCH PPS in the RY 2007 
LTCH PPS final rule (71 FR 27810 through 27817). For the reasons 
explained above, as we proposed, we are continuing to use the RPL 
market basket under the LTCH PPS for FY 2012. However, as discussed in 
greater detail in section VII.D. of this preamble, we are finalizing 
our proposal to rebase and revise the FY 2002-based RPL market basket 
by creating a FY 2008-based RPL market basket. As we discussed in the 
FY 2012 IPPS/LTCH PPS proposed rule (76 FR 26006), currently, we are 
exploring the viability of creating two separate market baskets from 
the current RPL market basket: One market basket would include 
freestanding IRFs and freestanding IPFs and would be used to update 
payments under both the IPF and IRF payment systems. The other market 
basket would be a stand-alone LTCH market basket. Depending on the 
outcome of our research, we may propose a stand-alone LTCH market 
basket in the next LTCH PPS update cycle.
    In that same proposed rule, we invited public comment on the 
possibility of using this type of market basket to update LTCH payments 
in the future. Under the authority of section 123 of the BBRA as 
amended by section 307(b) of the BIPA, we proposed to use the FY 2008-
based RPL market basket (described in section VII.D. of this preamble) 
under the LTCH PPS for FY 2012, which we continue to believe 
appropriately reflects the cost structure of LTCHs.
    Comment: One commenter supported CMS' work to rebase and revise the 
market basket used for LTCHs, and asked if it would be possible to 
identify separate LTCH market baskets for hospitals-within-hospitals 
and freestanding facilities, further stating that CMS mentions there 
are cost differences between free standing IPFs and hospital-based IPF 
facilities, and also for IRF facilities, but CMS does not make the same 
statement for LTCHs. The commenter asked if this is an ongoing item of 
study, or if it is CMS' belief that there are no cost differences 
between freestanding LTCHs and hospital-within-hospital LTCHs. The 
commenter encouraged CMS to consider having a differentiation for 
freestanding LTCHs and hospital-within-hospital LTCHs.
    Response: The FY 2008-based RPL market basket reflects all LTCH 
facilities, including both freestanding LTCHs and hospitals-within-
hospitals. We are continuing to analyze all aspects of a possible 
stand-alone LTCH market basket, including the contributions of 
hospital-within-hospital LTCHs on such a market basket. Any future 
changes to the market basket used to update LTCHs, including the 
possible introduction of a LTCH-specific market basket, would be 
proposed and subject to notice and comment rulemaking.
    Comment: Several commenters supported CMS' work to rebase and 
revise the FY 2002-based RPL market basket to a FY 2008-based RPL 
market basket. These commenters also stated their support for CMS' 
inclusion of LTCH cost reports to develop the FY 2008-based RPL market 
basket.
    Response: We appreciate the support for this policy. As we 
proposed, in this final rule, we are finalizing our proposed methods 
for rebasing and revising the RPL market basket to a FY 2008-based RPL 
market basket.
d. Productivity Adjustment
    Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 and 
subsequent years, any annual update to the standard Federal rate shall 
be reduced by the productivity adjustment described in section 
1886(b)(3)(B)(xi)(II) of the Act. Section 1886(b)(3)(B)(xi)(II) of the 
Act, as added by section 3401(a) of the Affordable Care Act, defines 
the productivity adjustment as equal to the 10-year moving average of 
changes in annual economy-wide, private nonfarm business multifactor 
productivity (MFP) (as projected by the Secretary for the 10-year 
period ending with the applicable fiscal year, calendar year, cost 
reporting

[[Page 51771]]

period, or other annual period) (the ``MFP adjustment''). The Bureau of 
Labor Statistics (BLS) is the agency that publishes the official 
measure of private non-farm business MFP. We refer readers to the BLS 
Web site at http://www.bls.gov/mfp to obtain the BLS historical 
published MFP data.
    The MFP adjustment that is applied in determining any annual update 
to the LTCH PPS standard Federal rate is the same adjustment that is 
required to be applied in determining the applicable percentage 
increase under the IPPS under section 1886(b)(3)(B)(i) of the Act. As 
described in section IV.K.3. of this preamble, we derived the FY 2012 
MFP adjustment applied to the operating IPPS applicable percentage 
increase using a projection of MFP that is currently produced by IHS 
Global Insight, Inc. (IGI). For a detailed description of the model 
currently used by IGI to project MFP, as well as a description of how 
the MFP adjustment was calculated for FY 2012, we refer readers to 
section IV.K.3 of this preamble. We proposed that if more recent data 
became subsequently available (for example, a more recent estimate of 
the market basket and MFP adjustment), we would use such data, if 
appropriate, to determine the FY 2012 market basket update and MFP 
adjustment in the final rule. The current estimate of the MFP 
adjustment for FY 2012 based on IGI's second quarter 2011 forecast is 
1.0 percent. Consistent with the statute, we reduce the FY 2012 market 
basket update of the LTCH PPS standard Federal rate using this same FY 
2012 MFP adjustment.
    To determine the market basket update for LTCHs for FY 2012, as 
reduced by the MFP adjustment, consistent with the approach under the 
IPPS for FY 2012 (discussed in section IV.K.3. of this preamble), we 
subtracted the FY 2012 MFP percentage adjustment from the FY 2012 
market basket update. Following application of the productivity 
adjustment, the adjusted market basket update (that is, the full market 
basket increase less the MFP adjustment) is then reduced by the ``other 
adjustment'' as required by sections 1886(m)(3)(A)(ii) and 1886(m)(4) 
of the Act. The market basket update for FY 2012, which reflects both 
the MFP adjustment and the ``other adjustment'' as required by sections 
1886(m)(3)(A)(ii) and 1886(m)(4) of the Act, is described in section 
VII.E.2.e. of this preamble.
e. Annual Market Basket Update for LTCHs for FY 2012
    Consistent with our historical practice, we estimate the market 
basket update based on IGI's forecast using the most recent available 
data.For the proposed rule, based on IGI's first quarter 2011 forecast, 
the FY 2012 market basket estimate for the LTCH PPS using the FY 2008-
based RPL market basket was 2.8 percent. For this final rule, based on 
IGI's second quarter 2011 forecast, the FY 2012 estimate of the FY 
2008-based RPL market basket update is 2.9 percent.
    Section 1886(m)(3)(A)(i) of the Act specifies that, for FY 2012 
(and subsequent years), any annual update to the standard Federal rate 
shall be reduced by the productivity adjustment (referred to as ``the 
MFP adjustment'') described in section 1886(b)(3)(B)(xi)(II) of the 
Act. Furthermore, section 1886(m)(3)(A)(ii) of the Act specifies that, 
for each of RYs 2010 through 2019, any annual update to the standard 
Federal rate shall be reduced by the other adjustment specified in 
section 1886(m)(4) of the Act. Specifically, section 1886(m)(4)(C) of 
the Act requires a 0.1 percentage point reduction to the annual update 
to the LTCH PPS standard Federal rate for FY 2012.
    In accordance with section 1886(m)(3)(A)(i) of the Act, in the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 26006), we proposed to reduce 
the FY 2012 full market basket estimate of 2.8 percent (based on the 
first quarter 2011 forecast of the FY 2008-based RPL market basket) by 
the proposed FY 2012 MFP adjustment (that is, the 10-year moving 
average of MFP for the period ending FY 2012, as described in section 
VII.E.2.d of the preamble of the proposed rule) of 1.2 percent (based 
on IGI's first quarter 2011 forecast). Following application of the 
proposed productivity adjustment, the proposed adjusted market basket 
update of 1.6 percent (2.8 percent minus 1.2 percentage points) was 
then reduced by 0.1 percentage point, as required by sections 
1886(m)(3)(A)(ii) and 1886(m)(4)(C) of the Act. Accordingly, in the FY 
2012 IPPS/LTCH PPS proposed rule (76 FR 26007), we proposed an annual 
market basket update under the LTCH PPS for FY 2012 of 1.5 percent 
(that is, the most recent estimate of the proposed LTCH PPS market 
basket update of 2.8 percent less the proposed MFP adjustment of 1.2 
percentage points less the 0.1 percentage point required under section 
1886(m)(4)(C) of the Act. In that same proposed rule, we proposed to 
revise Sec.  412.523(c)(3) of the regulations by adding a new paragraph 
(viii), which would specify that the standard Federal rate for FY 2012 
is the standard Federal rate for the previous long-term care hospital 
prospective payment system fiscal year updated by 1.5 percent.
    Again, consistent with our historical practice of using the most 
recent available data, we proposed that if more recent data became 
available when we developed the final rule, we would use such data, if 
appropriate, in determining the final market basket update under the 
LTCH PPS for FY 2012. Therefore, in this final rule, consistent with 
our proposal, we are establishing an annual market basket update under 
the LTCH PPS for FY 2012 of 1.8 percent (that is, the most recent 
estimate of the LTCH PPS market basket update of 2.9 percent less the 
MFP adjustment of 1.0 percentage point less the 0.1 percentage point 
required under section 1886(m)(4)(C) of the Act). This is based on 
IGI's second quarter 2011 forecast. Consistent with our proposal, we 
are revising Sec.  412.523(c)(3) by adding a new paragraph (viii), 
which specifies that the standard Federal rate for FY 2012 is the 
standard Federal rate for the previous long-term care hospital 
prospective payment system fiscal year updated by 1.8 percent.
3. Budget Neutrality Adjustment for the Changes to the Area Wage Level 
Adjustment
    As described in section V.B. of the Addendum to this final rule, 
when the LTCH PPS was implemented, under the authority of section 123 
of the BBRA as amended by section 307(b) of the BIPA, we established an 
adjustment to the LTCH PPS standard Federal rate to account for 
differences in LTCH area wage levels at Sec.  412.525(c). The labor-
related share of the LTCH PPS standard Federal rate is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index. The applicable LTCH PPS wage index is 
computed using wage data from inpatient acute care hospitals without 
regard to reclassification under section 1886(d)(8) or section 
1886(d)(10) of the Act. Historically, in general, the LTCH PPS wage 
index and labor-related share are updated annually based on the latest 
available data. However, there are currently no statutory or regulatory 
requirements that state that any updates or adjustments to the LTCH PPS 
area wage level adjustment (that is, the wage index or the labor-
related share) be budget neutral, such that estimated aggregate LTCH 
PPS payments would be neither greater than nor less than estimated 
aggregate LTCH PPS payments without such changes to the area wage level 
adjustment.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56015), when we implemented the

[[Page 51772]]

LTCH PPS, we established a 5-year transition to the full area wage 
level adjustment. The area wage level adjustment was completely phased-
in for cost reporting periods beginning in FY 2007. Therefore, for cost 
reporting periods beginning on or after October 1, 2006, the applicable 
full LTCH PPS wage index values are used to make payments under the 
LTCH PPS. As discussed in section VII.D. of this preamble, we are 
finalizing our proposal to revise and rebase the market basket used 
under the LTCH PPS for FY 2012. We also are finalizing our proposal to 
update the labor-related share for FY 2012 based on this market basket. 
Concurrent with those proposals, in the FY 2012 IPPS/LTCH PPS proposed 
rule (76 FR 26007), we took the opportunity to revisit our approach for 
the annual update of the area wage level adjustment. We discussed that, 
in order to mitigate estimated yearly fluctuations in estimated 
aggregate LTCH PPS payments, as have been suggested in the past, we 
have given further consideration to the issue of establishing a budget 
neutrality requirement for any changes to the area wage level 
adjustment. Therefore, under the broad authority conferred upon the 
Secretary under section 123 of the BBRA, as amended by section 307(b) 
of the BIPA, to develop the LTCH PPS, we proposed under Sec.  
412.525(c) that, beginning with the adjustment for area wage levels for 
FY 2012, any changes to the wage index values or labor-related share 
would be made in a budget neutral manner such that estimated aggregate 
LTCH PPS payments would be unaffected, that is, would be neither 
greater than nor less than the estimated aggregate LTCH PPS payments 
that would have been made without such changes to the area wage level 
adjustment.
    Under this proposal, we proposed to determine an area wage level 
adjustment budget neutrality factor that would be applied to the 
standard Federal rate to ensure that any changes to the area wage level 
adjustment would be budget neutral such that any changes to the wage 
index values or labor-related share would not result in any change 
(increase or decrease) in estimated aggregate LTCH PPS payments. We 
also proposed the steps (described below) we would follow to determine 
an area wage level adjustment budget neutrality factor that would be 
applied to the standard Federal rate that would ensure that the any 
update to the wage index values and to the labor-related share would be 
adopted in a budget neutral manner. Under this proposal, we proposed to 
revise the existing regulations at Sec.  412.523(d) to add a new 
paragraph (4) to specify that, beginning in FY 2012, we adjust the 
standard Federal rate by a factor that accounts for the estimated 
effect of any adjustments or updates to the area wage level adjustment 
under Sec.  412.525(c)(1) on estimated aggregate LTCH PPS payments. We 
also proposed to revise existing Sec.  412.525(c) to reflect our 
current policy of updating the labor-related share annually. (76 FR 
26007)
    Comment: A few commenters opposed the proposed budget neutrality 
requirement for changes to the LTCH PPS area wage adjustment for FY 
2012. The commenters believed that CMS had not provided adequate 
justification for why such an adjustment is needed now when CMS has not 
contemplated one in past years, and requested that CMS provide data to 
justify this change in policy.
    Response: We do not agree with the commenters that we did not 
provide adequate justification for why we are revisiting our approach 
for the annual update of the area wage level adjustment at this time. 
As we stated in the FY 2102 IPPS/LTCH PPS proposed rule (76 FR 26007), 
we believe establishing a budget neutrality requirement for any changes 
to the area wage level adjustment would mitigate estimated yearly 
fluctuations in estimated aggregate LTCH PPS payments. Each labor 
market area's wage index value is calculated as the ratio of that labor 
market area's average hourly wage to the national average hourly wage. 
The annual update to the wage index is only intended to reflect changes 
in hospital labor costs in each geographic labor market area relative 
to the change in the national average hospital labor costs for all 
areas. Because the area wage adjustment is a measure of relative 
hospital labor costs, it is not intended to result in changes 
(increases or decreases) in aggregate payments. LTCH payments rates are 
updated annually to account for changes in hospital labor costs by the 
price growth reflected in the labor-related categories of the 
applicable LTCH PPS market basket update. For example, if nationally 
each hospital's labor costs increased by 5 percent, although labor 
costs have increased, the area wage index (which is the ratio of the 
area's average hourly wage to the national average hourly wage) would 
not change because the relative measure of the area's labor costs as 
compared to the national average labor costs has not changed. In fact, 
aggregate payments will increase based on changes to the labor portion 
of the market basket. Moreover, a budget neutrality requirement for any 
changes to the area wage level adjustment is consistent with our policy 
under other hospital PPSs, such as the IPPS, IRF PPS, and IPF PPS. We 
note that none of the commenters provided policy or technical 
justifications for not budget neutralizing for changes to the LTCH PPS 
area wage adjustment.
    Therefore, for the reasons stated above, in this final rule, we are 
adopting our proposal to establish a budget neutrality requirement for 
any changes to the area wage adjustment without modification, beginning 
in FY 2012.
    We did not receive any public comments on our proposed methodology 
(steps) for determining an area wage level adjustment budget neutrality 
factor that would be applied to the standard Federal rate. We also did 
not receive any public comments on our proposed changes to the 
regulations at Sec.  412.523(d) and Sec.  412.525(c) under our area 
wage level adjustment budget neutrality proposal. Therefore, as 
discussed below, we are adopting these proposals in this final rule.
    In this final rule, under the broad authority conferred upon the 
Secretary under section 123 of the BBRA, as amended by section 307(b) 
of the BIPA, to develop the LTCH PPS, as we proposed, under Sec.  
412.525(c)(2), we are establishing a budget neutrality requirement for 
any changes to the adjustment for area wage levels, beginning in FY 
2012. Under this policy, any changes to the wage index values or labor-
related share will be made in a budget neutral manner such that 
estimated aggregate LTCH PPS payments are unaffected, that is, will be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without such changes to the area 
wage level adjustment. We also are determining under this budget 
neutrality requirement, as we proposed, an area wage level adjustment 
budget neutrality factor that will be applied to the standard Federal 
rate to ensure that any changes to the area wage level adjustment are 
budget neutral, such that any changes to the wage index values or 
labor-related share will not result in any change (increase or 
decrease) in estimated aggregate LTCH PPS payments. As we proposed, we 
are revising the existing regulations at Sec.  412.523(d) to add a new 
paragraph (4), which specifies that, beginning in FY 2012, we adjust 
the standard Federal rate by a factor that accounts for the estimated 
effect of any adjustments or updates to the area wage level adjustment 
under Sec.  412.525(c)(1) on estimated aggregate LTCH PPS

[[Page 51773]]

payments. In addition, as we proposed, we are revising existing Sec.  
412.525(c) to reflect our current policy of updating the labor-related 
share annually.
    For this final rule, consistent with our proposal, we used the 
following methodology to determine an area wage level adjustment budget 
neutrality factor that is applied to the standard Federal rate under at 
Sec.  412.523(d)(4) for FY 2012 to account for the estimated effect of 
any adjustments or updates to the area wage level adjustment under 
Sec.  412.525(c)(1) on estimated aggregate LTCH PPS payments:
     Step 1--We simulate estimated aggregate LTCH PPS payments 
using the FY 2011 wage index values as established in Tables 12A and 
12B of the Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50627 through 50646) and the FY 2011 labor-related share of 75.271 
percent as established in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50391 and 50445).
     Step 2--We simulate estimated aggregate LTCH PPS payments 
using the FY 2012 wage index values as shown in Tables 12A and 12B of 
the Addendum to this final rule and the FY 2012 labor-related share of 
70.199 percent (based on the latest available data as discussed in 
section VII.D.3.f. of this preamble).
     Step 3--We calculate the ratio of these estimated total 
LTCH PPS payments by dividing the estimated total LTCH PPS payments 
using the FY 2011 area wage level adjustments (calculated in Step 1) by 
the estimated total LTCH PPS payments using the proposed FY 2012 area 
wage level adjustments (calculated in Step 2) to determine the area 
wage level adjustment budget neutrality factor.
     Step 4--We then apply the FY 2012 area wage level 
adjustment budget neutrality factor from Step 3 to determine the FY 
2012 LTCH PPS standard Federal rate after the application of the FY 
2012 annual update (discussed in section V.A.2. of the Addendum to this 
final rule). As explained above, this factor is applied to the FY 2012 
standard Federal rate to ensure that the FY 2012 update to the wage 
index values and to the labor-related share (discussed in section V.B. 
of the Addendum to this final rule) are adopted in a budget neutral 
manner.
    For this final rule, using the steps in the methodology described 
above, we determined a FY 2012 area wage level adjustment budget 
neutrality factor of 0.99775. Accordingly, in section V.A.2. of the 
Addendum to this final rule, to determine the FY 2012 LTCH PPS standard 
Federal rate, we applied an area wage level adjustment budget 
neutrality factor of 0.99775, in accordance with Sec.  412.523(d)(4). 
Accordingly, the FY 2012 LTCH PPS standard Federal rate shown in Table 
1E of the Addendum to this final rule reflects this adjustment.
4. Greater Than 25-Day Average Length of Stay Requirement for LTCHs
    Section 1886(d)(1)(B) of the Act lists hospitals that are excluded 
from the IPPS. Section 1886(d)(1)(B)(iv) of the Act specifies the 
exclusion from the IPPS for ``a hospital which has an average inpatient 
length of stay (as determined by the Secretary) of greater than 25 
days.'' The average length of stay requirement was established as the 
sole prerequisite for a hospital seeking to be excluded from the IPPS 
under this provider category. Section 114(a) of the MMSEA of 2007 
amended section 1861 of the Act by adding a new subsection (ccc), which 
further defined LTCHs. Thus, a hospital's classification as an LTCH has 
depended, in large part, upon whether an acute care hospital met the 
greater than 25 days average length of stay requirement. Once the 
hospital was classified as such under this criterion, the ability for 
the hospital to continue its exclusion from the IPPS and be paid as an 
LTCH depended, in part, upon its continuing to meet that criterion.
    The regulations at 42 CFR 412.23(e)(1) and (e)(2) set forth the 
requirements a hospital must meet in order to be excluded from the IPPS 
and be paid as an LTCH. Specifically, Sec.  412.23(e)(1) requires that 
a hospital must have a provider agreement under 42 CFR Part 489 to 
participate as a Medicare hospital, and Sec.  412.23(e)(2) provides 
that a hospital must meet the LTCH average length of stay of greater 
than 25 days policy. The methodology for calculating the average length 
of stay is specified at Sec.  412.23(e)(3). A detailed explanation of 
the procedural features of the average length of stay policy was 
included in the FY 2003 LTCH PPS final rule, which implemented the LTCH 
PPS (67 FR 55970 through 55974)).
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 26008), we 
proposed to clarify two existing CMS policies related to the greater 
than 25 days average length of stay requirement policy: (1) The 
determination of the average length of stay for a hospital seeking 
exclusion under the IPPS to be paid as an LTCH or an existing LTCH 
undergoes a change of ownership; and (2) the inclusion of Medicare 
Advantage days in calculating the average length of stay.
a. Determination of the Average Length of Stay When There Is a Change 
of Ownership
    Under Sec.  412.23(e)(3)(iv) of the regulations, we implemented a 
policy regarding the application of the average length of stay 
methodology, where a hospital (that is either seeking LTCH status, or 
is an existing LTCH) has undergone a change of ownership. Specifically, 
in the event of a change of ownership, the regulation provides:
    ``If a hospital has undergone a change of ownership (as described 
in Sec.  489.18 of this chapter) at the start of a cost reporting 
period or at any time within the period of at least 5 months of the 
preceding 6-month period, the hospital may be excluded from the 
prospective payment system as a long-term care hospital for a cost 
reporting period if, for the period of at least 5 months of the 6 
months immediately preceding the start of the period (including time 
before the change of ownership), the hospital has the required average 
length of stay, continuously operated as a hospital, and continuously 
participated as a hospital in Medicare.''
    Section 412.23(e)(3)(iv) institutes a procedure by which the 
average length of stay of a hospital seeking LTCH status or an existing 
LTCH is evaluated by its fiscal intermediary or MAC to determine 
whether or not the facility that is being sold meets the requirements 
for LTCH status. Because the sale of the facility, in effect, ends the 
seller's cost reporting period (Sec.  413.24(f)(1)), and triggers the 
beginning of the purchaser's first cost reporting period, the period of 
time that is evaluated is the ``at least 5 months of the 6 months 
immediately preceding the period (including time before the change of 
ownership'' to determine the average length of stay that will result in 
the hospital that meets the requirements for LTCH status. If the 
average length of stay data indicates that, for this period of time, 
the hospital met the required average length of stay of greater than 25 
days, then the new owner's hospital will achieve IPPS exclusion and 
LTCH status. On the other hand, if the data indicate that the hospital 
does not meet the required average length of stay, the hospital will 
instead be paid under the IPPS under its new ownership. We understand 
that there has been some confusion in the provider community regarding 
the specific applicability of this regulation to a change of ownership 
of an existing LTCH. Accordingly, in the proposed rule, we proposed to 
clarify this policy in regulation text by revising Sec.  
412.23(e)(3)(iv) to specifically address the circumstance of a hospital 
that has not as yet been classified as an LTCH

[[Page 51774]]

and wishes to be classified as an LTCH based on data from the 
hospital's discharges occurring both before and after the change of 
ownership. Moreover, in an effort to provide greater clarity, we also 
proposed to establish a separate provision in the regulations (proposed 
paragraph (e)(3)(v) under Sec.  412.23) to directly address LTCH status 
where there is a change of ownership of an existing LTCH. The sale of 
an existing LTCH, which triggers the beginning of a new cost reporting 
period under the new owner (413.24(f)(1)), is a situation where we 
believe it is appropriate to review whether the hospital that is being 
sold has been functioning as an LTCH, that is, has been treating 
patients for on average length of stay of greater than 25 days, before 
allowing the new owner to continue to be paid for services provided at 
the hospital under the LTCH PPS. Therefore, we proposed that where 
there has been a change of ownership of an existing LTCH, the hospital 
will continue to be excluded from the inpatient prospective payment 
system as a long-term care hospital for the cost reporting period 
beginning with the change of ownership only if for the period of at 
least 5 months of the 6 months immediately preceding the change of 
ownership, the hospital meets the required average length of stay. We 
note that, conversely, under this proposed policy, if the hospital 
fails to meet the required average length of stay criterion, after this 
evaluation, and if it is an acute-care hospital, it will be paid 
instead under the IPPS effective with the day of the change of 
ownership, that is, the start of the new owner's cost reporting period.
    Accordingly, we proposed to clarify our existing policy as 
described above by (1) revising existing Sec.  412.23(e)(3)(iv), to 
specifically address LTCH status in instances where a hospital is 
seeking IPPS exclusion and payment under the LTCH PPS but a change of 
ownership has occurred, and (2) proposed to establish a new Sec.  
412.23(e)(3)(v) to specifically address the issue of LTCH status for 
existing LTCHs undergoing a change of ownership.
    Comment: One commenter did not understand the clarification that 
CMS proposed, noting that the only distinction between Sec.  
412.23(e)(3)(iv) and Sec.  412.23(e)(3)(v) appeared to be a ``new [30 
day] notice requirement * * * applicable only to existing LTCHs, but 
not to newly qualifying LTCHs.'' This commenter also requested that CMS 
resolve an ``inconsistency'' between the preamble language and the 
regulation text language regarding the definition of the 5 months of 
the 6 months that is to be evaluated. The commenter indicated that the 
preamble states that the period in question is ``* * * at least 5 
months of the 6 months immediately preceding the change of ownership * 
* * '' but the regulation text at Sec.  412.23(e)(3)(v) states ``* * * 
at least 5 months of the 6 months immediately preceding the start of 
the hospital's next cost reporting period before the change of 
ownership * * *.'' Another commenter expressed concern about CMS 
recognizing the distinction between the sale of an LTCH that would 
trigger the average length of stay review specified in proposed Sec.  
412.23(e)(3)(v) and the transfer of an LTCH to a related party that 
could take place during a corporate reorganization of an integrated 
hospital system.
    Response: In response to the commenter's lack of clarity about the 
similarities between existing Sec.  412.23(e)(iv) and proposed 
Sec. Sec.  412.23(e)(3)(iv) and (e)(3)(v), we emphasize that we have 
proposed to clarify existing policy, not to change it. The two ``new'' 
regulations that we proposed are limited to LTCH changes of ownership 
under either of two specific situations: A hospital that is sold prior 
to achieving LTCH status (Sec.  412.23(e)(3)(iv)); and the sale of an 
existing LTCH (Sec.  412.23(e)(3)(v)). Our goal in proposing this 
clarification of our existing LTCH change of ownership policy at Sec.  
412.23(e)(iv) was to divide the regulation that was causing confusion 
among the provider community because it formerly covered change of 
ownership in both situations--LTCHs under development and existing 
LTCHs--into two separate regulations. The new regulation at Sec.  
412.23(e)(3)(v) cited the already existing requirement for a 30-day 
notice to CMS for a hospital undergoing a ``change of ownership or 
control, including changes in authorized official(s) or delegated 
official(s) * * *'' at Sec.  424.516(e). We included the 30-day notice 
because we have been informed by our regional offices that, in the 
past, compliance with this 30-day notice requirement by existing LTCHs 
that are being sold has been somewhat inconsistent and may not have 
been understood to apply to LTCHs. Because of ongoing communication 
between the hospital wishing to qualify as a LTCH and CMS when a 
hospital is applying to CMS for LTCH status, CMS regional office staff 
do not report this to be a problem during the LTCH qualifying period. 
However, the notice requirement at Sec.  424.516(e) applies to all 
providers and suppliers enrolled in the Medicare program.
    We appreciate the commenter bringing to our attention the lack of 
conformity between the preamble language and the regulation text at 
Sec.  412.23(e)(3)(v) regarding the 5 months of the 6 months period in 
question for the evaluation of the average length of stay calculation. 
Because, as we note in the preamble, a change of ownership triggers the 
start of a new cost reporting period, in order to clarify this 
regulation text, in this final rule, we are revising the regulation 
text to state ``* * * at least 5 months of the 6 months immediately 
preceding the change of ownership.
    In response to the commenter who requested that we specify that a 
corporate reorganization of an integrated hospital system that includes 
an LTCH would not trigger an evaluation of the LTCH's average length of 
stay, we note that if a business transaction relating to an LTCH meets 
the definition of a change of ownership under Sec.  489.18, it would be 
governed by the applicable regulation at Sec.  412.23(e)(3).
    After consideration of the public comments we received, we are 
finalizing our clarification of our change of ownership policy for 
LTCHs at Sec. Sec.  412.23(e)(3)(iv) and (e)(3)(v).
b. Inclusion of Medicare Advantage (MA) Days in the Average Length of 
Stay Calculation
    With the passage of the Balanced Budget Act of 1997, Medicare 
beneficiaries were given the option to receive their Medicare benefits 
through private health insurance plans instead of through the original 
Medicare plan (Parts A and B). These programs were known as 
Medicare+Choice or Part C plans (Section 1851 through 1859 of the Act, 
implemented in 42 CFR Part 422). Pursuant to the Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003, the compensation and 
business practices changed for insurers that offer these plans, and 
``Medicare+Choice'' plans became known as Medicare Advantage (MA) 
plans.)
    When CMS implemented the LTCH PPS beginning in FY 2003, we revised 
the then-existing policy for calculating the average length of stay for 
LTCHs described at then Sec.  412.23(e)(2)(i). Under the TEFRA payment 
system, the average length of stay was determined by ``* * * dividing 
the number of total inpatient days * * * by the total discharges for 
the hospital's most recent complete cost reporting period * * *'' 
However, beginning with FY 2003, under the newly implemented LTCH PPS, 
the calculation was based on ``dividing the total number of covered

[[Page 51775]]

and noncovered days of stay of Medicare inpatients * * * by the total 
Medicare discharges for the hospital's most recent complete cost 
reporting period'' (Sec.  412.23(e)(3)(i)). The rationale for this 
change, as noted in the preamble to the FY 2003 LTCH PPS final rule, is 
that ``LTCHs exist as a provider type in order to treat Medicare 
patients requiring complex long-term hospital-level care. We believe 
that a hospital's right to qualify for payments under the prospective 
payment system for LTCHs should result from the actual provision of 
clinically appropriate care to Medicare LTCH patients * * *'' (67 FR 
55971).
    Although the policy since the start of the LTCH PPS has been for 
all LTCH patients being paid for by Medicare to be included in the 
average length of stay calculation, until recently, we were unable to 
include data for Medicare Advantage (MA) patients in our calculations 
because our database did not capture discharge data on claims paid by 
an MA plan. (In contrast, patients who still had private insurance as 
their primary health coverage and for whom Medicare was a secondary 
payer, were included in the calculations because the portion of their 
claims covered by Medicare was paid by Part A and was therefore 
included in our database.)
    On July 20, 2007, we issued Change Request 5647 that required the 
submission by hospitals (IPPS, IRFs, and LTCHs) of ``information only'' 
(not for payment) bills for their MA patients to their fiscal 
intermediaries or MACs beginning with FY 2007. The stated goal of 
capturing these MA data was that the data were needed for 
disproportionate share payments (DSH) under the IPPS, low-income 
patient (LIP) payments under the IRF PPS, and for short-stay outlier 
(SSO) payments under the LTCH PPS. An additional one-time notification, 
Change Request 6821, issued on June 7, 2010, reiterated the 
requirements of Change Request 5647 for the reporting of MA days for 
DHS and LIP data and also noted ``[i]n addition, this data is used for 
other purposes such as determining LTCH short stay outlier payments and 
evaluating the greater than 25 days length of stay requirement of 
Medicare patients for LTCHs.''
    Although the inclusion of MA days in the average length of stay 
calculation has been CMS' policy under the LTCH PPS because, at the 
outset of the LTCH PPS, we specified that the average length of stay 
calculation was based on ``all covered'' and on ``all covered days of 
stay of Medicare patients'' (Sec.  412.23(e)(2)), we acknowledge that, 
in practice, MA days were not included due to limitations in our 
ability to capture the data. We have been informed by some members of 
the provider community that it was not their understanding that MA data 
should be included in determining a LTCH's average length of stay, and 
that, in some cases, the inclusion of these data could substantially 
lower their average length of stay, thus threatening their status as 
LTCHs. Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
26008 and 26009), we proposed to clarify our existing policy at 42 CFR 
412.23(e)(3) on the calculation of the average length of stay to 
specify that all data on all Medicare inpatient days, including MA 
days, shall be included in the average length of stay calculation.
    Comment: A number of commenters urged CMS to establish a specific 
effective date for this policy, and one of these commenters requested 
that we confirm that the existing ``* * * at least 5 months of the 
preceding 6 month'' cure period would still be in effect for an LTCH 
failing to meet the average length of stay requirement as a result of 
the inclusion of MA days in the average length of stay calculation. 
Several commenters challenged CMS' assertion that the inclusion of MA 
days was ``clarification of existing policy'' and argued that the 
inclusion of MA days in the average length of stay calculation was a 
new policy. Therefore, the commenters urged CMS to study the impact on 
LTCHs of instituting this ``new policy,'' while instructing Medicare 
contractors not to include MA days in the average length of stay 
calculation until this evaluation was completed and then, to subject 
the policy to notice and comment rulemaking. Several commenters 
expressed concern because contracts currently in place between some 
LTCHs and managed care organizations limit the LTCH lengths of stay of 
beneficiaries who are enrolled in those plans. The inclusion of those 
MA days, the commenters feared, would result in a decrease in some 
LTCHs' average length of stay, and thereby threatens their LTCH status.
    One commenter opposed the inclusion of MA days in the average 
length of stay calculation for LTCHs, arguing that the managed care 
payment model is radically different than the fee-for-service model 
and, therefore, is incompatible with the ``average of greater than 25 
day'' length of stay requirement for LTCHs. Because the inclusion of 
such days in the average length of stay calculation could negatively 
impact LTCH status, the commenter warned that inclusion of MA days 
could lead to some LTCHs denying care to beneficiaries who have elected 
to enroll in MA plans.
    Response: While we understand the commenters' concern about the 
impact of counting MA days in an LTCHs' average length of stay 
calculation, we reassert that the inclusion of such days has been 
contemplated since the establishment of the LTCH PPS (67 FR 55970 
through 55975) and delayed only by previous technical limitations on 
CMS' ability to obtain the MA data. Our regulations at Sec.  
412.23(e)(2)(i) specify that the average length of stay calculation is 
based on ``* * * all covered and noncovered days of stay of Medicare 
patients * * *. '' ``All covered and noncovered days of stay of 
Medicare patients'' includes the days of stay of Medicare managed care 
patients. Additionally, as noted in this preamble, on July 20, 2007, in 
Change Request 5647, we required the submission of data on MA patients 
by hospitals (IPPS hospitals, IRFs, and LTCHs), and on June 7, 2010, in 
Change Request 6821, we reiterated this requirement while also 
specifying that the data would be used for ``* * * evaluating the 
greater than 25 days length of stay requirement of Medicare patients 
for LTCHs.'' The inclusion of MA days in the LTCH average length of 
stay requirement is not a new policy, but rather the implementation of 
a long-stated step that is now technically feasible for the Medicare 
program. We had determined that it was appropriate to discuss this 
issue as a ``clarification'' in the FY 2012 IPPS/LTCH PPS proposed 
rule, and solicited public comments because it was brought to our 
attention that the above noted change requests had resulted in some 
confusion in the provider community. We also understand the concern 
that several of the commenters have about the impact that the shorter 
lengths of stay negotiated by managed care organizations could have on 
retaining LTCH status. Therefore, we are finalizing the clarification 
of our policy with an effective date for the inclusion of MA days in 
the average length of stay calculation for LTCH cost reporting periods 
beginning on or after January 1, 2012. We also are instructing our 
contractors not to remove LTCH designation from any LTCH based on the 
fact that it fails to meet the average length of stay requirement 
solely due to the inclusion of MA days in its average length of stay 
calculation until cost reporting periods beginning on or after January 
1, 2012. In response to the commenter's concern, we also are confirming 
our longstanding policy

[[Page 51776]]

regarding the evaluation of data from ``* * * at least 5 months of the 
preceding 6 month'' ``cure'' period for an LTCH that fails to meet the 
average length of stay requirement. Therefore, even after January 1, 
2012, a hospital will be able to maintain its LTCH status if it has a 
greater than 25-day average length of stay (including MA days) for at 
least 5 months of the 6 months prior to the beginning of the cost 
reporting period when it would lose its LTCH status if it did not meet 
the average length of stay requirement.
    In response to the commenter who objected to the inclusion of data 
from beneficiaries who elected to enroll in managed care plans rather 
than traditional Medicare in the average length of stay calculation, 
arguing that the MA model is not compatible with the average length of 
stay policy, which is based on a fee-for-service payment model, we note 
that Medicare Advantage (as Medicare + Choice) is a statutory creation 
(section 1851 through 1859 of the Act) for payment for services 
provided to Medicare patients. The exclusion of LTCHs from the IPPS as 
acute care hospitals for patients with ``* * *an average inpatient 
length of stay (as determined by the Secretary) of greater than 25 days 
(section 1886(d)(1)(B)(iv) of the Act) is a description of a hospital 
treating long length of stay patients. By regulation, we have 
prescribed that the test is based on Medicare patients rather than all 
of the hospital's patients. Congressional action could mandate a 
determination that MA patients should not be included. However, thus 
far, although Congress has addressed the LTCH PPS, it has not addressed 
the exclusion of MA days from the greater than 25-day average length of 
stay determination. Finally, our experience in meeting with LTCH trade 
associations, the medical and administrative leadership of LTCHs, and 
our site visits to numerous LTCHs, as well as our recent data on LTCH 
inpatient censuses, do not confirm the commenter's warnings about 
reduced MA patient access to LTCHs that will result should MA patient 
days be included in the average length of stay calculation.
    After consideration of the public comments we received, we are 
finalizing our proposed clarification but with an effective date for 
inclusion of MA days in the average length of stay calculation for LTCH 
cost reporting periods beginning on or after January 1, 2012.

F. Application of LTCH Moratorium on the Increase in Beds at Section 
114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and LTCH Satellite 
Facilities Established or Classified as Such Under Section 114(d)(2) of 
Public Law 110-173

    Under section 114(d) of the Medicare, Medicaid, and SCHIP Extension 
Act of 2007 (MMSEA) (Pub. L. 110-173), Congress established one 
moratorium on the establishment or classification of new LTCHs and LTCH 
satellite facilities and a second moratorium on the increase in the 
number of LTCH beds in ``existing hospitals and satellite facilities.'' 
This section 114(d) provision was amended by section 4302(b) of the 
American Recovery and Reinvestment Act of 2009 (ARRA) (Pub. L. 111-5) 
and implemented in interim final rules issued in the Federal Register 
on May 22, 2008, and August 27, 2009 (73 FR 29704 through 29707 and 74 
FR 43990 through 43992, respectively), and finalized in the FY 2010 and 
FY 2011 IPPS/LTCH PPS final rules (74 FR 43985 through 43990 and 75 FR 
50397 through 50399, respectively). With the passage of the Affordable 
Care Act on March 23, 2010, these moratoria were extended under 
sections 3016 and 10312 for an additional 2 years, through December 29, 
2012. The extension was implemented in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50400).
    Specific exceptions to each moratorium are included in the statute 
and permit both the continued establishment or classification of an 
LTCH or LTCH satellite facility and an increase in LTCH beds at a 
statutorily defined ``existing'' hospital or satellite facility, 
respectively. Under section 114(d)(2) of the MMSEA, as of December 29, 
2007, the preclusion on the establishment or classification of a new 
LTCH or LTCH satellite facility as of December 29, 2007, would not 
apply if the hospital met one of the following three exceptions:
     The LTCH began its qualifying period for payment as a LTCH 
under 42 CFR 412.23(e) on or before the date of enactment of the MMSEA 
(section 114(d)(2)(A));
     The LTCH has a binding written agreement with an outside, 
unrelated party for the actual construction, renovation, lease, or 
demolition for a LTCH and had expended before December 29, 2007, at 
least 10 percent of the estimated cost of the project or, if less, $2.5 
million (section 114(d)(2)(B)); or
     The LTCH has obtained an approved certificate of need 
(CON) in a State where one is required on or before December 29, 2007 
(section 114(d)(2)(C)).
    Section 114(d)(3) of the MMSEA, as originally enacted, provided an 
exception to the moratorium on an increase in beds at an existing LTCH 
or LTCH satellite facility, if an existing LTCH or satellite facility 
is located in a State where there is only one other LTCH; and the LTCH 
or satellite facility requests an increase in beds following the 
closure or decrease in the number of beds of another LTCH in the State. 
Section 4302(b) of the ARRA amended this MMSEA provision to specify an 
additional exception to the moratorium on the increase in bed number if 
the hospital or facility obtained a certificate of need for an increase 
in beds that is in a State for which such certificate of need is 
required and that the CON was issued on or after April 1, 2005, and 
before December 29, 2007.
    In implementing these two moratorium provisions, we required that 
each hospital or entity submit details of its individual circumstance 
for evaluation by CMS regional offices and contractors in order to 
determine whether a specific statutory exception was applicable to the 
particular situation (74 FR 43985 through 43990). We note that, based 
upon these exceptions (73 FR 29707), CMS records indicate that, as of 
January 1, 2011, 50 new LTCHs and 8 new LTCH satellites have been 
established or classified after December 29, 2007, the date MMSEA was 
enacted. (Data on additional beds developed in existing LTCHs and LTCH 
satellite facilities under the CON exception provided by section 
4302(b) of the ARRA are maintained by States.)
    Sections 3106 and 10312 of the Affordable Care Act provided a 2-
year extension of both moratoria initially established by section 
114(d)(1) of the MMSEA (which provided for an original 3-year 
application), indicating that Congress continues to believe that it is 
appropriate to continue to stem the increase in the number of LTCHs and 
LTCH satellite facilities and LTCH beds.
    As noted above, section 114(d)(1)(B) of the MMSEA established a 
moratorium on the increase of LTCH beds in existing LTCHs or satellite 
facilities. Section 114(d)(4) of the MMSEA defines ``an existing 
hospital or satellite facility'' as a hospital or satellite facility 
that received payment under the LTCH PPS as of December 29, 2007, the 
date of enactment of the MMSEA. By definition, LTCHs or satellite 
facilities that were established or classified as such under an 
exception at section 114(d)(2) to the moratorium under section 
114(d)(1)(A) first received payments under the LTCH PPS after

[[Page 51777]]

December 29, 2007, and therefore, would not fall under the definition 
of ``an existing hospital or satellite facility'' to whom the 
moratorium on the increase in bed numbers at section 114(d)(1)(B) 
applies. However, we do not believe that it was Congress' intent to 
allow this subset of hospitals and satellite facilities established or 
classified after the enactment of MMSEA unlimited bed growth and 
expansion. In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 26010), we 
noted that continued Congressional concern regarding the increase in 
the number of LTCHs and satellite facilities and LTCH beds is indicated 
in the 2-year extension of the moratorium provided by sections 3106 and 
10312 of the Affordable Care Act.
    Section 123 of the Medicare, Medicaid, and SCHIP [State Children's 
Health Insurance Program] Balanced Budget Refinement Act of 1999 (BBRA 
of 1999) (Pub. L. 106-113), as amended by section 307 (b) of the 
Medicare, Medicaid, and SCHIP [State Children's Health Insurance 
Program] Benefits Improvement and Protection Act of 2000 (BIPA) (Pub. 
L. 106-554), confers upon the Secretary discretion in creating the LTCH 
PPS as the payment system for LTCHs beginning in FY 2003. Furthermore, 
the Secretary has authority, under the general rulemaking authority of 
sections 1102(a) and 1871(a) of the Act, to establish rules and 
regulations as necessary to administer the Medicare program and for the 
efficient administration of the Medicare program. Consistent with these 
authorities, therefore, in the FY 2012 IPPS/LTCH PPS proposed rule (76 
FR 26010), we proposed that, effective October 1, 2011, the moratorium 
established under section 114(d)(1)(B) of the MMSEA, and implemented at 
42 CFR 412.23(e)(7) be applied to those LTCHs and LTCH satellite 
facilities established or classified as such pursuant to the exceptions 
at section 114(d)(2) to the moratorium specified under section 
114(d)(1)(B) of the MMSEA, as implemented at 42 CFR 412.23(e)(6). 
Specifically, we proposed to limit the number of beds in these 
facilities to the number of beds that were certified by Medicare at the 
LTCH or satellite facility when it was first paid under the LTCH PPS. 
We proposed to amend Sec.  412.23 by adding a new paragraph (e)(8) to 
specify this policy. We believe that this policy captures the essence 
of the original statutory moratoria and the subsequent extension of the 
moratoria for an additional 2 years--which was to limit growth in the 
number of LTCHs and LTCH satellite facilities and LTCH beds payable 
under Medicare--while recognizing the inherent fairness in allowing 
those projects already underway that represented substantial 
investment, planning, and State commitment to be completed.
    Comment: One commenter supported CMS' position on extending the 
moratorium on increasing the number of beds in ``existing'' LTCHs to 
those LTCHs and satellites established pursuant to exceptions provided 
in the statute.
    Response: We appreciate the commenter's support for the proposed 
policy.
    Comment: Three commenters urged CMS not to implement the extension 
of the moratorium to ``new'' LTCHs and LTCH satellites. These 
commenters noted that had Congress wished to extend the original 
moratorium on an increase in the number of beds in existing LTCHs and 
LTCH satellites that was first promulgated in MMSEA to LTCHs and LTCH 
satellites that had been established under one of the exceptions to the 
moratorium on the establishment of new LTCHs and LTCH satellites, 
Congress could have utilized either the ARRA or the Affordable Care Act 
for such a purpose. One of the commenters cited a longstanding Supreme 
Court decision (Chevron U.S.A. v. NRDC, 467 U.S. 837, 842-843 (1984)) 
which established the standard for determining the validity of 
regulatory provisions. The commenter stated that under Chevron's two-
pronged test: (1) if it is determined that Congress has directly spoken 
to ``* * * the precise question at issue'' then ``* * * we must give 
effect to the unambiguously expressed intent of Congress;'' but (2) if 
the statute is ``silent or ambiguous with respect to the specific 
issue'' it need only be asked whether the regulation is ``based on a 
permissible construction of the statute.'' This commenter argued that 
because the MMSEA specified that the moratorium on bed increases 
applied to ``existing LTCHs and satellites,'' the extension of the 
moratorium by CMS to LTCHs and LTCH satellites that did not exist at 
the time of the legislation but were established under an exception, 
would be a violation of the Chevron Court decision.
    Response: We do not agree that the failure to include a specific 
extension of the moratorium on bed increases to those LTCHs and LTCH 
satellite facilities originally excepted from the moratoria established 
under the MMSEA (new LTCHs and LTCH satellite facilities) in either the 
ARRA or the Affordable Care Act indicates that Congress intended to 
allow such LTCHs and LTCH satellite facilities unlimited authority to 
expand their bed numbers while restricting the growth of ``existing'' 
LTCHs. We also disagree with the commenters' arguments that the statute 
precisely answers the question at issue. We believe the discussion 
above describing our understanding of Congress' intent as well as the 
law governing the authorities for creating the LTCH PPS and the 
authorities to establish rules and regulations as necessary to 
administer the Medicare program and for the efficient administration of 
the Medicare program provide an appropriate and sufficient basis for 
the agency to finalize this policy as proposed. Moreover, we emphasize 
that, in finalizing this policy as proposed, we do not believe that it 
was Congress' intent to allow the one subgroup of LTCHs and LTCH 
satellite facilities established after the enactment of the MMSEA 
unlimited bed growth and expansion, particularly while extending both 
of the moratoria applicable to ``existing'' LTCHs and LTCH satellite 
facilities an additional 2 years in sections 3106 and 10312 of the 
Affordable Care Act.
    Comment: One commenter requested that, if CMS finalizes the 
proposed policy, ``a specific exclusion'' be applied to any ``new'' 
LTCH that had increased its bed capacity beyond the number of beds that 
were certified by Medicare when it was first paid under the LTCH PPS.
    Response: We agree with the commenter that it is possible that some 
``new'' LTCHs have already increased their bed numbers beyond those 
that existed when they were first certified by Medicare and paid under 
the LTCH PPS. In consideration of this possibility, we are revising the 
proposed regulation text at Sec.  412.23(e)(8) that we are adopting as 
final to indicate that the moratorium on increases in bed numbers for 
LTCHs and LTCH satellites that were established under one of the 
exceptions to the moratorium applies to the number of beds at the LTCH 
as of October 1, 2011.
    After consideration of the public comments we received, in this 
final rule, we are adopting our proposed addition of new Sec.  
412.23(e)(8) with the modification noted above. That is, we are 
specifying that effective October 1, 2011 and ending December 28, 2012, 
the moratorium established under section 114(d)(1)(B) of the MMSEA, and 
implemented at 42 CFR 412.23(e)(7) will be applied to those LTCHs and 
LTCH satellite facilities established or classified as such pursuant to 
the exceptions at section 114(d)(2) to the

[[Page 51778]]

moratorium specified under section 114(d)(1)(B) of the MMSEA, as 
implemented at Sec.  412.23(e)(6). Specifically, we are modifying the 
language to limit the number of beds in these facilities to the number 
of beds to those ``that were certified by Medicare at the LTCH or 
satellite facility as of October 1, 2011'' to replace the proposed 
language of the ``initial number of Medicare certified beds established 
under paragraph (e)(6)(ii). * * *''.

VIII. MedPAC Recommendations

    Under section 1886(e)(4)(B) of the Act, the Secretary must consider 
MedPAC's recommendations regarding hospital inpatient payments. Under 
section 1886(e)(5) of the Act, the Secretary must publish in the annual 
proposed and final IPPS rules the Secretary's recommendations regarding 
MedPAC's recommendations. We have reviewed MedPAC's March 2011 ``Report 
to the Congress: Medicare Payment Policy'' and have given the 
recommendations in the report consideration in conjunction with the 
policies set forth in this final rule. MedPAC recommendations for the 
IPPS for FY 2012 are addressed in Appendix B to this final rule.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, contact MedPAC at (202) 653-7226, 
or visit MedPAC's Web site at: http://www.medpac.gov.

IX. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have established a process under 
which commenters can gain access to raw data on an expedited basis. 
Generally, the data are now available on compact disc (CD) format. 
However, many of the files are available on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS. We listed the data files and the 
cost for each file, if applicable, in the FY 2012 IPPS/LTCH PPS 
proposed rule (76 FR 26010 through 26012).
    Commenters interested in discussing any data used in constructing 
this proposed rule should contact Nisha Bhat at (410) 786-5320.

B. Collection of Information Requirements

1. Statutory Requirement for Solicitation of Comments
    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 226012 through 
26015), we solicited public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs). We discuss and respond to any public comments we 
received in each individual section.
2. ICRs for Add-On Payments for New Services and Technologies
    Section II.I.1. of the preamble of the proposed rule and this final 
rule discusses add-on payments for new services and technologies. 
Specifically, this section states that applicants for add-on payments 
for new medical services or technologies for FY 2012 must submit a 
formal request. A formal request includes a full description of the 
clinical applications of the medical service or technology and the 
results of any clinical evaluations demonstrating that the new medical 
service or technology represents a substantial clinical improvement. In 
addition, the request must contain a significant sample of the data to 
demonstrate that the medical service or technology meets the high-cost 
threshold. We detailed the burden associated with this requirement in 
the September 7, 2001, IPPS final rule (66 FR 46902). As stated in that 
final rule, collection of the information for this requirement is 
conducted on an individual case-by-case basis. We believe the 
associated burden is thereby exempt from the PRA as stipulated under 5 
CFR 1320.3(h)(6). Similarly, we also believe the burden associated with 
this requirement is exempt from the PRA under 5 CFR 1320.3(c), which 
defines the agency collection of information subject to the 
requirements of the PRA as information collection imposed on 10 or more 
persons within any 12-month period. This information collection does 
not impact 10 or more entities in a 12-month period. In FYs 2008, 2009, 
2010, 2011, and 2012, we received 1, 4, 5, 3, and 3 applications, 
respectively.
    We did not receive any public comments regarding these information 
collections.
3. ICRs for the Hospital Inpatient Quality Reporting (IQR) Program
    The Hospital Inpatient Quality Reporting (IQR) Program (formerly 
referred to as the Reporting Hospital Quality Data for Annual Payment 
(RHQDAPU) Program) was originally established to implement section 
501(b) of the MMA, Public Law 108-173. This Program expanded our 
voluntary Hospital Quality Initiative. The Hospital IQR Program 
originally consisted of a ``starter set'' of 10 quality measures. The 
collection of information associated with the original starter set of 
quality measures was previously approved under OMB control number 0938-
0918. We are currently seeking reinstatement of the information 
collection and will publish the required 60-day and 30-day notices in 
the Federal Register to solicit public comments.
    We added additional quality measures to the Hospital IQR Program 
and submitted the information collection request to OMB for approval. 
This expansion of the Hospital IQR measures was part of our 
implementation of section 5001(a) of the DRA. New section 
1886(b)(3)(B)(viii)(III) of the Act, added by section 5001(a) of the 
DRA, requires that the Secretary expand the ``starter set'' of 10 
quality measures that were established by the Secretary as of November 
1, 2003, to include measures ``that the Secretary determines to be 
appropriate for the measurement of the quality of care furnished by 
hospitals in inpatient settings.'' The burden associated with these 
reporting requirements was previously approved under OMB control number 
0938-1022. We are currently seeking reinstatement of the information 
collection and will publish the required 60-day and 30-day notices in 
the Federal Register to solicit public comments.is currently approved 
under OMB control number 0938-1022.
    For the FY 2014 and FY 2015 payment updates, we intend to seek OMB 
approval for a revised information collection request using the same 
OMB control number (0938-1022). In the revised request, we will add 
five measures that we adopted in the FY 2011 IPPS/LTCH PPS final rule 
(four chart-abstracted measures and an HAI measure (Surgical Site 
Infection (SSI)) to be collected via NSHN for the FY 2014 payment 
determination. In addition, we

[[Page 51779]]

are adding one HAI measure (CAUTI) also to be collected via NHSN, one 
structural measure and one claims-based measure that we are adopting in 
this final rule for the FY 2014 payment determination. We estimate that 
the changes to our FY 2014 payment determination measure set will 
increase the collection burden on hospitals by approximately 3,260,175 
hours per year. Because the currently approved CDC information 
collection request for the NHSN (OCN: 0920-0666) does not include all 
of the respondents associated with the Hospital IQR Program, we intend 
to request a separate OMB control number for the measures to be 
collected via the NHSN.
    With respect to the four new chart-abstracted measures for the FY 
2014 payment determination, hospitals will be required to submit data 
on patients who receive inpatient acute care hospital services. 
Specifically, with respect to the two EDT measures and two Global 
Immunization measures, hospitals will need to collect information on 
patients who receive inpatient acute care hospital services regarding 
EDT, as well as influenza and pneumonia vaccination information for all 
inpatients for which hospitals currently collect only for patients 
admitted for pneumonia. We estimate that hospitals will incur an 
additional 3,500,000 burden hours resulting from the addition of these 
four measures for the FY 2014 payment determination. We estimate that 
hospitals will submit approximately 3,500,000 cases annually for these 
4 measures, and the information needed to calculate these measures 
requires an average of 1 hour to abstract from medical records for each 
case.
    The HAI measure (Surgical Site Infection (SSI)) that we added in 
the FY 2011 IPPS/LTCH PPS final rule for the FY 2014 payment 
determination and the HAI measure that we are adding in this final rule 
for the FY 2014 payment determination (CAUTI) are structured to keep 
additional burden to a minimum because they are to be collected via 
NHSN. More than 4,000 hospitals in 29 States are already using NHSN to 
comply with State-mandated reporting. Although these HAI measures will 
add burden for hospitals, we believe that the additional burden will be 
lessened because hospitals will already be using NHSN to report the 
CLABSI measure for the FY 2013 payment determination. In addition, as 
mentioned above, not all hospitals will experience any additional 
burden because many hospitals already submit data to this system either 
voluntarily or as part of mandatory State reporting requirements for 
HAIs. The burden associated with these requirements is the time and 
effort associated with collecting and submitting the additional data. 
We estimate that hospitals will need about 500,000 additional hours to 
report Surgical Site Infection (SSI), and CAUTI event data and 
denominator information into the system.
    The structural measure we are adding for the FY 2014 payment 
determination will require hospitals to indicate whether they are 
participating in a systematic qualified clinical database for registry 
for General Surgery and, if so, to identify the registry. We estimate 
that 3,500 hospitals will spend about 5 minutes each to answer this 
question each year, resulting in an estimated total increase of 175 
hours in terms of the total burden to hospitals each year.
    We also are adding one new claims-based measure for the FY 2014 
payment determination. We do not believe that this claims-based measure 
will create any additional burden for hospitals because it will be 
collected and calculated by CMS based on the Medicare FFS claims the 
hospitals have already submitted to CMS.
    We believe that the overall burden on hospitals will be reduced to 
some extent by the policy we finalized in the FY 2011 IPPS/LTCH PPS 
final rule to retire two measures (PN-2 and PN-7) beginning with the FY 
2014 payment determination. Burden will be further reduced because, in 
this final rule, beginning with the FY 2014 payment determination, we 
are retiring or suspending data collection for eight additional 
measures (AMI-1 Aspirin at Arrival, AMI-3 ACE/ARB, AMI-4 Smoking 
Cessation, AMI-5 Beta-Blocker at Discharge, HF-4 Smoking Cessation, PN-
4 Smoking Cessation, PN-5c Antibiotic within 6 Hours of Arrival and 
SCIP Inf-6 Appropriate Hair Removal), beginning with discharges 
occurring on January 1, 2012. We estimate that the retirement or 
suspension of these measures will reduce the burden to hospitals by a 
total of 740,000 hours including reductions of 170,000 hours for 
abstracting AMI measures, 220,000 hours for abstracting PN measures, 
50,000 hours for abstracting HF measures, and 300,000 hours for 
abstracting SCIP measures.
    We also are adding two new chart-abstracted measure sets to the 
Hospital IQR Program for FY 2015: Stroke (eight measures) and Venous 
Thromboembolism (VTE) (six measures). Both measure sets are of great 
importance to the Medicare population, with stroke affecting about 
795,000 people each year (American Stroke Association). Both stroke and 
VTE measures are currently collected by The Joint Commission for 
accreditation and certification purposes. Both measure sets use 
complementary data elements to our current SCIP, VTE, and AMI measure 
sets, thus reducing the chart-abstraction burden. The burden associated 
with these measure sets is the time and effort associated with 
collecting and submitting the additional data. We estimate that each 
chart-abstracted measure set will require about 1 hour to abstract. We 
anticipate the number of subsection (d) hospitals participating in the 
Hospital IQR Program to be approximately 3,500. The number of charts to 
be abstracted by all participating hospitals is estimated to be 180,000 
per year for the Stroke measure set, and 6,000,000 per year for the VTE 
measure set. In total, our addition of the Stroke and VTE measure sets 
is estimated to increase the burden to hospitals by 6,180,000 hours per 
year.
    We also are adding three new HAI measures to be collected via NHSN 
to the Hospital IQR Program for FY 2015: (1) Methicillin-resistant 
Staphylococcus aureus (MRSA) Bacteremia measure; (2) C. Difficile SIR 
measure; and (3) Healthcare Personnel Influenza vaccination measure. 
The information needed for these measures will be collected via NHSN, 
and, therefore, is structured to keep additional burden to a minimum 
because more than 4,000 hospitals in 29 States are already using NHSN 
to comply with State-mandated reporting. Although this will add burden 
to hospitals, the initial setup and acclimation to the NHSN system will 
have already occurred with the adoption of the CLABSI measure for the 
Hospital IQR Program for the FY 2013 payment determination. In 
addition, as mentioned above, not all hospitals will experience any 
additional burden since many hospitals already submit data to this 
system either voluntarily or as part of mandatory State reporting 
requirements for HAIs. The burden associated with this section is the 
time and effort associated with collecting and submitting the 
additional data. With respect to the new HAI measures for the FY 2015 
payment determination, we estimate that an additional 1,500,000 burden 
hours per year (500,000 hours per measure) will be incurred by 
hospitals to report data on these measures.
    We estimate that our changes to the FY 2015 Hospital IQR Program 
measure set will increase the collection burden to hospitals by 
approximately 7,680,000 hours per year.
    We have stated our intention to explore mechanisms for data 
submission using electronic health

[[Page 51780]]

records (EHRs) (73 FR 48614; 74 FR 43866, 43892; 75 FR 50189). 
Establishing such a system will require interoperability between EHRs 
and CMS data collection systems, additional infrastructure development 
on the part of hospitals and CMS, and the adoption of standards for 
capturing, formatting, and transmitting the data elements that make up 
the measures. However, once these activities are accomplished, the 
adoption of measures that rely on data obtained directly from EHRs will 
enable us to expand the Hospital IQR Program measure set with less cost 
and burden to hospitals. We believe that automatic collection and 
reporting of data through EHRs will greatly simplify and streamline 
reporting for various CMS quality reporting programs, and that at a 
future date, currently targeted to be FY 2015, hospitals will be able 
to switch solely to EHR-based reporting of data that are currently 
manually chart-abstracted and submitted to CMS for the Hospital IQR 
Program.
4. ICRs for the Occupational Mix Adjustment to the FY 2012 Index 
(Hospital Wage Index Occupational Mix Survey)
    Section II.D. of the preamble of the proposed rule and this final 
rule discusses the occupational mix adjustment to the final FY 2012 
wage index. While the preamble does not contain any new ICRs, it is 
important to note that there is an OMB approved information collection 
request associated with the hospital wage index.
    Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) 
of the Act to require CMS to collect data at least once every 3 years 
on the occupational mix of employees for each short-term, acute care 
hospital participating in the Medicare program in order to construct an 
occupational mix adjustment to the wage index. We collect the data via 
the occupational mix survey.
    The burden associated with this information collection requirement 
is the time and effort required to collect and submit the data in the 
Hospital Wage Index Occupational Mix Survey to CMS. The aforementioned 
burden is subject to the PRA; however, it is currently approved under 
OMB control number 0938-0907, with an expiration date of February 28, 
2013.
5. Hospital Applications for Geographic Reclassifications by the MGCRB
    Section III.I.3. of the preamble of the proposed rule and this 
final rule discusses revisions to the wage index based on hospital 
redesignations. As stated in that section, under section 1886(d)(10) of 
the Act, the MGCRB has the authority to accept short-term IPPS hospital 
applications requesting geographic reclassification for wage index or 
standardized payment amounts and to issue decisions on these requests 
by hospitals for geographic reclassification for purposes of payment 
under the IPPS.
    The burden associated with this application process is the time and 
effort necessary for an IPPS hospital to complete and submit an 
application for reclassification to the MGCRB. While this requirement 
is subject to the PRA, the associated burden is currently approved 
under OMB control number 0938-0573, with an expiration date of December 
31, 2011.
    We did not receive any public comments on this information 
collection requirement.
6. ICRs for the Quality Reporting Program for LTCHs
    In section VII.C. of the preamble of the proposed rule and this 
final rule, we discuss three quality reporting measures for LTCHs for 
FY 2014: (1) Catheter Associated Urinary Tract Infections (CAUTI); (2) 
Central Line Associated Blood Stream Infection Event (CLABSI); and (3) 
Pressure Ulcers that are New or Have Worsened.
    As proposed, we will collect the HAI CLABSI and CAUTI quality 
measures through the use of the CDC/NHSN (http://www.cdc.gov/nhsn/). We 
will require that LTCH facilities report data on each patient in their 
facility who has been diagnosed with either a catheter associated 
urinary tract infection or a central line associated bloodstream 
infection.
    The NHSN is a secure, Internet-based surveillance system which is 
maintained and managed by CDC. Many LTCHs already submit data to the 
NHSN either voluntarily or as part of mandatory State reporting 
requirements for HAIs. There are currently 439 certified LTCHs and, 
according to CDC, 80 of these LTCHs already submit HAI data to NHSN. 
For these LTCHs, the burden of complying with the requirements of the 
quality reporting program will be reduced because these LTCHs are 
familiar with the NHSN submission process.
    We provide financial incentives to IPPS hospitals to report data 
regarding certain HAIs via NHSN as part of the Hospital IQR Program. We 
adopted the CLABSI quality measure under the Hospital IQR Program for 
the FY 2013 payment determination and are adopting the CAUTI measure 
for the FY 2014 payment determination. In addition, hospitals in 29 
States are already using NHSN, and CDC supports more than 4,000 
hospitals that are already using NHSN. Many LTCHs are integrated into 
or are part of large inpatient hospital systems. We believe that these 
hospital systems have gained the requisite knowledge and experience 
with the submission of data about HAIs via NHSN, under the Hospital IQR 
Program, State law, or voluntarily. Therefore, the transition to 
reporting HAIs via the NHSN for these LTCHs may be less burdensome.
    The burden associated with these quality measures is the time and 
effort associated with collecting and submitting the data concerning 
CAUTI and CLABSI to NHSN for LTCHs that are not currently reporting 
such data. During the 12-month period from April 2010 to March 2011, 58 
LTCHs reported CLABSI for at least one month, and the same number 
reported CAUTI for at least one month. For LTCHs that already submit 
data regarding these HAIs to NHSN, there should be little, if any, 
additional burden. For LTCHs who submit data to NHSN for other HAIs, 
but not CAUTI and CLABSI data, there may be some burden. However, we 
believe that this burden will be significantly decreased because these 
LTCHs are already enrolled in the NHSN system and are already familiar 
with the NHSN data submission process.
    There are currently 435 LTCHs in the United States paid under the 
LTCH PPS. We estimate that each LTCH will submit approximately 12 NHSN 
submissions (6 CAUTI and 6 CLABSI) per month (144 per LTCH annually). 
This equates to a total of approximately 62,640 submissions of HAI data 
to NHSN from all LTCHs paid under the LTCH PPS per year. We estimate 
that each NHSN assessment will take approximately 25 minutes to 
complete. This time estimate consists of 10 minutes of clinical (for 
example, nursing time) needed to collect the clinical data and 15 
minutes of clerical time necessary to enter the data into the NHSN data 
base. Based on this estimate, we expect each LTCH will expend 300 
minutes (5 hours) per month and 60 hours per year reporting to NHSN. 
Therefore, the total estimated annual hourly burden to all LTCHs paid 
under the LTCH PPS for reporting to NHSN is 26,100 hours. The estimated 
cost per submission is estimated at $12.07. These costs are estimated 
using an hourly wage for a Registered Nurse of $41.59 and a Medical 
Billing Clerk/Data Entry person of $20.57 (U.S. Bureau of Labor 
Statistics data). Therefore, we estimate that the annual cost per each 
LTCH provider will be $1,739 and the total yearly cost to all LTCHs 
paid under the LTCH PPS for the

[[Page 51781]]

submission of CAUTI and CLABSI data to NHSN would be $756,326.\71\ The 
aforementioned requirements are subject to the PRA and the associated 
burden hours will be accounted for in a revision to the information 
collection request currently approved as OCN 0920-0666.
---------------------------------------------------------------------------

    \71\ Nursing Time--24 hours @ $41.59 per hour = $998.16; $998.16 
x 435 LTCHs = $434,200.
    Admin Time--36 hours @ $20.57 per hour = $740.52; $740.52 x 435 
LTCHs = $322,126.
    TOTAL = $434,200 + $322,126 = $756,326.
---------------------------------------------------------------------------

    With respect to the pressure ulcer measure, we will post the 
specification for the pressure ulcer measure on our Web site along with 
the specific data elements necessary to be collected by no later than 
January 31, 2012. We expect that the specific data items needed are 
part of the Continuity Assessment Record & Evaluation (CARE) data item 
set. We developed the CARE as required by section 5008 of the Deficit 
Reduction Act of 2005. In 2011, CARE underwent revisions. The revised 
CARE data item set now consists of a compilation of items from a 
comprehensive CMS standardized item library. The revised Medicare CARE 
data item set is intended to be used to: (1) Standardize program 
information on Medicare beneficiaries' acuity at discharge from acute 
hospitals, (2) document medical severity, functional status and other 
factors related to outcomes and resource utilization at admission, 
discharge, and interim times during post acute treatment, (3) 
understand the relationship between severity of illness, functional 
status, social support factors, and resource utilization; and (4) 
report quality measure data to CMS.
    Because the CMS CARE pressure ulcer data item set has not 
previously been introduced in the LTCH setting, there will be some 
initial burdens associated with the introduction of this data item set. 
These initial costs will mainly be incurred in the training of the 
facility staff. However, there should be little, if any, additional 
education required, in regards to the collection of the data, because 
pressure ulcer assessment should be a vital part of good patient care 
and daily in-house patient chart documentation.
    LTCHs participating in the LTCH Quality Reporting Program will be 
required to perform the CARE pressure ulcer assessment on each patient 
upon admission and again upon discharge. We believe that it is 
necessary to obtain admission and discharge pressure ulcer assessments 
on all patients admitted to LTCH facilities in order to obtain full and 
complete statistical data regarding the quality of care provided by the 
facility to the patients receiving care in that facility. The delivery 
of high quality care in the LTCH setting is imperative. We believe that 
collecting quality data on all patients in the LTCH setting supports 
our mission to insure quality care for Medicare beneficiaries. 
Collecting data on all patients provides the most robust and accurate 
reflection of quality in the LTCH setting. Accurate representation of 
quality provided in LTCHs is best conveyed using data related to 
pressure ulcers on all LTCH patients, regardless of payer, using a 
subset of the CARE data item set. An admission assessment is necessary 
in order to assess for either the presence or absence of pressure 
ulcers upon admission. If pressure ulcers are detected upon admission, 
they must be properly assessed, staged and documented. Upon discharge, 
an assessment is needed to determine if any worsening of the pressure 
ulcers occurred during the LTCH stay. If no pressure ulcers had been 
noted on the admission assessment, then a discharge pressure ulcer 
assessment would be necessary in order to assess whether the patient 
had developed any new pressure ulcers during the LTCH stay.
    At the time of publication of this final rule, CMS has not 
completed development of the information collection instrument that 
LTCHs would have to submit to comply with the reporting requirements 
regarding the CARE pressure ulcer assessment. Because the CARE data 
item set is still undergoing development, we cannot assign a complete 
burden estimate at this time. Once the CARE data item set has been 
completed and finalized, we will publish the required 60-day and 30-day 
Federal Register notices to solicit public comments on this data 
reporting method and to announce the submission of the information 
collection request to OMB for its review and approval.

List of Subjects

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 476

    Health care, Health professional, Health record, Peer Review 
Organization (PRO), Penalties, Privacy, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble of this final rule, the 
Centers for Medicare & Medicaid Services confirms the interim rule 
published March 14, 2011, at 76 FR 13515, is confirmed as final without 
change and is amending 42 CFR Chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

0
2. Section 412.23 is amended by--
0
a. In paragraph (e)(3)(i), removing the cross-reference ``paragraph 
(e)(3)(ii) through (e)(3)(iv) of this section'' and adding in its place 
the cross-reference ``paragraphs (e)(3)(ii) through (v) of this 
section''.
0
b. Revising paragraph (e)(3)(iv).
0
c. Adding paragraph (e)(3)(v).
0
d. Adding paragraph (e)(8).
    The revision and additions read as follows:

Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (e) * * *
    (3) * * *
    (iv) If a hospital seeks exclusion from the inpatient prospective 
payment system as a long-term care hospital and a change of ownership 
(as described in Sec.  489.18 of this chapter) occurs within the period 
of at least 5 months of the 6-month period preceding its petition for 
long-term care hospital status, the hospital may be excluded from the 
inpatient prospective payment system as a long-term care hospital for 
the next cost reporting period if, for the period of at least 5 months 
of the 6 months immediately preceding the start of the cost reporting 
period for which the hospital is seeking exclusion from the inpatient 
prospective payment system as a long-term care hospital (including time 
before the change of ownership), the hospital has met the required 
average length of stay, has continuously operated as a hospital, and 
has continuously participated as a hospital in Medicare.
    (v) For periods beginning on or after October 1, 2011, a hospital 
that is excluded from the inpatient prospective payment system as a 
long-term care hospital that plans to undergo a change of ownership (as 
described in Sec.  489.18 of this chapter) must notify its fiscal 
intermediary or MAC within 30 days of the effective date of such change 
of

[[Page 51782]]

ownership, as specified in Sec.  424.516(e) of this subchapter. The 
hospital will continue to be excluded from the inpatient prospective 
payment system as a long-term care hospital for the cost reporting 
period following the change of ownership only if, for the period of at 
least 5 months of the 6 months immediately preceding the change of 
ownership, the hospital meets the required average length of stay 
(calculated in accordance with paragraph (e)(3)(i) of this section).
* * * * *
    (8) Application of LTCH moratorium on the increase in beds at 
section 114(d)(1)(B) of Public Law 110-173 to LTCHs and LTCH satellite 
facilities established or classified as such under section 114(d)(2) of 
Public Law 110-173. Effective for the period beginning October 1, 2011, 
and ending December 28, 2012, for long-term care hospitals and long-
term care hospital satellite facilities established under paragraph 
(e)(6)(ii) of this section for the period beginning December 29, 2007, 
and ending September 30, 2011, the moratorium under paragraph (e)(7) of 
this section applies and the number of Medicare-certified beds must not 
be increased beyond the number of beds that were certified by Medicare 
at the long-term care hospital or the long-term care hospital satellite 
facility as of October 1, 2011.
* * * * *

0
3. Section 412.64 is amended by--
0
a. Adding paragraph (d)(1)(iv).
0
b. Revising paragraph (h)(4) introductory text.
    The addition and revision read as follows:

Sec.  412.64  Federal rates for inpatient operating costs for Federal 
fiscal year 2005 and subsequent fiscal years.

* * * * *
    (d) * * *
    (1) * * *
    (iv) For fiscal year 2012, the percentage increase in the market 
basket index less a multifactor productivity adjustment (as determined 
by CMS) and less 0.1 percentage point for prospective payment hospitals 
(as defined in Sec.  413.40(a) of this subchapter) for hospitals in all 
areas.
* * * * *
    (h) * * *
    (4) For discharges on or after October 1, 2004 and before September 
30, 2013, CMS establishes a minimum wage index for each all-urban 
State, as defined in paragraph (h)(5) of this section. This minimum 
wage index value is computed using the following methodology:
* * * * *

0
4. Section 412.105 is amended by revising paragraph (b)(4) to read as 
follows:

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

* * * * *
    (b) * * *
    (4) Beds otherwise countable under this section used for outpatient 
observation services, skilled nursing swing-bed services, ancillary 
labor/delivery services, or inpatient hospice services;
* * * * *

0
5. Section 412.106 is amended by revising paragraph (a)(1)(ii)(B) to 
read as follows:

Sec.  412.106  Special treatment: Hospitals that service a 
disproportionate share of low income patients.

    (a) * * *
    (1) * * *
    (ii) * * *
    (B) Beds otherwise countable under this section used for outpatient 
observation services, skilled nursing swing-bed services, or inpatient 
hospice services;
* * * * *

0
6. Section 412.140 is added to Subpart H to read as follows:

Sec.  412.140  Participation, data submission, and validation 
requirements under the Hospital Inpatient Quality Review (IQR) Program.

    (a) Participation in the Hospital IQR Program. In order to 
participate in the Hospital IQR Program, a section 1886(d) of the 
hospital must-
    (1) Register onQualityNet.org, before it begins to report data;
    (2) Identify and register a QualityNet Administrator as part of the 
registration process under paragraph (a)(1) of this section; and
    (3) Submit a completed Notice of Participation Form to CMS if the 
hospital is participating in the program for the first time, has 
previously withdrawn from the program and would like to participate 
again, or has received a new CMS Certification Number (CNN).
    (i) A hospital that would like to participate in the program for 
the first time (and to which paragraph (a)(3)(ii) of this section does 
not apply), or that previously withdrew from the program and would now 
like to participate again, must submit to CMS a completed Notice of 
Participation Form by December 31 of the fiscal year preceding the 
fiscal year in which it wishes to participate.
    (ii) A hospital that has received a new CCN and would like to 
participate in the program must submit a completed Notice of 
Participation Form to CMS no later than 180 days from the date 
identified as the open date on the approved CMS Quality Improvement 
Evaluation System (QIES).
    (b) Withdrawal from the Hospital IQR Program. CMS will accept 
Hospital IQR Program withdrawal forms from hospitals on or before 
August 15 of the fiscal year preceding the fiscal year for which a 
Hospital IQR payment determination will be made.
    (c) Submission and validation of Hospital IQR Program data. (1) 
General rule. Except as provided in paragraph (c)(2) of this section, 
subsection (d) hospitals that participate in the Hospital IQR Program 
must submit to CMS data on measures selected under section 
1886(b)(3)(B)(viii) of the Act in a form and manner, and at a time, 
specified by CMS. A hospital must begin submitting data on the first 
day of the quarter following the date that the hospital submits a 
completed Notice of Participation form under paragraph (a)(3) of this 
section.
    (2) Exception. Upon request by a hospital, CMS may grant an 
extension or waiver of one or more data submission deadlines in the 
event of extraordinary circumstances beyond the control of the 
hospital. Specific requirements for submission of a request for an 
extension or waiver are available onQualityNet.org.
    (d) Validation of Hospital IQR Program data. CMS may validate one 
or more measures selected under section 1886(b)(3)(B)(viii) of the Act 
by reviewing patient charts submitted by selected participating 
hospitals.
    (1) Upon written request by CMS or its contractor, a hospital must 
submit to CMS a sample of patient charts that the hospital used for 
purposes of data submission under the program. The specific sample that 
a hospital must submit will be identified in the written request. A 
hospital must submit the patient charts to CMS or its contractor within 
30 days of the date identified on the written request.
    (2) A hospital meets the validation requirement with respect to a 
fiscal year if it achieves a 75-percent score, as determined by CMS.
    (e) Reconsiderations and appeals of Hospital IQR Program decisions. 
(1) A hospital may request reconsideration of a decision by CMS that 
the hospital has not met the requirements of the Hospital IQR Program 
for a particular fiscal year. Except as provided in paragraph (c)(2) of 
this section, a hospital must submit a reconsideration request to CMS 
no later than 30 days from the date identified on the Hospital 
Inpatient Quality Reporting Program Annual

[[Page 51783]]

Payment Update Notification Letter provided to the hospital.
    (2) A reconsideration request must contain the following 
information:
    (i) The hospital's CMS Certification Number (CCN);
    (ii) The name of the hospital;
    (iii) Contact information for the hospital's chief executive 
officer and QualityNet system administrator, including each 
individual's name, e-mail address, telephone number, and physical 
mailing address;
    (iv) A summary of the reason(s), as set forth in the Hospital 
Inpatient Quality Reporting Program Annual Payment Update Notification 
Letter, that CMS concluded the hospital did not meet the requirements 
of the Hospital IQR Program;
    (v) A detailed explanation of why the hospital believes that it 
complied with the requirements of the Hospital IQR Program for the 
applicable fiscal year;
    (vi) Any evidence that supports the hospital's reconsideration 
request, including copies of patient charts, e-mails and other 
documents; and
    (vii) If the hospital has requested reconsideration on the basis 
that CMS concluded it did not meet the validation requirement set forth 
in paragraph (d) of this section, the reconsideration request must 
contain the following additional information:
    (A) A copy of each patient chart that the hospital timely submitted 
to CMS or its contractor in response to a request made under paragraph 
(d)(1) of this section; and
    (B) A detailed explanation identifying which data the hospital 
believes was improperly validated by CMS and why the hospital believes 
that such data are correct.
    (3) A hospital that is dissatisfied with a decision made by CMS on 
its reconsideration request may file an appeal with the Provider 
Reimbursement Review Board under Part 405, Subpart R of this chapter.

0
7. Section 412.211 is amended by adding paragraph (c)(4) to read as 
follows:

Sec.  412.211  Puerto Rico rates for Federal fiscal year 2004 and 
subsequent fiscal years.

* * * * *
    (c) * * *
    (4) For fiscal year 2012 and subsequent fiscal years, the 
applicable percentage increase specified in Sec.  412.64(d).
* * * * *

0
8. Section 412.230 is amended by adding paragraph (d)(5) to read as 
follows:

Sec.  412.230  Criteria for an individual hospital seeking 
redesignation to another rural area or an urban area.

* * * * *
    (d) * * *
    (5) Single hospital MSA exception. The requirements of paragraph 
(d)(1)(iii) of this section do not apply if a hospital is the single 
hospital in its MSA that is paid under subpart D of this Part.

0
9. Section 412.523 is amended by adding paragraphs (c)(3)(viii) and 
(d)(4) to read as follows:

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

* * * * *
    (c) * * *
    (3) * * *
    (viii) For long-term care hospital prospective payment system 
fiscal year beginning October 1, 2011, and ending September 30, 2012. 
The standard Federal rate for the long-term care hospital prospective 
payment system beginning October 1, 2011, and ending September 30, 
2012, is the standard Federal rate for the previous long-term care 
hospital prospective payment system fiscal year updated by 1.8 percent. 
The standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *
    (d) * * *
    (4) Changes to the adjustment for area wage levels. Beginning in FY 
2012, CMS adjusts the standard Federal rate by a factor that accounts 
for the estimated effect of any adjustments or updates to the area wage 
level adjustment under Sec.  412.525(c)(1) on estimated aggregate LTCH 
PPS payments.
* * * * *

0
10. Section 412.525 is amended by revising paragraph (c) to read as 
follows:

Sec.  412.525  Adjustments to the Federal prospective payment.

* * * * *
    (c) Adjustments for area wage levels. (1) The labor portion of a 
long-term care hospital's Federal prospective payment is adjusted to 
account for geographical differences in the area wage levels using an 
appropriate wage index (established by CMS), which reflects the 
relative level of hospital wages and wage-related costs in the 
geographic area (that is, urban or rural area as determined in 
accordance with the definitions set forth in Sec.  412.503) of the 
hospital compared to the national average level of hospital wages and 
wage-related costs. The appropriate wage index that is established by 
CMS is updated annually. The labor portion of a long-term care 
hospital's Federal prospective payment is established by CMS and is 
updated annually.
    (2) Beginning in FY 2012, any adjustments or updates to the area 
wage level adjustment under this paragraph (c) will be made in a budget 
neutral manner such that estimated aggregate LTCH PPS payments are not 
affected.
* * * * *

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

0
11. The authority citation for Part 413 continues to read as follows:

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

0
12. Section 413.70 is amended by--
0
a. Revising paragraph (b)(5)(i)(B).
0
b. Adding paragraph (b)(5)(i)(C).
    The revision and addition read as follows:

Sec.  413.70  Payment for services of a CAH.

* * * * *
    (b) * * *
    (5) * * *
    (i) * * *
    (B) Effective for cost reporting periods beginning on or after 
January 1, 2004 and on or before September 30, 2011, payment for 
ambulance services furnished by a CAH or an entity that is owned and 
operated by a CAH is 101 percent of the reasonable costs of the CAH or 
the entity in furnishing those services, but only if the CAH or the 
entity is the only provider or supplier of ambulance services located 
within a 35-mile drive of the CAH or the entity.
    (C) Effective for cost reporting periods beginning on or after 
October 1, 2011, payment for ambulance services furnished by a CAH or 
an entity that is owned and operated by a CAH is 101 percent of the 
reasonable costs of the CAH or the entity in furnishing those services, 
but only if the CAH or the entity is the only provider or supplier of 
ambulance services located within a 35-mile drive of the CAH. If there 
is no provider or supplier of ambulance services located within a 35-
mile drive of the CAH and there is an entity that is owned and operated 
by a CAH that is more than a 35-mile drive from the CAH, payment for 
ambulance services

[[Page 51784]]

furnished by that entity is 101 percent of the reasonable costs of the 
entity in furnishing those services, but only if the entity is the 
closest provider or supplier of ambulance services to the CAH.
* * * * *

PART 476--UTILIZATION AND QUALITY CONTROL REVIEW

0
13. The authority citation for Part 476 continues to read as follows:

    Authority: Secs. 1102 and 1871 of the Social Security Act (42 
U.S.C. 1302 and 1395(hh)).

0
14. Section 476.78 is amended by--
0
a. In paragraph (a), removing the reference ``Sec.  466.71'' and adding 
in its place the reference ``Sec.  476.71''.
0
b. Revising paragraph (b).
    The revision reads as follows:

Sec.  476.78  Responsibilities of health care facilities.

* * * * *
    (b) Cooperation with QIOs. Health care providers that submit 
Medicare claims must cooperate in the assumption and conduct of QIO 
review.
    (1) Providers must allocate adequate space to the QIO for its 
conduct of review at the times the QIO is conducting review.
    (2) Providers must provide patient care data and other pertinent 
data to the QIO at the time the QIO is collecting review information 
that is required for the QIO to make its determinations. QIOs pay 
providers paid under the prospective payment system for the costs of 
photocopying records requested by the QIO in accordance with the 
payment rate determined under the methodology described in paragraph 
(c) of this section and for first class postage for mailing the records 
to the QIO. When the QIO does postadmission, preprocedure review, the 
provider must provide the necessary information before the procedure is 
performed, unless it must be performed on an emergency basis. Providers 
must--
    (i) Photocopy and deliver to the QIO all required information 
within 30 calendar days of a request;
    (ii) Deliver all required medical information to the QIO within 21 
calendar days from the date of the request in those situations where a 
potential ``serious reportable event'' has been identified or where 
other circumstances as deemed by the QIO warrant earlier receipt of all 
required medical information. For purposes of this paragraph, a serious 
reportable event is defined as a preventable, serious, and unambiguous 
adverse event that should never occur.
    (3) Providers must inform Medicare beneficiaries at the time of 
admission, in writing, that the care for which Medicare payment is 
sought will be subject to QIO review and indicate the potential 
outcomes of that review. Furnishing this information to the patient 
does not constitute notice, under Sec.  411.402(a) of this chapter, 
that can support a finding that the beneficiary knew the services were 
not covered.
    (4) When the provider has issued a written determination in 
accordance with Sec.  412.42(c)(3) of this chapter that a beneficiary 
no longer requires inpatient hospital care, it must submit a copy of 
its determination to the QIO within 3 working days.
    (5) Providers must assure, in accordance with the provisions of 
their agreements with the QIO, that each case subject to preadmission 
review has been reviewed and approved by the QIO before admission to 
the hospital or a timely request has been made for QIO review.
    (6)(i) Providers must agree to accept financial liability for any 
admission subject to preadmission review that was not reviewed by the 
QIO and is subsequently determined to be inappropriate or not medically 
necessary.
    (ii) The provisions of paragraph (b)(6)(i) of this section do not 
apply if a provider, in accordance with its agreement with a QIO, makes 
a timely request for preadmission review and the QIO does not review 
the case timely. Cases of this type are subject to retrospective 
prepayment review under paragraph (b)(7) of this section.
    (7) Hospitals must agree that, if the hospital admits a case 
subject to preadmission review without certification, the case must 
receive retrospective prepayment review, according to the review 
priority established by the QIO.
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; Program No. 93.774, Medicare--
Supplementary Medical Insurance Program; and Program No. 93.778, 
Medical Assistance)

    Dated: July 21, 2011.
 Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 27, 2011.
Kathleen Sebelius,
Secretary.

    Note: The following Addendum and Appendixes will not appear in 
the Code of Federal Regulations.

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
on or After October 1, 2011

I. Summary and Background

    In this Addendum, we are setting forth a description of the 
methods and data we used to determine the prospective payment rates 
for Medicare hospital inpatient operating costs and Medicare 
hospital inpatient capital-related costs for FY 2012 for acute care 
hospitals. We also are setting forth the rate-of-increase 
percentages for updating the target amounts for certain hospitals 
excluded from the IPPS for FY 2012. We note that, because certain 
hospitals excluded from the IPPS are paid on a reasonable cost basis 
subject to a rate-of-increase ceiling (and not by the IPPS), these 
hospitals are not affected by the figures for the standardized 
amounts, offsets, and budget neutrality factors. Therefore, in this 
finalrule, we are finalizing the rate-of-increase percentages for 
updating the target amounts for certain hospitals excluded from the 
IPPS that are effective for cost reporting periods beginning on or 
after October 1, 2011.
    In addition, we are setting forth a description of the methods 
and data we used to determine the standard Federal rate that will be 
applicable to Medicare LTCHs for FY 2012.
    In general, except for SCHs, MDHs, and hospitals located in 
Puerto Rico, each hospital's payment per discharge under the IPPS is 
based on 100 percent of the Federal national rate, also known as the 
national adjusted standardized amount. This amount reflects the 
national average hospital cost per case from a base year, updated 
for inflation.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: The Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or the updated hospital-specific rate based on 
the FY 2006 costs per discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs historically have 
been paid based on the Federal national rate or, if higher, the 
Federal national rate plus 50 percent of the difference between the 
Federal national rate and the updated hospital-specific rate based 
on FY 1982 or FY 1987 costs per discharge, whichever was higher. 
However, section 5003(a)(1) of Public Law 109-171 extended and 
modified the MDH special payment provision that was previously set 
to expire on October 1, 2006, to include discharges occurring on or 
after October 1, 2006, but before October 1, 2011. Section 3124(a) 
of the Affordable Care Act amended sections 1886(d)(5)(G)(i) and 
1886(d)(5)(G)(ii)(II) of the Act to extend the MDH program and 
payment methodology from the end of FY 2011 to the end of FY 2012, 
by striking ``October 1, 2011'' and inserting ``October 1, 2012''. 
Section 3124(b) of the Affordable Care Act also made conforming 
amendments to sections 1886(b)(3)(D) and 1886(b)(3)(D)(iv)

[[Page 51785]]

of the Act. Section 3124(b)(2) of the Affordable Care Act also 
amended section 13501(e)(2) of OBRA 1993 to extend the provision 
permitting hospitals to decline reclassification as an MDH through 
FY 2012. Under section 5003(b) of Public Law 109-171, if the change 
results in an increase to an MDH's target amount, we must rebase an 
MDH's hospital-specific rates based on its FY 2002 cost report. 
Section 5003(c) of Public Law 109-171 further required that MDHs be 
paid based on the Federal national rate or, if higher, the Federal 
national rate plus 75 percent of the difference between the Federal 
national rate and the updated hospital-specific rate. Further, based 
on the provisions of section 5003(d) of Public Law 109-171, MDHs are 
no longer subject to the 12-percent cap on their DSH payment 
adjustment factor.
    For hospitals located in Puerto Rico, the payment per discharge 
is based on the sum of 25 percent of an updated Puerto Rico-specific 
rate based on average costs per case of Puerto Rico hospitals for 
the base year and 75 percent of the Federal national rate. (We refer 
readers to section II.D.3. of this Addendum for a complete 
description.)
    As discussed below in section II. of this Addendum, we are 
making changes in the determination of the prospective payment rates 
for Medicare inpatient operating costs for acute care hospitals for 
FY 2012. In section III. of this Addendum, we discuss our policy 
changes for determining the prospective payment rates for Medicare 
inpatient capital-related costs for FY 2012. In section IV. of this 
Addendum, we are setting forth our changes for determining the rate-
of-increase limits for certain hospitals excluded from the IPPS for 
FY 2012. In section V. of this Addendum, we are making changes in 
the determination of the standard Federal rate for LTCHs under the 
LTCH PPS for FY 2012. The tables to which we refer in the preamble 
of this final rule are listed in section VI. of this Addendum and 
are available via the Internet.

II. Changes to Prospective Payment Rates for Hospital Inpatient 
Operating Costs for Acute Care Hospitals for FY 2012

    The basic methodology for determining prospective payment rates 
for hospital inpatient operating costs for acute care hospitals for 
FY 2005 and subsequent fiscal years is set forth at Sec.  412.64. 
The basic methodology for determining the prospective payment rates 
for hospital inpatient operating costs for hospitals located in 
Puerto Rico for FY 2005 and subsequent fiscal years is set forth at 
Sec. Sec.  412.211 and 412.212. Below we discuss the factors used 
for determining the prospective payment rates for FY 2012.
    In summary, the standardized amounts set forth in Tables 1A, 1B, 
and 1C that are listed and published in section VI. of this Addendum 
(and available via the Internet) reflect--
     Equalization of the standardized amounts for urban and 
other areas at the level computed for large urban hospitals during 
FY 2004 and onward, as provided for under section 
1886(d)(3)(A)(iv)(II) of the Act.
     The labor-related share that is applied to the 
standardized amounts and Puerto Rico-specific standardized amounts 
to give the hospital the highest payment, as provided for under 
sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act.
     Updates of 1.9 percent for all areas (that is, the FY 
2012 estimate of the market basket rate-of-increase of 3.0 percent 
less an adjustment of 1.0 percentage point for multifactor 
productivity and less 0.1 percentage point), as required by section 
1886(b)(3)(B)(i) of the Act, as amended by sections 3401(a) and 
10319(a) of the Affordable Care Act. For hospitals that fail to 
submit data, in a form and manner, and at the time, specified by the 
Secretary relating to the quality of inpatient care furnished by the 
hospital, pursuant to section 1886(b)(3)(B)(viii) of the Act, the 
update is -0.1 percent (that is, the FY 2012 estimate of the market 
basket rate-of-increase of 3.0 percent, less 2.0 percentage points 
for failure to submit data under the Hospital IQR Program, less an 
adjustment of 1.0 percentage point for multifactor productivity, and 
less 0.1 percentage point).
     An update of 1.9 percent to the Puerto Rico-specific 
standardized amount (that is, the FY 2012 estimate of the market 
basket rate-of-increase of 3.0 percent less an adjustment of 1.0 
percentage point for multifactor productivity and less 0.1 
percentage point), in accordance with section 1886(d)(9)(C)(i) of 
the Act, as amended by section 401(c) of Public Law 108-173, which 
sets the update to the Puerto Rico-specific standardized amount 
equal to the applicable percentage increase set forth in section 
1886(b)(3)(B)(i) of the Act.
     An adjustment to the standardized amount to ensure 
budget neutrality for DRG recalibration and reclassification, as 
provided for under section 1886(d)(4)(C)(iii) of the Act.
     An adjustment to ensure the wage index changes are 
budget neutral, as provided for under section 1886(d)(3)(E)(i) of 
the Act. We note that section 1886(d)(3)(E)(i) of the Act requires 
that when we compute such budget neutrality, we assume that the 
provisions of section 1886(d)(3)(E)(ii) of the Act (requiring a 62 
percent labor-related share in certain circumstances) had not been 
enacted.
     An adjustment to ensure the effects of geographic 
reclassification are budget neutral, as provided for in section 
1886(d)(8)(D) of the Act, by removing the FY 2011 budget neutrality 
factor and applying a revised factor.
     An adjustment to ensure the effects of the rural 
community hospital demonstration required under section 410A of 
Public Law 108-173, as amended by sections 3123 and 10313 of Public 
Law 111-148, which extended the demonstration for an additional 5 
years are budget neutral, as required under section 410A(c)(2) of 
Public Law 108-173.
     An adjustment in light of the court's decision in Cape 
Cod v. Sebelius, (630 F.3d 203 (DC Cir. 2011)).
     An adjustment to remove the FY 2011 outlier offset and 
apply an offset for FY 2012, as provided for in section 
1886(d)(3)(B) of the Act.
     As discussed below and in section II.D. of the preamble 
to this final rule, an adjustment to meet the requirements of 
sections 7(b)(1)(A) and 7(b)(1)(B) of Public Law 110-90 to adjust 
the standardized amounts to offset the estimated amount of the 
increase in aggregate payments (including interest) due to the 
effect of documentation and coding that did not reflect real changes 
in case-mix for discharges occurring during FY 2008 and FY 2009.
    Beginning in FY 2008, we applied the budget neutrality 
adjustment for the rural floor to the hospital wage indices rather 
than the standardized amount. As we did for FY 2011, for FY 2012, we 
are continuing to apply the rural floor budget neutrality adjustment 
to hospital wage indices rather than the standardized amount. 
Consistent with section 3141 of the Affordable Care Act, instead of 
applying a State level rural floor budget neutrality adjustment on 
the wage index, we are applying a uniform, national budget 
neutrality adjustment to the FY 2012 wage index for the rural floor. 
We note that, as discussed in section III.F.2. of the preamble of 
this final rule, we are extending the imputed floor for 2 more 
years. Therefore, we are continuing to apply the imputed floor 
budget neutrality adjustment to the wage indices. Thus, the imputed 
floor is reflected in the final FY 2012 wage index.

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

    In general, the national standardized amount is based on per 
discharge averages of adjusted hospital costs from a base period 
(section 1886(d)(2)(A) of the Act), updated and otherwise adjusted 
in accordance with the provisions of section 1886(d) of the Act. For 
Puerto Rico hospitals, the Puerto Rico-specific standardized amount 
is based on per discharge averages of adjusted target amounts from a 
base period (section 1886(d)(9)(B)(i) of the Act), updated and 
otherwise adjusted in accordance with the provisions of section 
1886(d)(9) of the Act. The September 1, 1983 interim final rule (48 
FR 39763) contained a detailed explanation of how base-year cost 
data (from cost reporting periods ending during FY 1981) were 
established for urban and rural hospitals in the initial development 
of standardized amounts for the IPPS. The September 1, 1987 final 
rule (52 FR 33043 and 33066) contains a detailed explanation of how 
the target amounts were determined and how they are used in 
computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and 1886(d)(2)(C) of the Act require us 
to update base-year per discharge costs for FY 1984 and then 
standardize the cost data in order to remove the effects of certain 
sources of cost variations among hospitals. These effects include 
case-mix, differences in area wage levels, cost-of-living 
adjustments for Alaska and Hawaii, IME costs, and costs to hospitals 
serving a disproportionate share of low-income patients.
    In accordance with section 1886(d)(3)(E) of the Act, the 
Secretary estimates, from time-to-time, the proportion of hospitals' 
costs that are attributable to wages and wage-related costs. In 
general, the standardized amount is divided into labor-related and 
nonlabor-related amounts; only the proportion considered to be the 
labor-related amount is adjusted by the wage index. Section

[[Page 51786]]

1886(d)(3)(E) of the Act requires that 62 percent of the 
standardized amount be adjusted by the wage index, unless doing so 
would result in lower payments to a hospital than would otherwise be 
made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this 
provision to the labor-related share for hospitals located in Puerto 
Rico.)
    For FY 2012, we are continuing to use a labor-related share of 
68.8 percent for discharges occurring on or after October 1, 2011, 
for the national standardized amounts and 62.1 percent for the 
Puerto Rico-specific standardized amount. Consistent with section 
1886(d)(3)(E) of the Act, we are applying the wage index to a labor-
related share of 62 percent for all IPPS hospitals whose wage index 
values are less than or equal to 1.0000. For all IPPS hospitals 
whose wage indices are greater than 1.0000, we are applying the wage 
index to a labor-related share of 68.8 percent of the national 
standardized amount. For FY 2012, all Puerto Rico hospitals have a 
wage index less than 1.0. Therefore, the national labor-related 
share will always be 62 percent because the wage index for all 
Puerto Rico hospitals is less than 1.0.
    For hospitals located in Puerto Rico, we are applying a labor-
related share of 62.1 percent if its Puerto Rico-specific wage index 
is greater than 1.0000. For hospitals located in Puerto Rico whose 
Puerto-Rico specific wage index values are less than or equal to 
1.0000, we are applying a labor share of 62 percent.
    The standardized amounts for operating costs appear in Table 1A, 
1B, and 1C that are listed and published in section VI. of the 
Addendum to this final rule and are available via Internet.

2. Computing the Average Standardized Amount

    Section 1886(d)(3)(A)(iv)(II) of the Act requires that, 
beginning with FY 2004 and thereafter, an equal standardized amount 
be computed for all hospitals at the level computed for large urban 
hospitals during FY 2003, updated by the applicable percentage 
update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the 
Puerto Rico-specific urban and rural area rates. Accordingly, we are 
calculating the FY 2012 national and Puerto Rico standardized 
amounts irrespective of whether a hospital is located in an urban or 
rural location.

3. Updating the Average Standardized Amount

    Section 1886(b)(3)(B) of the Act specifies the applicable 
percentage increase used to update the standardized amount for 
payment for inpatient hospital operating costs. As discussed in 
section IV.K.3. of the preamble of this final rule, in accordance 
with section 1886(b)(3)(B) of the Act, as amended by section 3401(a) 
of the Affordable Care Act, we are reducing the FY 2012 applicable 
percentage increase (which is based on the second quarter 2011 
forecast of the FY 2006-based IPPS market basket) by the multifactor 
productivity (MFP) adjustment (the 10-year moving average of MFP for 
the period ending FY 2012) of 1.0 percent, which is calculated based 
on IHS Global Insight, Inc.'s (IGI's) second quarter 2011 forecast. 
In addition, in accordance with section 1886(b)(3)(B)(i) of the Act, 
as amended by sections 3401(a) and 10319(a) of the Affordable Care 
Act, we are further updating the standardized amount for FY 2012 by 
the estimated market basket percentage increase less 0.1 percentage 
point for hospitals in all areas. Sections 1886(b)(3)(B)(xi) and 
(xii) of Act, as added and amended by sections 3401(a) and 10319(a) 
the Affordable Care Act, further state that these adjustments may 
result in the applicable percentage increase being less than zero. 
The percentage increase in the market basket reflects the average 
change in the price of goods and services comprising routine, 
ancillary, and special care unit hospital inpatient services. Based 
on IGI's 2011 second quarter forecast of the hospital market basket 
increase (as discussed in Appendix B of this final rule), the most 
recent forecast of the hospital market basket increase for FY 2012 
is 3.0 percent. Thus, for FY 2012, the update to the average 
standardized amount is 1.9 percent for hospitals in all areas (that 
is, the FY 2012 estimate of the market basket rate-of-increase of 
3.0 percent less an adjustment of 1.0 percentage point for 
multifactor productivity and less 0.1 percentage point). For 
hospitals that do not submit quality data pursuant to section 
1886(b)(3)(B)(viii), the estimated update to the operating 
standardized amount is -0.1 percent (that is, the FY 2012 estimate 
of the market basket rate-of-increase of 3.0 percent, less 2.0 
percentage points for failure to submit data under the IQR program, 
less an adjustment of 1.0 percentage point for multifactor 
productivity, and less 0.1 percentage point) The standardized 
amounts in Tables 1A through 1C that are published in section VI. of 
this Addendum and available via the Internet reflect these 
differential amounts.
    Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act and states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located 
in any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for FY 2003 for hospitals in a 
large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount is subject to the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act, as amended by 
sections 3401(a) and 10319(a) of the Affordable Care Act (that is, 
the same update factor as for all other hospitals subject to the 
IPPS). Accordingly, we are finalizing an applicable percentage 
increase to the Puerto Rico-specific standardized amount of 1.9 
percent.
    Although the update factors for FY 2012 are set by law, we are 
required by section 1886(e)(4) of the Act to recommend, taking into 
account MedPAC's recommendations, appropriate update factors for FY 
2012 for both IPPS hospitals and hospitals and hospital units 
excluded from the IPPS. Section 1886(e)(5)(A) of the Act requires 
that we publish our proposed recommendations in the Federal Register 
for public comment. Our recommendation on the update factors is set 
forth in Appendix B of this final rule.

4. Other Adjustments to the Average Standardized Amount

    As in the past, we are adjusting the FY 2012 standardized amount 
to remove the effects of the FY 2011 geographic reclassifications 
and outlier payments before applying the FY 2012 updates. We then 
apply budget neutrality offsets for outliers and geographic 
reclassifications to the standardized amount based on FY 2012 
payment policies.
    We do not remove the prior year's budget neutrality adjustments 
for reclassification and recalibration of the DRG weights and for 
updated wage data because, in accordance with sections 
1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate 
payments after updates in the DRG relative weights and wage index 
should equal estimated aggregate payments prior to the changes. If 
we removed the prior year's adjustment, we would not satisfy these 
conditions.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making changes that are required to be 
budget neutral (for example, changes to DRG classifications, 
recalibration of the DRG relative weights, updates to the wage 
index, and different geographic reclassifications). We include 
outlier payments in the simulations because they may be affected by 
changes in these parameters.
    Consistent with our methodology established in the FY 2011 IPPS/
LTCH final rule (75 FR 50422 through 50433), because IME Medicare 
Advantage payments are made to IPPS hospitals under section 1886(d) 
of the Act, we believe these payments must be part of these budget 
neutrality calculations. However, we note that it is not necessary 
to include Medicare Advantage IME payments in the outlier threshold 
calculation or the outlier offset to the standardized amount because 
the statute requires that outlier payments be not less than 5 
percent nor more than 6 percent of total ``operating DRG payments,'' 
which does not include IME and DSH payments. In order to account for 
these Medicare Advantage IME payments in determining the budget 
neutrality adjustments for this final rule, we identified Medicare 
Advantage claims from IPPS teaching hospitals in the MedPAR data. 
Consistent with our methodology established in the FY 2011 IPPS/LTCH 
final rule (75 FR 50422-50423), we first searched the MedPAR file 
for all claims with an IME payment greater than zero. We then 
filtered these claims for a subset of claims with a GHO Paid 
indicator with a value of ``1'' or if the IME payment field was 
equal to the DRG payment field. The GHO Paid indicator with a value 
of ``1'' in the MedPAR file indicates that the claim was paid by a 
Medicare Advantage plan (other than the IPPS IME payment specified 
at Sec.  412.105(g)). For these Medicare Advantage claims from IPPS 
teaching hospitals, we computed a transfer-adjusted CMI by provider 
based on the FY 2011 MS-DRG GROUPER Version 28.0 assignment and 
relative weights. We also computed a transfer-adjusted CMI for these 
Medicare

[[Page 51787]]

Advantage claims from IPPS teaching hospitals based on the FY 2012 
MS-DRG GROUPER Version 29.0 assignments and relative weights. These 
transfer-adjusted CMIs (and corresponding case counts) were used to 
calculate an IME teaching add-on payment in accordance with Sec.  
412.105(g). The total Medicare Advantage IME payment amount was then 
added to the total Federal payment amount for each provider (where 
applicable) in order to account for the Medicare Advantage IME 
payment in determining the budget neutrality adjustments. We note 
that we did not include Medicare Advantage IME claims when 
estimating outlier payments for providers because Medicare Advantage 
claims are not eligible for outlier payments under the IPPS.
    Also, for this final rule, in order to ensure that we capture 
only fee for service claims, we are only including claims with a 
``Claim Type'' of 60 (which is a field on the MedPAR file that 
indicates a claim is a fee for service claim).
    Additionally, consistent with our methodology established in the 
FY 2011 IPPS/LTCH final rule (75 FR 50422-50423), we examined the 
MedPAR and removed pharmacy charges for antihemophilic blood factor 
(which are paid separately under the IPPS) with an indicator of 
``3'' for blood clotting with a revenue code of ``0636''from the 
covered charge field for the budget neutrality adjustments. We also 
removed organ acquisition charges from the covered charge field for 
the budget neutrality adjustments because organ acquisition is a 
pass-through payment not paid under the IPPS.
    Comment: One commenter noted that it is still likely that CMS is 
including charges for anti-hemophilic blood factor (which are paid 
separately under the IPPS) for the budget neutrality adjustments. 
The commenter explained that the majority of patients receiving 
blood clotting drugs have a pharmacy indicator of ``5,'' which 
denotes ``general drugs and/or IV therapy and blood clotting 
drugs.'' The commenter searched the MedPAR file and found 48,494 
claims with a pharmacy indicator of ``5'' and 715 claims with a 
pharmacy indicator of ``3.'' Based on this analysis the commenter 
concluded that a majority of anti hemophilic blood factor claims 
contain an indicator of ``5'' rather than ``3.'' The commenter 
requested that CMS develop a method to identify and separate the 
charges for blood clothing drugs from other pharmacy charges for 
blood factor claims with an indicator of ``5.'' The commenter also 
stated that, alternatively, CMS could remove all pharmacy charges 
for code ``5'' claims that are projected to qualify as outliers 
under the FY 2012 proposed rule in situations where no outlier 
payments for FY 2010 were shown on the claims, but the patients 
would have qualified as outliers in FY 2010 based on the MedPAR 
claims for covered charges (which include charges for anti-
hemophilic drugs). The commenter explained that anti-hemophilic 
blood factor are typically included in the covered charges but are 
excluded by the PRICER program from the charges used to pay the 
outlier. In many of these cases an outlier payment would have been 
made if the covered charges were used but once the PRICER program 
excluded pharmacy charges for blood factor claims with an indicator 
of ``5'', no outlier payment was made.
    Response: We appreciate the commenter's insights and are 
studying methods to uniquely identify anti-hemophilic blood factor 
charges in our MedPAR claims database with an indicator of ``5.'' It 
is possible that a change would be required to the MedPAR file, 
which could delay implementation, depending on the time needed to 
adopt the systems change. Additionally, we thank the commenter for 
providing an alternative methodology to identify anti-hemophilic 
blood factor charges with an indicator of ``5.'' However, we are not 
able to determine if the charges the commenter is excluding are only 
charges related to anti-hemophilic blood factor, and we are 
concerned that this method could exclude other charges that are not 
related to these items. Therefore, we prefer to develop a 
methodology that is more specific so that charges that are not 
related to antihemophilic blood factor are not excluded.

a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment

    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning 
in FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that 
aggregate payments to hospitals are not affected. As discussed in 
section II. of the preamble of this final rule, we normalized the 
recalibrated DRG weights by an adjustment factor so that the average 
case weight after recalibration is equal to the average case weight 
prior to recalibration. However, equating the average case weight 
after recalibration to the average case weight before recalibration 
does not necessarily achieve budget neutrality with respect to 
aggregate payments to hospitals because payments to hospitals are 
affected by factors other than average case weight. Therefore, as we 
have done in past years, we are making a budget neutrality 
adjustment to ensure that the requirement of section 
1886(d)(4)(C)(iii) of the Act is met.
    Section 1886(d)(3)(E)(i) of the Act requires us to update the 
hospital wage index on an annual basis beginning October 1, 1993. 
This provision also requires us to make any updates or adjustments 
to the wage index in a manner that ensures that aggregate payments 
to hospitals are not affected by the change in the wage index. 
Section 1886(d)(3)(E)(i) of the Act requires that we implement the 
wage index adjustment in a budget neutral manner. However, section 
1886(d)(3)(E)(ii) of the Act sets the labor-related share at 62 
percent for hospitals with a wage index less than or equal to 1.0, 
and section 1886(d)(3)(E)(i) of the Act provides that the Secretary 
shall calculate the budget neutrality adjustment for the adjustments 
or updates made under that provision as if section 1886(d)(3)(E)(ii) 
of the Act had not been enacted. In other words, this section of the 
statute requires that we implement the updates to the wage index in 
a budget neutral manner, but that our budget neutrality adjustment 
should not take into account the requirement that we set the labor-
related share for hospitals with indices less than or equal to 1.0 
at the more advantageous level of 62 percent. Therefore, for 
purposes of this budget neutrality adjustment, section 
1886(d)(3)(E)(i) of the Act prohibits us from taking into account 
the fact that hospitals with a wage index less than or equal to 1.0 
are paid using a labor-related share of 62 percent. Consistent with 
current policy, for FY 2012, we are adjusting 100 percent of the 
wage index factor for occupational mix. We describe the occupational 
mix adjustment in section III.C. of the preamble of this final rule.
    For FY 2012, to comply with the requirement that DRG 
reclassification and recalibration of the relative weights be budget 
neutral for the Puerto Rico standardized amount and the hospital-
specific rates, we used FY 2010 discharge data to simulate payments 
and compared aggregate payments using the FY 2011 labor-related 
share percentages, the FY 2011 relative weights, and the FY 2011 
pre-reclassified wage data to aggregate payments using the FY 2011 
labor-related share percentages, the FY 2012 relative weights, and 
the FY 2011 pre-reclassified wage data. Based on this comparison, we 
computed a budget neutrality adjustment factor equal to 0.997903. As 
discussed in section IV. of this Addendum, we also apply the DRG 
reclassification and recalibration budget neutrality factor of 
0.997903 to the hospital-specific rates that are effective for cost 
reporting periods beginning on or after October 1, 2011.
    In order to meet the statutory requirements that we do not take 
into account the labor-related share of 62 percent when computing 
wage index budget neutrality, it was necessary to use a three-step 
process to comply with the requirements that DRG reclassification 
and recalibration of the relative weights and the updated wage index 
and labor-related share have no effect on aggregate payments for 
IPPS hospitals. We first determined a DRG reclassification and 
recalibration budget neutrality factor of 0.997903 by using the same 
methodology described above to determine the DRG reclassification 
and recalibration budget neutrality factor for the Puerto Rico 
standardized amount and hospital-specific rates. Secondly, to 
compute a budget neutrality factor for wage index and labor-related 
share changes, we used FY 2010 discharge data to simulate payments 
and compared aggregate payments using FY 2012 relative weights and 
FY 2011 pre-reclassified wage indices, and applied the FY 2011 
labor-related share of 68.8 percent to all hospitals (regardless of 
whether the hospital's wage index was above or below 1.0) to 
aggregate payments using the FY 2012 relative weights and the FY 
2012 pre-reclassified wage indices, and applied the labor-related 
share for FY 2012 of 68.8 percent to all hospitals (regardless of 
whether the hospital's wage index was above or below 1.0). In 
addition, we applied the DRG reclassification and recalibration 
budget neutrality factor (derived in the first step) to the rates 
that were used to simulate payments for this comparison of aggregate 
payments from FY 2011 to FY 2012. By applying this methodology, we 
determined a budget neutrality factor of

[[Page 51788]]

1.000558 for changes to the wage index. Finally, we multiplied the 
DRG reclassification and recalibration budget neutrality factor of 
0.997903 (derived in the first step) by the budget neutrality factor 
of 1.000558 for changes to the wage index (derived in the second 
step) to determine the DRG reclassification and recalibration and 
updated wage index budget neutrality factor of 0.99846.

b. Reclassified Hospitals--Budget Neutrality Adjustment

    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the 
Act provides for the reclassification of hospitals based on 
determinations by the MGCRB. Under section 1886(d)(10) of the Act, a 
hospital may be reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is 
required to adjust the standardized amount to ensure that aggregate 
payments under the IPPS after implementation of the provisions of 
sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal 
to the aggregate prospective payments that would have been made 
absent these provisions. We note that the wage index adjustments 
provided under section 1886(d)(13) of the Act are not budget 
neutral. Section 1886(d)(13)(H) of the Act provides that any 
increase in a wage index under section 1886(d)(13) shall not be 
taken into account ``in applying any budget neutrality adjustment 
with respect to such index'' under section 1886(d)(8)(D) of the Act. 
To calculate the budget neutrality factor for FY 2012, we used FY 
2010 discharge data to simulate payments and compared total IPPS 
payments with FY 2012 relative weights, FY 2012 labor-related share 
percentages, and FY 2012 wage data prior to any reclassifications 
under sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to 
total IPPS payments with FY 2012 relative weights, FY 2012 labor-
related share percentages, and FY 2012 wage data after such 
reclassifications. Based on these simulations, we calculated an 
adjustment factor of 0.991493 to ensure that the effects of these 
provisions are budget neutral, consistent with the statute.
    The FY 2012 budget neutrality adjustment factor is applied to 
the standardized amount after removing the effects of the FY 2011 
budget neutrality adjustment factor. We note that the FY 2012 budget 
neutrality adjustment reflects FY 2012 wage index reclassifications 
approved by the MGCRB or the Administrator. We note that, for this 
final rule, as discussed in section III.B. of the preamble to this 
final rule, section 3137(c) of the Affordable Care Act resulted in 
some additional hospitals receiving reclassifications, or some 
hospitals receiving reclassifications to a different area. These 
reclassifications are included in the calculation of 
reclassification budget neutrality.

c. Rural Floor and Imputed Floor Budget Neutrality Adjustment

    As noted above, as discussed in section III.F.2. of the preamble 
of this final rule, we are extending the imputed floor for 2 more 
years. We make an adjustment to the wage index to ensure that 
aggregate payments to hospitals after implementation of the rural 
floor under section 4410 of the BBA (Pub. L. 105-33) and the imputed 
floor under Sec.  412.64(h)(4) of the regulations are not affected. 
As discussed in section III.F. of the preamble of this final rule, 
consistent with section 3141 of the Affordable Care Act, the budget 
neutrality adjustment for the rural and imputed floors is a national 
adjustment to the wage index.
    As discussed in section III.F.2. of the preamble of this final 
rule, for the FY 2012 wage index, there is one new hospital in rural 
Puerto Rico when previously there were none. Therefore, for FY 2012, 
we are calculating a national rural Puerto Rico wage index (used to 
adjust the labor-related share of the national standardized amount 
for hospitals in Puerto Rico which receive 75 percent of the 
national standardized amount) and a rural Puerto Rico-specific wage 
index (which is used to adjust the labor-related share of the Puerto 
Rico-specific standardized amount for hospitals in Puerto Rico that 
receive 25 percent of the Puerto Rico-specific standardized amount). 
As the new rural Puerto Rico hospital has no established wage data, 
our calculation is based on the policy adopted in the FY 2008 IPPS 
final rule with comment period (72 FR 47323). A complete discussion 
on the computation of the rural Puerto Rico wage index can be found 
in section III.G. of the preamble of this final rule. In past fiscal 
years, when there was no rural Puerto Rico wage index, we applied 
the national rural floor budget neutrality wage index factor to the 
national wage indices used to adjust the labor-related share for the 
national standardized amount (including the national Puerto Rico 
wage indexes) but did not apply this factor to the Puerto Rico-
specific wage indices. We did not apply the national rural floor 
budget neutrality wage index factor to the Puerto Rico-specific wage 
indices (nor did we compute a Puerto Rico-specific rural floor 
budget neutrality wage index factor) because there were no rural 
hospitals in Puerto Rico. As mentioned above, for FY 2012, there is 
now one rural Puerto Rico hospital and, therefore, it is necessary 
to compute and apply a Puerto Rico-specific rural floor budget 
neutrality wage index factor (in addition to the national factor).
    To calculate the national rural floor and imputed floor budget 
neutrality factor and Puerto Rico-specific rural floor budget 
neutrality adjustment factor, we used FY 2010 discharge data and FY 
2012 post-reclassified national and Puerto Rico-specific wage 
indices to simulate IPPS payments. First, we compared the national 
and Puerto Rico-specific simulated payments without the national 
rural floor and imputed floor and Puerto Rico-specific rural floor 
applied to national and Puerto Rico-specific simulated payments with 
the national rural floor and imputed floor and Puerto Rico-specific 
rural floor applied to determine the national rural budget 
neutrality adjustment factor of 0.991007 and the Puerto Rico-
specific budget neutrality adjustment factor of 0.989417. The 
national adjustment was applied to the national wage indices to 
produce a national rural floor budget neutral wage index and the 
Puerto Rico-specific adjustment was then applied to the Puerto Rico-
specific wage indices to produce a Puerto Rico-specific rural floor 
budget neutral wage index.

d. Adjustment in Light of Court Decision in Cape Cod v. Sebelius

    In the FY 2012 IPPS/LTCH PPs proposed rule (76 FR 26022), we 
proposed a 1.1 percent adjustment to the standardized amount in 
recognition of the decision of Cape Cod v. Sebelius (630 F.3d 203 
(DC Cir. 2011)) (hereafter referred to as ``Cape Cod''). However, we 
emphasized that remand proceedings in that case were not complete at 
that time and that the proposal reflected the timing of the 
development of the proposed rule and not a final decision as to how 
the remand will proceed. In Cape Cod, the plaintiff hospitals 
challenged the rural floor budget neutrality adjustments for FY 2007 
and FY 2008. In its opinion, the DC Circuit Court found that section 
4410 of the Balanced Budget Act of 1997 (BBA) Public Law 105-33, 
which authorized both the rural floor and rural floor budget 
neutrality, would not permit CMS to ignore prior year errors in 
calculating rural floor budget neutrality adjustments. The case was 
remanded to CMS for further proceedings consistent with the DC 
Circuit Court's opinion.
    While Cape Cod involved only FYs 2007 and 2008, in the FY 2012 
proposed rule we stated that the decision may have implications for 
FY 2012 payment rates, depending on the ultimate result of the 
remand proceedings. In light of that opinion and the timing of the 
rulemaking development process, we proposed to restore to the FY 
2012 standardized amount the offset for the rural floor and imputed 
floor on the standardized amount over FY 1998 through 2006. We 
stated by making this proposal for FY 2012, all affected parties 
would have an opportunity to consider and comment on the proposed 
adjustment. Given that the court had remanded the case to the 
Secretary for FYs 2007 and 2008 and those remand proceedings were 
not yet completed at the time of issuance of the proposed rule, we 
indicated that the final rule might adopt a different approach, 
depending on public comments or developments in the remand 
proceedings.
    For purposes of the proposed rule, to assess the overall impact 
of applying the rural floor budget neutrality adjustment to the 
standardized amount for the years between FY 1998 and FY 2006, we 
remodeled the recalibration/wage index budget neutrality factor for 
the years at issue (for which data were available), excluding the 
effect of the rural floor adjustment. For example, to compute the 
revised recalibration/wage index budget neutrality factor for FY 
2000, we compared the FY 1999 pre-reclassified wage data with no 
rural floor to FY 2000 pre-reclassified wage data with no rural 
floor. We then compared the revised factor to the wage/recalibration 
budget neutrality factor derived under the original modeling logic; 
that is, where the current year's pre-reclassified wage data had a 
rural floor applied. The percent change in these

[[Page 51789]]

two factors was then calculated for each remodeled year.
    Remodeled years from FY 1998 to FY 2004 showed an approximate 
0.1 percentage point increase between the factors for each year. 
This increase results in a total of 0.7 percentage point, which we 
proposed to return to the standardized amount in setting the FY 2012 
IPPS rates. Beginning with FY 2005 through FY 2006, the number of 
States for which a floor wage index was available was extended via 
the imputed floor policy. With additional States receiving increases 
in payment due to the application of the imputed floor, we estimated 
the combined effects of the rural and imputed floor to be 
approximately 0.2 percentage point per year. This resulted in a 
total of 0.4 percentage point, which we proposed to return to the 
standardized amount in setting the FY 2012 IPPS rates. Therefore, to 
remove the effects of the rural floor from the standardized amount 
for FY 1998 through FY 2006, we proposed a one-time adjustment of 
1.1 percentage points, which increases the standardized amount (0.7 
percentage point plus 0.4 percentage point for a factor of 1.011). 
We noted that, in the FY 2008 IPPS final rule with comment period, 
we applied a one-time adjustment of 1.002214 to the FY 2008 
standardized amount to address a single year transition (from FY 
2007 to FY 2008) to a noncumulative system of the rural floor budget 
neutrality adjustment. The adjustment of 1.002214 to the FY 2008 
standardized amount reflected the increase to the rates to remove 
the effects of the rural floor budget neutrality adjustment from FY 
2007. Because this 1.002214 factor remains on the rate, we did not 
include an adjustment for FY 2007 in our calculation above.
    Comment: Commenters supported CMS' proposal to provide a 1.1 
percent adjustment in setting FY 2012 IPPS rates in light of the 
Court's decision in Cape Cod Hospital vs. Sebelius. Several 
commenters requested that CMS provide complete explanations of the 
methodologies and data used in the calculation of the 1.1 and 0.9 
percent adjustments to the standardized amount and hospital-specific 
rate, respectively, for FYs 1998 through 2006. The commenters 
suggested that such information would allow them to verify the 
adjustment. These commenters, however, did not propose an adjustment 
different from the 1.1 percent included in the FY 2012 proposed 
rule.
    Response: In response to these commenters' comments, we are 
providing more detail on how we calculated the one-time adjustment 
for purposes of determining the FY 2012 IPPS rates. All of the data 
files discussed in this response are available to the public for 
download at http://www.cms.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    We first estimated the percentage by which the budget neutrality 
factors for wage and recalibration differed due to applying a 
cumulative budget rural floor for FYs 1998 through FY 2006. In 
calculating the original wage and recalibration budget neutrality 
factors, we simulated payments with the prior year's pre-
reclassified wage data that had no rural floor applied and prior 
year DRG assignments and weights. We then simulated payments with 
the current year's pre reclassified wage data with a rural floor 
applied and new DRG assignments and weights. These two simulations 
were compared against each other. The revised modeling approach, 
which was instituted and described in the FY 2008 IPPS final rule 
with comment period, calculates the wage and recalibration budget 
neutrality factor by simulating payments with the prior year pre 
reclassified wage data with no rural floor applied and prior year 
DRG assignments and weights and comparing those to simulated 
payments with the current year's pre-reclassified wage data with no 
rural floor applied and new DRG assignments and weights.
    To estimate the percentage contribution of the rural floor to 
the wage and recalibration budget neutrality, we reconstructed 
payment data and budget neutrality models for the years involved in 
this case and then applied both the original and revised budget 
neutrality calculation methodology within the model. Some fiscal 
years (for example, FY 1998, FY 2001, and FY 2005) were more 
challenging to model than other fiscal years because multiple 
statutory changes in those years led to a more complicated payment 
structure. Each year, impact files are prepared to analyze the 
payment impact of policies and payment changes put forth in the IPPS 
final rules and contain the variables needed to simulate payments 
within each year. These impact files did not hold a wage index 
variable that reflected the ``new'' pre-reclassified wage data with 
no floor applied. From FY 2003 forward, we reconstructed pre 
reclassified wage index values with and without a floor applied 
using the wage and hour data files. For years prior to FY 2003, the 
wage and hour data files were not available so we set the wage index 
from the standardization file as the pre reclassified no floor wage 
index. Standardization files are prepared each year in conjunction 
with each final rule and contain pre-reclassified, pre-floor wage 
index values for use in the process of recalibrating the DRG 
relative weights. Due to the time constraints with preparing the 
final rule each year, the wage index values contained in the 
standardization files are typically prepared as soon as there is 
wage data available and would reflect a pre-reclassified, pre-floor 
wage index value. Although they may not reflect all corrections and 
edits to the wage data that occurred in a particular year, the 
majority of wage index values contained in these files should match 
the correct pre-reclassified, pre-floor wage index values. 
Therefore, we believe these files are sufficient to approximate the 
payment effects of the rural floor policy. To establish a rural 
floor for each State, we used the wage index values for providers 
physically located in the rural area for their States. We then 
compared each provider's pre-reclassified no floor wage index to the 
rural floor; if the pre-reclassified no floor wage index was lower, 
the provider's wage index value was set equal to its State rural 
floor wage index. This established a pre-reclassified wage index 
with the rural floor.
    For FY 2003, FY 2004, and FY 2006, we reconstructed pre-
reclassified wage index values with and without a rural floor using 
the wage data files. Because the wage data files typically reflect 
the final wage data for the year and contain the most recent updates 
(minor wage data updates can occur throughout the year if there were 
mistakes in the data on the part of the provider and/or CMS), these 
files produced slightly different national average hourly wage 
values than the values published in the Federal Register for the 
IPPS final rules. Again, the majority of wage index values contained 
in these files should match the correct pre-reclassified, pre-floor 
wage index values. Therefore, we believe these files are sufficient 
to approximate the payment effects of the rural floor policy. We 
followed the same steps that we took for fiscal years prior to FY 
2003 in building pre-reclassified with floor wage index values using 
the pre-floor wage index values for the rural providers to set the 
rural floors. Once the ``with'' and ``without'' rural floor wage 
index variables were constructed, they were merged into the impact 
files. Using payment simulation programs and rates from the 
historical budget neutrality libraries, we were able to estimate the 
effect of the rural floor policy for FY 1999, FY 2000, FY 2002, FY 
2003, FY 2004, and FY 2006. We used these resulting estimates to 
assume a rural floor effect for the years we were unable to remodel 
in full because of the complexity of the payment structure in those 
years as noted above, that is, FY 1998, FY 2001, and FY 2005.
    For each separate fiscal year remodeled, we simulated payments 
with the prior year pre-reclassified wage data with no rural floor 
applied and prior year DRG assignments and weights. We compared 
these to simulated payments with the current year's pre-reclassified 
wage data with no rural floor applied (constructed as described in 
the preceding paragraph) and new DRG assignments and weights. For 
example, for FY 2000, we compared the FY 1999 pre-reclassified wage 
data with no rural floor to FY 2000 pre-reclassified wage data with 
no rural floor. This produced a wage and recalibration budget 
neutrality factor that did not carry any rural floor effects. Using 
the same data set, we then repeated the original calculation 
methodology that retained prior years' rural floor budget neutrality 
on the standardized amount; that is, we simulated payments with the 
prior year pre reclassified wage data with no floor applied and 
prior year DRG assignments and weights and then compared them to 
simulated payments with the new year's pre reclassified wage data 
with floor applied (constructed as described in the preceding 
paragraph) and new DRG assignments and weights. We then calculated 
the percent change between the resulting budget neutrality factors 
to determine the percent contribution of the rural floor to the 
budget neutrality adjustment. The ``original'' methodology under 
which the rural floor was included in the wage and recalibration 
budget neutrality calculation was repeated on the data set(s) used 
for this estimate rather than using the actual wage and 
recalibration factors carried on the rates in order to limit the 
percent change between the two numbers solely to the application of 
the rural floor and to prevent introducing differences that would be 
due to data shifts between the original files and the ones used for 
this estimate.

[[Page 51790]]

----------------------------------------------------------------------------------------------------------------
                                                                                         Percent change  between
                                           Original budget           Revised budget         estimated  budget
     Remodeled budget neutrality       neutrality method  with     neutrality method       neutrality  factors
                                        rural floor  included    excluding rural  floor         (percent)
----------------------------------------------------------------------------------------------------------------
FY 1999..............................                 0.999053                 0.999666                     0.10
FY 2000..............................                 1.007418                 1.008316                     0.10
FY 2002..............................                 0.996092                 0.997134                     0.10
FY 2003..............................                 0.993478                 0.994443                     0.10
FY 2004..............................                 1.003011                 1.003932                     0.10
FY 2006..............................                 1.001375                 1.003103                     0.20
----------------------------------------------------------------------------------------------------------------

    We note that there is no difference between applying the 
cumulative and non-cumulative rural floor budget neutrality 
methodology in FY 1998 because there are no prior year payments to 
FY 1998 where the rural floor was applied. The first year in which 
there is an impact of the cumulative methodology is FY 1999, which 
carries forward the budget neutrality adjustment made in FY 1998. 
The only significant change in rural floor wage index policy (during 
the FYs 1999 through 2006) happened in FY 2005 when the imputed 
floor policy was established. The imputed floor policy provided a 
higher wage index to hospitals in States that have no rural areas 
and increases the impact of the rural floor on the budget neutrality 
calculation. In all the years we modeled through and including FY 
2004, the percentage change in the wage and recalibration budget 
neutrality showed a 0.1 percent effect for the rural floor within 
each year. For FY 2006 and FY 2007, the estimate for the rural floor 
showed a 0.2 percent effect. Therefore, we assume that, similar to 
FY 2006, FY 2005 would also show a 0.2 percent effect because that 
was the year the imputed floor was first implemented. We further 
assume that any year prior to FY 2004 for which budget neutrality 
was not remodeled (that is, FY 1998 and FY 2001) would show a 0.1 
percent effect due to the rural floor. Once the effects within each 
year were determined, we determined a cumulative effect of 1.1 
percentage points.
    We note that, in the FY 2008 IPPS final rule with comment 
period, we applied a one-time adjustment of 1.002214 to the FY 2008 
standardized amount to address a single year transition (from FY 
2007 to FY 2008) to a noncumulative system of the rural floor budget 
neutrality adjustment. This adjustment of 1.002214 to the FY 2008 
standardized amount reflected the increase to the rates to remove 
the effects of the rural floor budget neutrality adjustment from FY 
2007. Because this 1.002214 factor remains on the rate, we do not 
include an adjustment for FY 2007 in the calculation described 
above.

e. Case-Mix Budget Neutrality Adjustment

(1) Adjustment to the FY 2012 IPPS Standardized Amount for the 
Prospective Adjustment for FY 2010 and Subsequent Years Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(A)(vi) 
of the Act

    As stated earlier, beginning in FY 2008, we adopted the MS-DRG 
patient classification system for the IPPS to better recognize 
patients' severity of illness in Medicare payment rates. In the FY 
2008 IPPS final rule with comment period (73 FR 47175 through 
47186), we indicated that we believe the adoption of the MS-DRGs had 
the potential to lead to increases in aggregate payments without a 
corresponding increase in actual patient severity of illness due to 
the incentives for changes in documentation and coding. In that 
final rule, using the Secretary's authority under section 
1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by 
adjusting the national standardized amounts to eliminate the effect 
of changes in documentation and coding that do not reflect real 
change in case-mix, we established prospective documentation and 
coding adjustments of -1.2 percent for FY 2008, -1.8 percent for FY 
2009, and -1.8 percent for FY 2010 (for a total adjustment of -4.8 
percent). On September 29, 2007, Public Law 110-90 was enacted. 
Section 7 of Public Law 110-90 included a provision that reduces the 
documentation and coding adjustment for the MS-DRG system that we 
adopted in the FY 2008 IPPS final rule with comment period to -0.6 
percent for FY 2008 and -0.9 percent for FY 2009. To comply with the 
provision of section 7(a) of Public Law 110-90, in a final rule that 
appeared in the Federal Register on November 27, 2007 (72 FR 66886), 
we changed the IPPS documentation and coding adjustment for FY 2008 
to -0.6 percent, and revised the FY 2008 national standardized 
amounts (as well as other payment factors and thresholds) 
accordingly, with these revisions being effective as of October 1, 
2007. For FY 2009, section 7(a) of Public Law 110-90 required a 
documentation and coding adjustment of -0.9 percent instead of the -
1.8 percent adjustment specified in the FY 2008 IPPS final rule with 
comment period. As required by statute, we applied a documentation 
and coding adjustment of -0.9 percent to the FY 2009 IPPS national 
standardized amounts. The documentation and coding adjustments 
established in the FY 2008 IPPS final rule with comment period are 
cumulative. As a result, the -0.9 percent documentation and coding 
adjustment in FY 2009 was in addition to the -0.6 percent adjustment 
in FY 2008, yielding a combined effect of -1.5 percent.
    In the FY 2010 IPPS proposed rule and final rule (74 FR 24092 
through 24101 and 43768 through 43772, respectively), we discussed 
our analysis of FY 2008 claims data and did not apply any additional 
documentation and coding adjustments to the average standardized 
amounts under section 1886(d) of the Act. We refer readers to these 
rules for a detailed description of our analysis, responses to 
comments, and final policy respectively. After analysis of the FY 
2009 claims data for the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50057 through 50073), we found a total prospective documentation and 
coding effect of 1.054. After accounting for the -0.6 percent and 
the -0.9 percent documentation and coding adjustments in FYs 2008 
and 2009, we found a remaining documentation and coding effect of 
3.9 percent. Therefore, we determined that an additional cumulative 
adjustment of -3.9 percent would be necessary to meet the 
requirements of section 7(b)(1)(A) of Public Law 110-90 to make an 
adjustment to the average standardized amounts in order to eliminate 
the full effect of the documentation and coding changes on future 
payments. As we discussed in the FY 2011 IPPS/LTCH PPS final rule, 
we did not propose a prospective adjustment under section 7(b)(1)(A) 
of Public Law 110-90 for FY 2011 (75 FR 23868 through 23870). We 
note that, as a result, payments in FY 2011 (and in each future year 
until we implement the requisite adjustment) were 3.9 percent higher 
than they would have been if we had implemented an adjustment under 
section 7(b)(1)(A) of Public Law 110-90. Our actuaries estimate that 
this 3.9 percentage point increase will result in an aggregate 
payment of approximately $4 billion. We refer readers to the FY 2011 
IPPS/LTCH PPS final rule for a detailed description of our analysis, 
responses to comments, and final policy (75 FR 50057 through 50073).
    In the proposed rule, we stated it was imperative that CMS make 
a prospective adjustment amount in FY 2012 to prevent the continued 
accumulation of unrecoverable overpayments. After consideration of 
the public comments we received, and in keeping with our 
longstanding policy to mitigate, when possible, the effects of 
significant downward adjustments on hospitals to avoid what could be 
widespread, disruptive effects of such adjustments on hospitals, we 
are finalizing a prospective adjustment of -2.0 percent instead of 
the -3.15 percent prospective adjustment that was proposed. We refer 
the reader to section II.D. of the preamble of this final rule for 
more discussion. In addition, for a complete discussion on our 
proposed and final documentation and coding adjustment to the 
hospital-specific rates, we refer readers to section II.D.2.c.of 
this Addendum.

[[Page 51791]]

(2) Adjustment to the FY 2012 IPPS Standardized Amount for the 
Recoupment or Repayment Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90

    As indicated in section II.D.4. in the preamble to this final 
rule, the change due to documentation and coding that did not 
reflect real changes in case-mix for discharges occurring during FY 
2008 and FY 2009 exceeded the -0.6 and -0.9 percent prospective 
documentation and coding adjustment applied under section 7(a) of 
Public Law 110-90 for those 2 years respectively by 1.9 percentage 
points in FY 2008 and 3.9 percentage points in FY 2009. In total, 
this change exceeded the cumulative prospective adjustments by 5.8 
percentage points. Our actuaries estimated that this 5.8 percentage 
point increase resulted in an increase in aggregate payments of 
approximately $6.9 billion. In the FY 2011 IPPS/LTCH PPS final rule, 
we determined that an aggregate adjustment of -5.8 percent in FYs 
2011 and 2012, subject to actuarial adjustment to reflect 
accumulated interest, would be necessary in order to meet the 
requirements of section 7(b)(1)(B) of Public Law 110-90 to adjust 
the standardized amounts for discharges occurring in FYs 2010, 2011, 
and/or 2012 to offset the estimated amount of the increase in 
aggregate payments (including interest) in FYs 2008 and 2009.
    It is often our practice to phase in rate adjustments over more 
than one year in order to moderate the effect on rates in any one 
year. Therefore, as we specified in the FY 2011 IPPS/LTCH PPS final 
rule (75 FR 50425), we made an adjustment in FY 2011 to the 
standardized amount of -2.9 percent, representing half of the 
aggregate adjustment required under section 7(b)(1)(B) of Public Law 
110-90, for FY 2011. As we have previously noted, unlike the 
prospective adjustment to the standardized amounts under section 
7(b)(1)(A) of Public Law 110-90 described earlier, the recoupment or 
repayment adjustment to the standardized amounts under section 
7(b)(1)(B) of Public Law 110-90 is not cumulative, but would be 
removed for subsequent fiscal years once we have offset the increase 
in aggregate payments for discharges for FY 2008 expenditures and FY 
2009 expenditures. We refer readers to the FY 2011 IPPS/LTCH PPS 
final rule for a detailed description of our analysis, responses to 
comments, and final policy (75 FR 50057 through 50073).
    While we stated in the FY 2011 IPPS/LTCH PPS final rule the need 
to potentially adjust the remaining -2.9 percent estimate to account 
for accumulated interest, our actuaries have determined that there 
has been no significant interest accumulation and that no additional 
adjustment will be required. Therefore, in section II.D. of the 
preamble to this final rule, we finalized our proposal to complete 
the recoupment adjustment according to the timeframes set forth by 
section 7(b)(1)(B) of Public Law 110-90 by implementing the 
remaining -2.9 percent adjustment, in addition to removing the 
effect of the -2.9 percent adjustment to the standardized amount 
finalized in FY 2011.
    Because these adjustments will, in effect, balance out, there 
will be no year-to-year change in the standardized amount due to 
this recoupment adjustment. As this adjustment will complete the 
required recoupment for overpayments due to documentation and coding 
effects on discharges occurring in FYs 2008 and 2009, we anticipate 
removing the effect of this adjustment by adding 2.9 percent to the 
standardized amount in FY 2013. We continue to believe that this is 
a reasonable and fair approach that satisfies the requirements of 
the statute while substantially moderating the financial impact on 
hospitals. We refer the reader to section II.D. of the preamble to 
this final rule for more discussion.

(3) Adjustment to the FY 2012 Puerto Rico Standardized Amount

    As discussed in section II.D.9. of the preamble of this final 
rule, in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 through 
50073), using the same methodology we applied to estimate 
documentation and coding changes under IPPS for non-Puerto Rico 
hospitals, our best estimate, based on the then most recently 
available data (FY 2009 claims paid through March 2010), was that 
for documentation and coding changes that occurred over FY 2008 and 
FY 2009, a cumulative adjustment of -2.6 percent was required to 
eliminate the full effect of the documentation and coding changes on 
future payments from the Puerto Rico-specific rate. In FY 2011, as 
finalized in the FY 2011 IPPS/LTCH PPS final rule (75 FR 50071 
through 50073), we applied an adjustment of -2.6 percent to the 
Puerto Rico-specific rate. Therefore, because the Puerto Rico-
specific rate received a full prospective adjustment of -2.6 percent 
in FY 2011, in section II.D.9. of the preamble of this final rule, 
we finalized our proposal to make no further adjustment for FY 2012. 
For a complete discussion on our final policy, we refer readers to 
section II.D.9. of the preamble of this final rule.

f. Rural Community Hospital Demonstration Program Adjustment

    As discussed in section IV.N. of the preamble to this final 
rule, section 410A of Public Law 108-173 originally required the 
Secretary to establish a demonstration that modifies reimbursement 
for inpatient services for up to 15 small rural hospitals. Section 
410A(c)(2) of Public Law 108-173 requires that ``[i]n conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.''
    Sections 3123 and 10313 of the Affordable Care Act extended the 
demonstration for an additional 5-year period, and allow up to 30 
hospitals to participate in 20 States with low population densities 
determined by the Secretary. (In determining which States to include 
in the expansion, the Secretary is required to use the same criteria 
and data that the Secretary used to determine the States for 
purposes of the initial 5-year period). In the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50426), in order to achieve budget neutrality, we 
adjusted the national IPPS rates by an amount sufficient to account 
for the added costs of this demonstration as described in section 
IV.K. of that final rule. In other words, we applied budget 
neutrality across the payment system as a whole rather than merely 
across the participants of this demonstration, consistent with past 
practice. We stated that we believe that the language of the 
statutory budget neutrality requirement permits the agency to 
implement the budget neutrality provision in this manner. The 
statutory language requires that ``aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have 
paid if the demonstration * * * was not implemented,'' but does not 
identify the range across which aggregate payments must be held 
equal.
    For FY 2012, we proposed the estimated amount for the adjustment 
to the national IPPS rates for FY 2012 to be $52,642,213. For this 
final rule, we determined that for the 25 hospitals participating in 
the demonstration project an estimated amount for the adjustment to 
the national IPPS rates for FY 2012 is $52,452,060. Accordingly, to 
account for the estimated costs of the demonstration for the 
specific time periods as explained in detail in section IV.N. of the 
preamble of this final rule, for FY 2012, we computed a factor of 
0.999487 for the rural community hospital demonstration program 
budget neutrality adjustment that is applied to the IPPS 
standardized rate.
    We noted that because the settlement process for the 
demonstration hospitals' third and fourth year cost reports, that 
is, for cost reporting periods starting in FYs 2007 and 2008, has 
experienced a delay, for the proposed rule, we were unable to state 
the costs of the demonstration corresponding to FYs 2007 and 2008 
for purposes of determining the amount by which the costs of the 
demonstration corresponding to FYs 2007 and 2008 exceeded the amount 
offset by the budget neutrality adjustments for FYs 2007 and 2008. 
As a result, we were unable to propose the specific numeric 
adjustment representing this offsetting process that would be a 
component of the budget neutrality adjustment and that would be 
applied to the national IPPS rates. Therefore, the estimated budget 
neutrality adjustment to the national IPPS rate in the proposed rule 
did not include a component to account for these costs. We indicated 
in the proposed rule that we anticipated that this information may 
be available for the FY 2012 IPPS/LTCH PPS final rule, at which 
time, if data from settled cost reports are available, under our 
proposal, we would incorporate a component into the budget 
neutrality adjustment to the national IPPS rates to account for the 
amount by which the demonstration costs corresponding to FY 2007 and 
FY 2008 exceeded the amount offset by the budget neutrality 
adjustments for FYs 2007 and 2008.
    Similarly, for this final rule, we are unable to identify the 
specific numeric amount representing this offsetting process that 
can be incorporated into the budget neutrality adjustment applied to 
the national IPPS rates

[[Page 51792]]

due to delays in the settlement process for the demonstration 
hospitals' third and fourth year cost reports. We note that we 
anticipate that they may be available for the FY 2013 IPPS/LTCH PPS 
proposed and final rules. Therefore, the estimated adjustment to the 
national IPPS rates in this final rule cannot include a component to 
account for these costs.

g. Outlier Payments

    Section 1886(d)(5)(A) of the Act provides for payments in 
addition to the basic prospective payments for ``outlier'' cases 
involving extraordinarily high costs. To qualify for outlier 
payments, a case must have costs greater than the sum of the 
prospective payment rate for the DRG, any IME and DSH payments, any 
new technology add-on payments, and the ``outlier threshold'' or 
``fixed-loss'' amount (a dollar amount by which the costs of a case 
must exceed payments in order to qualify for an outlier payment). We 
refer to the sum of the prospective payment rate for the DRG, any 
IME and DSH payments, any new technology add-on payments, and the 
outlier threshold as the outlier ``fixed-loss cost threshold.'' To 
determine whether the costs of a case exceed the fixed-loss cost 
threshold, a hospital's CCR is applied to the total covered charges 
for the case to convert the charges to estimated costs. Payments for 
eligible cases are then made based on a marginal cost factor, which 
is a percentage of the estimated costs above the fixed-loss cost 
threshold. The marginal cost factor for FY 2012 is 80 percent, the 
same marginal cost factor we have used since FY 1995 (59 FR 45367).
    In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year are projected to be not less than 5 percent 
nor more than 6 percent of total operating DRG payments plus outlier 
payments. We note that the statute requires outlier payments to be 
not less than 5 percent nor more than 6 percent of total ``operating 
DRG payments'' (which does not include IME and DSH payments) plus 
outlier payments. When setting the outlier threshold, we compute the 
5.1 percent target by dividing the total operating outlier payments 
by the total operating DRG payments plus outlier payments. We do not 
include any other payments such as IME and DSH within the outlier 
target amount. Therefore, it is not necessary to include Medicare 
Advantage IME payments in the outlier threshold calculation. Section 
1886(d)(3)(B) of the Act requires the Secretary to reduce the 
average standardized amount by a factor to account for the estimated 
proportion of total DRG payments made to outlier cases. Similarly, 
section 1886(d)(9)(B)(iv) of the Act requires the Secretary to 
reduce the average standardized amount applicable to hospitals 
located in Puerto Rico to account for the estimated proportion of 
total DRG payments made to outlier cases. More information on 
outlier payments may be found on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.

(1) FY 2012 Outlier Fixed-Loss Cost Threshold

    For FY 2012, we proposed to continue to use the same methodology 
used for FY 2009 (73 FR 48763 through 48766) to calculate the 
outlier threshold. Similar to the methodology used in the FY 2009 
IPPS final rule, for FY 2012, we proposed to apply an adjustment 
factor to the CCRs to account for cost and charge inflation (as 
explained below). As we have done in the past, to calculate the 
proposed FY 2012 outlier threshold, we simulated payments by 
applying proposed FY 2012 rates and policies using cases from the FY 
2010 MedPAR files. Therefore, in order to determine the proposed FY 
2012 outlier threshold, we inflated the charges on the MedPAR claims 
by 2 years, from FY 2010 to FY 2012.
    We proposed to continue to use a refined methodology that takes 
into account the lower inflation in hospital charges that are 
occurring as a result of the outlier final rule (68 FR 34494), which 
changed our methodology for determining outlier payments by 
implementing the use of more current CCRs. Our refined methodology 
uses more recent data that reflect the rate-of-change in hospital 
charges under the new outlier policy.
    Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges per case from the last 
quarter of FY 2009 in combination with the first quarter of FY 2010 
(July 1, 2009 through December 31, 2009) to the last quarter of FY 
2010 in combination with the first quarter of FY 2011 (July 1, 2010 
through December 31, 2010). This rate-of-change was 4.43 percent 
(1.044394) or 9.07 percent (1.090759) over 2 years. As we have done 
in the past, we established the proposed FY 2012 outlier threshold 
using hospital CCRs from the December 2010 update to the Provider-
Specific File (PSF)--the most recent available data at the time of 
the proposed rule.
    As discussed in the FY 2007 IPPS final rule (71 FR 48150), we 
worked with the Office of Actuary to derive the methodology 
described below to develop the CCR adjustment factor. For FY 2012, 
we proposed to continue to use the same methodology to calculate the 
CCR adjustment by using the FY 2010 operating cost per discharge 
increase in combination with the actual FY 2010 operating market 
basket percentage increase determined by IHS Global Insight, Inc. 
(IGI), as well as the charge inflation factor described above to 
estimate the adjustment to the CCRs. (We note that the FY 2010 
actual (otherwise referred to as ``final'') operating market basket 
percentage increase reflects historical data, whereas the published 
FY 2010 operating market basket update factor was based on IGI's 
2009 second quarter forecast with historical data through the first 
quarter of 2009. We also note that while the FY 2010 published 
operating market basket update was based on the FY 2002-based IPPS 
market basket, the actual or ``final'' market basket percentage 
increase is based on the FY 2006-based IPPS market basket. 
Similarly, the FY 2010 published capital market basket update factor 
was based on the FY 2002-based capital market basket and the actual 
or ``final'' capital market basket percentage increase is based on 
the FY 2006-based capital market basket.) By using the operating 
market basket percentage increase and the increase in the average 
cost per discharge from hospital cost reports, we are using two 
different measures of cost inflation. For FY 2012, we determined the 
adjustment by taking the percentage increase in the operating costs 
per discharge from FY 2008 to FY 2009 (1.0285) from the cost report 
and dividing it by the final operating market basket percentage 
increase from FY 2009 (1.026). This operation removes the measure of 
pure price increase (the market basket) from the percentage increase 
in operating cost per discharge, leaving the nonprice factors in the 
cost increase (for example, quantity and changes in the mix of goods 
and services). We repeated this calculation for 2 prior years to 
determine the 3-year average of the rate of adjusted change in costs 
between the operating market basket percentage increase and the 
increase in cost per case from the cost report (the FY 2006 to FY 
2007 percentage increase of operating costs per discharge of 1.0465 
divided by the FY 2007 final operating market basket percentage 
increase of 1.036, the FY 2007 to FY 2008 percentage increase of 
operating costs per discharge of 1.0506 divided by the FY 2008 final 
operating market basket percentage increase of 1.040). For FY 2012, 
we averaged the differentials calculated for FY 2007, FY 2008, and 
FY 2009, which resulted in a mean ratio of 1.0076. We multiplied the 
3-year average of 1.0076 by the FY 2010 final operating market 
basket percentage increase of 1.021, which resulted in an operating 
cost inflation factor of 2.87 percent or 1.028747. We then divided 
the operating cost inflation factor by the 1-year average change in 
charges (1.044394) and applied an adjustment factor of 0.985018 to 
the operating CCRs from the PSF (calculation performed on unrounded 
numbers).
    As stated in the FY 2009 IPPS final rule (73 FR 48763), we 
continue to believe it is appropriate to apply only a 1-year 
adjustment factor to the CCRs. On average, it takes approximately 9 
months for a fiscal intermediary or MAC to tentatively settle a cost 
report from the fiscal year end of a hospital's cost reporting 
period. The average ``age'' of hospitals' CCRs from the time the 
fiscal intermediary or the MAC inserts the CCR in the PSF until the 
beginning of FY 2009 is approximately 1 year. Therefore, as stated 
above, we believe a 1-year adjustment factor to the CCRs is 
appropriate.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2008 to FY 2009 (1.0508) from the cost 
report and dividing it by the final capital market basket percentage 
increase from FY 2009 (1.015). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the capital market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2006 to FY 2007 percentage increase of capital costs per 
discharge of 1.0507 divided by the FY 2007 final capital market 
basket percentage increase of 1.013, the FY 2007 to FY 2008 
percentage increase of capital costs per discharge of 1.0811 divided 
by the FY 2008 final capital market basket percentage increase of 
1.015). For FY 2012, we averaged the differentials calculated for

[[Page 51793]]

FY 2007, FY 2008, and FY 2009, which resulted in a mean ratio of 
1.0459. We multiplied the 3-year average of 1.0459 by the FY 2010 
final capital market basket percentage increase of 1.010, which 
resulted in a capital cost inflation factor of 5.63 percent or 
1.056329. We then divided the capital cost inflation factor by the 
1-year average change in charges (1.044394) and applied an 
adjustment factor of 1.011428 to the capital CCRs from the PSF 
(calculation performed on unrounded numbers). We proposed to use the 
same charge inflation factor for the capital CCRs that was used for 
the operating CCRs. The charge inflation factor is based on the 
overall billed charges. Therefore, we believe it is appropriate to 
apply the charge factor to both the operating and capital CCRs.
    As stated above, for FY 2012, we applied the proposed FY 2012 
rates and policies using cases from the FY 2010 MedPAR files in 
calculating the proposed outlier threshold. As discussed in section 
III.B.3. of the preamble to the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50160 and 50161) and in section III.F. of this final rule, in 
accordance with section 10324(a) of the Affordable Care Act, 
beginning in FY 2011, we created a wage index floor of 1.00 for all 
hospitals located in States determined to be frontier States. We 
noted that the frontier State floor adjustments will be calculated 
and applied after rural and imputed floor budget neutrality 
adjustments are calculated for all labor market areas, in order to 
ensure that no hospital in a frontier State will receive a wage 
index lesser than 1.00 due to the rural and imputed floor 
adjustment. In accordance with section 10324(a) of the Affordable 
Care Act, the frontier State adjustment will not be subject to 
budget neutrality, and will only be extended to hospitals 
geographically located within a frontier State. However, for 
purposes of estimating the proposed outlier threshold for FY 2012, 
it was necessary to apply this provision by adjusting the wage index 
of those eligible hospitals in a frontier State when calculating the 
outlier threshold that results in outlier payments being 5.1 percent 
of total payments for FY 2012. If we did not take into account this 
provision, our estimate of total FY 2012 payments would be too low, 
and, as a result, our proposed outlier threshold would be too high, 
such that estimated outlier payments would be less than our 
projected 5.1 percent of total payments.
    In the proposed rule, we stated that our estimate of the 
cumulative effect of changes in documentation and coding due to the 
adoption of the MS-DRGs through FY 2010 of 5.4 percent is already 
included within the claims data (FY 2010 MedPAR files) used to 
calculate the FY 2012 outlier threshold. We also stated in the 
proposed rule that we estimated that there would be no continued 
changes in documentation and coding in FYs 2011 and 2012. Therefore, 
the cumulative effect of documentation and coding that has occurred 
is already reflected within the FY 2010 MedPAR claims data, and we 
did not believe there was any need to inflate FY 2010 claims data 
for any additional case-mix growth projected to have occurred since 
FY 2010.
    Using this methodology, we proposed an outlier fixed-loss cost 
threshold for FY 2012 equal to the prospective payment rate for the 
DRG, plus any IME and DSH payments, and any add-on payments for new 
technology, plus $23,375.
    As we did in establishing the FY 2009 outlier threshold (73 FR 
57891), in our projection of FY 2012 outlier payments, we did not 
propose to make any adjustments for the possibility that hospitals' 
CCRs and outlier payments may be reconciled upon cost report 
settlement. We indicated that we continue to believe that, due to 
the policy implemented in the June 9, 2003 outlier final rule (68 FR 
34494), CCRs will no longer fluctuate significantly and, therefore, 
few hospitals will actually have these ratios reconciled upon cost 
report settlement. In addition, it is difficult to predict the 
specific hospitals that will have CCRs and outlier payments 
reconciled in any given year. We also note that reconciliation 
occurs because hospitals' actual CCRs for the cost reporting period 
are different than the interim CCRs used to calculate outlier 
payments when a bill is processed. Our simulations assume that CCRs 
accurately measure hospital costs based on information available to 
us at the time we set the outlier threshold. For these reasons, we 
proposed not to make any assumptions about the effects of 
reconciliation on the outlier threshold calculation.
    Comment: Commenters, including major hospital associations, 
stated that CMS currently estimates outlier payments in FY 2010 at 
4.7 percent of total payments. The commenters commended CMS for 
making refinements such as applying an adjustment factor to CCRs 
when computing the outlier threshold but noted that, because CMS is 
still not reaching the 5.1 percent target for outlier payments, 
there is still room for improvement. The commenters further stated 
that although CMS currently projects outlier payments in FY 2011 to 
be estimated at 4.9 percent of total payments, which is lower the 
5.1 percent target, this estimate is based on discharges from a 
prior year and, in their view, will likely not reflect the actual 
result. The commenters noted that in prior years when CMS provided 
its projected estimate of outlier payments for a given fiscal year, 
once the actual claims were available to determine the actual 
outlier payment (in the following fiscal year), their analysis 
showed that the estimate declined between 0.2 percent and 0.3 
percent from the projection.
    One commenter suggested that the methodology to develop the 
adjustment factor to the CCRs is unnecessarily complicated and does 
not lead to a more accurate result. The commenter requested 
clarification if CMS applies the same CCR throughout the fiscal year 
within the outlier model. The commenter also urged CMS to adopt a 
methodology that uses recent historical industry wide average rate 
of change, similar to the methodology used to develop the charge 
inflation factor. Specifically, the commenter recommended that CMS 
measure the rate of change in CCRs to develop the adjustment factor 
to the CCRs. Further, in addition to recommending an adjustment to 
the CCRs based on historical data, the commenter opposed CMS's 
methodology of applying the adjustment factor over one year and 
suggested that the CCRs should be projected over different periods 
of time, some less or more than one year, based on variations in 
hospital fiscal year ends. The commenter also opposed CMS' use of 
the December 2010 update of the PSF and assert that CMS's 
methodology is oversimplified. The commenter believed that its 
methodology would more accurately project the decline in CCRs.
    The commenter also suggested that, if CMS did not incorporate 
the changes described above to its methodology for estimating 
outlier payments, it would recommend incorporating an ``estimate 
adjustment factor'' into the outlier projections. The commenter 
explained that outlier payments have been underpaid in every year 
since 2004. Based on actual payments determined by the commenter 
using data analysis, the commenter asserted that the underpayment 
has exceeded 0.5 percent in all years except one. The commenter 
recommended that CMS maintain the outlier threshold at 5.1 percent 
but apply an estimate adjustment factor when projecting the outlier 
threshold. The commenter provided an example and computed this 
factor for FY 2009 and FY 2010 by taking the average variance in the 
actual payment for FY 2008 and FY 2009 which was 0.491 percent. 
Based on this factor, CMS would model the threshold to a level of 
5.591 percent (5.1 plus .491 percent). If CMS were to overpay 
outliers, then the adjustment would be become negative. The 
commenter stated that this would fulfill the statutory requirement 
in section 1886 (d)(5)(A) of the Act that requires that CMS 
establish thresholds such that outlier payments will be projected to 
achieve at least 5.1 percent of DRG payments and would more closely 
achieve a result that is fully consistent with the statute.
    The commenter responded to CMS's concerns expressed in last 
year's final rule (75 FR 50429) that an ``estimate adjustment 
factor'' to the outlier threshold or standardized amount in a given 
year to account for ``overpayments'' or ``underpayments'' of 
outliers in other years would not result in the agency making 
outlier payments that were not directly related to the actual cost 
of furnishing care in extraordinarily costly cases. The commenter 
believed that an ``estimate adjustment factor'' represents a 
prospective adjustment factor based on historical data and would not 
constitute a retroactive adjustment to prior outlier payments 
because the adjustment would have no impact on past outlier 
payments. Moreover, the commenter further opined that the estimate 
adjustment factor would be based on historical outlier cases so 
payments would be directly related to the actual cost of furnishing 
care to outlier patients.
    Response: Commenters to previous rules have raised similar 
concerns regarding our estimates of outlier payments. We refer 
readers to a similar discussion in the FY 2008 final rule with 
comment period (72 FR 47418). In response to the comment that CCRs 
should be projected over different periods of time, it is possible 
that some of the

[[Page 51794]]

CCRs in the March PSF will be used in FY 2009 for actual outlier 
payments, while other CCRs may be one year old. Therefore, we apply 
a 1-year adjustment to the CCRs. The adjusted CCR is applied 
throughout the fiscal year within the outlier model. With respect to 
the comment on our methodology used to adjust the CCRs, as we stated 
in the FY 2008 IPPS final rule with comment period (72 FR 47418), we 
continue to believe this calculation of an adjustment to the CCRs is 
more accurate and stable than the commenter's methodology because it 
takes into account the costs per discharge and the market basket 
percentage increase when determining a cost adjustment factor. There 
are times where the market basket and the cost per discharge will be 
constant, while other times these values will differ from each 
other, depending on the fiscal year. Therefore, as mentioned above, 
using the market basket in conjunction with the cost per discharge 
takes into account two sources that measure potential cost inflation 
and ensures a more accurate and stable cost adjustment factor.
    With respect to the comment of computing an ``estimate 
adjustment factor,'' we thank the commenter for further explaining 
their position on this adjustment. Further analysis by CMS is 
necessary to determine if the commenter's approach to applying an 
``estimate adjustment factor'' is appropriate. We will consider the 
commenter's suggestion of applying an ``estimate adjustment factor'' 
in future rulemaking if, based on our analysis, we determine that 
application of an ``estimate adjustment factor'' is appropriate and 
consistent with the statute.
    Comment: One commenter was concerned that CMS did not include 
outlier reconciliations in developing the outlier threshold. The 
commenter requested that CMS disclose in the final rule and future 
proposed and final IPPS rules the amount of money it has recovered 
through reconciliation. The commenter explained that this 
information will allow others to comment specifically on how this 
provision would impact the threshold.
    Response: We received a similar comment to last year's rule, and 
we thank the commenter for again informing us of its concern 
regarding not including outlier reconciliation within the 
development of the outlier threshold. However, as stated above, we 
continue to believe that, due to the policy implemented in the June 
9, 2003 outlier final rule (68 FR 34494), CCRs will no longer 
fluctuate significantly and, therefore, few hospitals will actually 
have these ratios reconciled upon cost report settlement. In 
addition, it is difficult to predict the specific hospitals that 
will have CCRs and outlier payments reconciled in any given year. We 
also noted that reconciliation occurs because hospitals' actual CCRs 
for the cost reporting period are different than the interim CCRs 
used to calculate outlier payments when a bill is processed. Our 
simulations assume that CCRs accurately measure hospital costs based 
on information available to us at the time we set the outlier 
threshold. For these reasons, we proposed and are finalizing our 
policy not to make any assumptions about the effects of 
reconciliation on the outlier threshold calculation.
    Additionally, we published a manual update (Change Request 7192) 
to our outlier policy on December 3, 2010, which also updated 
Chapter 3, Section 20.1.2 of the Medicare Claims Processing Manual. 
The manual update outlines the outlier reconciliation process for 
hospitals and Medicare contractors. The instructions in Change 
Request 7192 regarding outlier reconciliation were effective on 
April 1, 2011. Medicare contractors record the outlier 
reconciliation amount on each provider's cost report (and are not 
required to report these data to CMS outside of the cost report 
settlement process). Therefore, the outlier reconciliation data that 
the commenter is requesting will be publicly available once the cost 
report data are posted on our Web site at http://www.cms.gov/CostReports/02_HospitalCostReport.asp#TopOfPage. Since April 1, 
2011, we have approved some provider's outlier payments to be 
reconciled. Other providers that were flagged for outlier 
reconciliation are still under review for approval. Some providers 
flagged for outlier reconciliation may experience a delay in 
reconciling their outlier payments due to circumstances that prevent 
the Medicare contractor from finalizing the hospital's cost report 
(such as other payments that may need to be reconciled aside from 
outlier payments). As instructed in Change Request 7192, barring an 
exception from CMS, Medicare contractors were given until October 1, 
2011, to complete the reconciliation process for those providers 
flagged for outlier reconciliation prior to April 1, 2011. To 
download and view the manual instructions on outlier reconciliation, 
we refer readers to the CMS Web site:  http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.
    Because we are not making any changes to our methodology for 
this final rule, for FY 2012, we are using the same methodology we 
proposed to calculate the outlier threshold.
    Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges per case from the first 
quarter of FY 2010 in combination with the second quarter of FY 2010 
(October 1, 2009 through March 31, 2010) to the first quarter of FY 
2011 in combination with the second quarter of FY 2011 (October 1, 
2010 through March 31, 2010). This rate-of-change was 3.89 percent 
(1.038944) or 7.94 percent (1.079405) over 2 years. As we have done 
in the past, we established the final FY 2012 outlier threshold 
using hospital CCRs from the March 2011 update to the Provider-
Specific File (PSF)--the most recent available data at the time of 
this final rule.
    For FY 2012, we calculated the CCR adjustment by using the FY 
2010 operating cost per discharge increase in combination with the 
actual FY 2010 operating market basket percentage increase 
determined by IHS Global Insight, Inc. (IGI), as well as the charge 
inflation factor described above to estimate the adjustment to the 
CCRs. (We note that the FY 2010 actual (otherwise referred to as 
``final'') operating market basket percentage increase reflects 
historical data, whereas the published FY 2010 operating market 
basket update factor was based on IGI's 2009 second quarter forecast 
with historical data through the first quarter of 2009. We also note 
that while the FY 2010 published operating market basket update was 
based on the FY 2002-based IPPS market basket, the actual or 
``final'' market basket percentage increase is based on the FY 2006-
based IPPS market basket. Similarly, the FY 2010 published capital 
market basket update factor was based on the FY 2002-based capital 
market basket and the actual or ``final'' capital market basket 
percentage increase is based on the FY 2006-based capital market 
basket.) By using the operating market basket percentage increase 
and the increase in the average cost per discharge from hospital 
cost reports, we are using two different measures of cost inflation. 
For FY 2012, we determined the adjustment by taking the percentage 
increase in the operating costs per discharge from FY 2008 to FY 
2009 (1.0290) from the cost report and divided it by the final 
operating market basket percentage increase from FY 2009 (1.026). 
This operation removes the measure of pure price increase (the 
market basket) from the percentage increase in operating cost per 
discharge, leaving the nonprice factors in the cost increase (for 
example, quantity and changes in the mix of goods and services). We 
repeated this calculation for 2 prior years to determine the 3-year 
average of the rate of adjusted change in costs between the 
operating market basket percentage increase and the increase in cost 
per case from the cost report (the FY 2006 to FY 2007 percentage 
increase of operating costs per discharge of 1.0464 divided by the 
FY 2007 final operating market basket percentage increase of 1.036, 
the FY 2007 to FY 2008 percentage increase of operating costs per 
discharge of 1.0507 divided by FY 2008 final operating market basket 
percentage increase of 1.040). For FY 2012, we averaged the 
differentials calculated for FY 2007, FY 2008, and FY 2009, which 
resulted in a mean ratio of 1.0078. We multiplied the 3-year average 
of 1.0078 by the FY 2010 final operating market basket percentage 
increase of 1.021, which resulted in an operating cost inflation 
factor of 2.87 percent or 1.028913. We then divided the operating 
cost inflation factor by the 1-year average change in charges 
(1.038994) and applied an adjustment factor of 0.990297 to the 
operating CCRs from the PSF (calculation performed on unrounded 
numbers).
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2008 to FY 2009 (1.0494) from the cost 
report and dividing it by the final capital market basket percentage 
increase from FY 2009 (1.015). We repeated this calculation for 2 
prior years to determine the 3-year average of the rate of adjusted 
change in costs between the capital market basket percentage 
increase and the increase in cost per case from the cost report (the 
FY 2006 to FY 2007 percentage increase of capital costs per 
discharge of 1.0508 divided by the FY 2007 final capital market 
basket percentage increase of 1.013, the FY 2007 to FY 2008 
percentage increase of capital costs per discharge of 1.0813 divided 
by the FY 2008 final capital market basket percentage increase of 
1.015). For FY 2012,

[[Page 51795]]

we averaged the differentials calculated for FY 2007, FY 2008, and 
FY 2009, which resulted in a mean ratio of 1.0455. We multiplied the 
3-year average of 1.0455 by the FY 2010 final capital market basket 
percentage increase of 1.010, which resulted in a capital cost 
inflation factor of 5.6 percent or 1.055964. We then divided the 
capital cost inflation factor by the 1-year average change in 
charges (1.038994) and applied an adjustment factor of 1.011428 to 
the capital CCRs from the PSF (calculation performed on unrounded 
numbers). We are using the same charge inflation factor for the 
capital CCRs that was used for the operating CCRs. The charge 
inflation factor is based on the overall billed charges.
    As stated above, for FY 2012, we applied the FY 2012 rates and 
policies using cases from the FY 2010 MedPAR files in calculating 
the outlier threshold. As discussed in section III.B.3. of the 
preamble to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50160 and 
50161) and in section III.F. of this final rule, in accordance with 
section 10324(a) of the Affordable Care Act, beginning in FY 2011, 
we created a wage index floor of 1.00 for all hospitals located in 
States determined to be frontier States. We noted that the frontier 
State floor adjustments will be calculated and applied after rural 
and imputed floor budget neutrality adjustments are calculated for 
all labor market areas, in order to ensure that no hospital in a 
frontier State will receive a wage index lesser than 1.00 due to the 
rural and imputed floor adjustment. In accordance with section 
10324(a) of the Affordable Care Act, the frontier State adjustment 
will not be subject to budget neutrality, and will only be extended 
to hospitals geographically located within a frontier State. 
However, for purposes of estimating the final outlier threshold for 
FY 2012, it was necessary to apply this provision by adjusting the 
wage index of those eligible hospitals in a frontier State when 
calculating the outlier threshold that results in outlier payments 
being 5.1 percent of total payments for FY 2012. If we did not take 
into account this provision, our estimate of total FY 2012 payments 
would be too low, and, as a result, our proposed outlier threshold 
would be too high, such that estimated outlier payments would be 
less than our projected 5.1 percent of total payments.
    Also, for this final rule, our estimate of the cumulative effect 
of changes in documentation and coding due to the adoption of the 
MS-DRGs through FY 2010 of 5.4 percent is already included within 
the claims data (FY 2010 MedPAR files) used to calculate the FY 2012 
outlier threshold. Also, we estimate that there will be no continued 
changes in documentation and coding in FYs 2011 and 2012. Therefore, 
the cumulative effect of documentation and coding that has occurred 
is already reflected within the FY 2010 MedPAR claims data, and we 
did not believe there was any need to inflate FY 2010 claims data 
for any additional case-mix growth projected to have occurred since 
FY 2010.
    Using this methodology, we calculated a final outlier fixed-loss 
cost threshold for FY 2012 equal to the prospective payment rate for 
the DRG, plus any IME and DSH payments, and any add-on payments for 
new technology, plus $22,385.
    We note that our final threshold is less than the proposed 
threshold. We believe this is due to the increase in the 
standardized amount from the proposed rule to the final rule. (Some 
examples that caused the standardized amount to increase from the 
proposed rule to this final rule include, but are not limited to, 
the increase in the market basket update and the decreases in the 
multifactor productivity adjustment and our prospective 
documentation and coding adjustment). As payments increase, fewer 
cases will qualify for outlier payments thus requiring us to lower 
the threshold from the proposed rule to this final rule.

(2) Other Changes Concerning Outliers

    As stated in the FY 1994 IPPS final rule (58 FR 46348), we 
establish an outlier threshold that is applicable to both hospital 
inpatient operating costs and hospital inpatient capital-related 
costs. When we modeled the combined operating and capital outlier 
payments, we found that using a common threshold resulted in a lower 
percentage of outlier payments for capital-related costs than for 
operating costs. We project that the thresholds for FY 2012 will 
result in outlier payments that will equal 5.1 percent of operating 
DRG payments and 6.18 percent of capital payments based on the 
Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, as we 
proposed, we are reducing the FY 2012 standardized amount by the 
same percentage to account for the projected proportion of payments 
paid as outliers.
    The outlier adjustment factors that are applied to the 
standardized amount based on the FY 2012 outlier threshold are as 
follows:

------------------------------------------------------------------------
                                             Operating
                                           standardized       Capital
                                              amounts      federal  rate
------------------------------------------------------------------------
National................................        0.948990        0.938207
Puerto Rico.............................        0.953549        0.926153
------------------------------------------------------------------------

    We are applying the outlier adjustment factors to the FY 2012 
rates after removing the effects of the FY 2011 outlier adjustment 
factors on the standardized amount.
    To determine whether a case qualifies for outlier payments, we 
apply hospital-specific CCRs to the total covered charges for the 
case. Estimated operating and capital costs for the case are 
calculated separately by applying separate operating and capital 
CCRs. These costs are then combined and compared with the outlier 
fixed-loss cost threshold.
    Under our current policy at Sec.  412.84, we calculate operating 
and capital CCR ceilings and assign a statewide average CCR for 
hospitals whose CCRs exceed 3.0 standard deviations from the mean of 
the log distribution of CCRs for all hospitals. Based on this 
calculation, for hospitals for which the fiscal intermediary or MAC 
computes operating CCRs greater than 1.152 or capital CCRs greater 
than 0.159, or hospitals for which the fiscal intermediary or MAC is 
unable to calculate a CCR (as described at Sec.  412.84(i)(3) of our 
regulations), statewide average CCRs are used to determine whether a 
hospital qualifies for outlier payments. Table 8A listed in section 
VI. of this Addendum (and available only via the Internet) contains 
the statewide average operating CCRs for urban hospitals and for 
rural hospitals for which the fiscal intermediary or MAC is unable 
to compute a hospital-specific CCR within the above range. Effective 
for discharges occurring on or after October 1, 2011, these 
statewide average ratios will replace the ratios published in the 
IPPS final rule for FY 2011 (75 FR 50390-50392). Table 8B listed in 
section VI. of this Addendum (and available via the Internet) 
contains the comparable statewide average capital CCRs. Again, the 
CCRs in Tables 8A and 8B will be used during FY 2012 when hospital-
specific CCRs based on the latest settled cost report are either not 
available or are outside the range noted above. Table 8C listed in 
section VI. of this Addendum (and available via the Internet) 
contains the statewide average total CCRs used under the LTCH PPS as 
discussed in section V. of this Addendum.
    We finally note that we published a manual update (Change 
Request 3966) to our outlier policy on October 12, 2005, which 
updated Chapter 3, Section 20.1.2 of the Medicare Claims Processing 
Manual. The manual update covered an array of topics, including 
CCRs, reconciliation, and the time value of money. We encourage 
hospitals that are assigned the statewide average operating and/or 
capital CCRs to work with their fiscal intermediary or MAC on a 
possible alternative operating and/or capital CCR as explained in 
Change Request 3966. Use of an alternative CCR developed by the 
hospital in conjunction with the fiscal intermediary or MAC can 
avoid possible overpayments or underpayments at cost report 
settlement, thus ensuring better accuracy when making outlier 
payments and negating the need for outlier reconciliation. We also 
note that a hospital may request an alternative operating or capital 
CCR ratio at any time as long as the guidelines of Change Request 
3966 are followed. Additionally, as mentioned above, we published an 
additional manual update (Change Request 7192) to our outlier policy 
on December 3, 2010 which also updated Chapter 3, Section 20.1.2 of 
the Medicare Claims Processing Manual. The manual update outlines 
the outlier reconciliation process for hospitals and Medicare 
contractors. To download and view the manual instructions on outlier 
reconciliation, we refer readers to the CMS Web site: http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.

(3) FY 2010 and FY 2011 Outlier Payments

    In the FY 2011 IPPS final rule (75 FR 50431), we stated that, 
based on available data, we estimated that actual FY 2010 outlier 
payments would be approximately 4.7 percent of actual total DRG 
payments. This estimate was computed based on simulations using the 
FY 2009 MedPAR file (discharge data for FY 2009 claims). That is, 
the estimate of actual outlier payments did not reflect actual FY 
2010 claims, but instead reflected the application of FY 2010 rates 
and policies to available FY 2009 claims.
    Our current estimate, using available FY 2010 claims data, is 
that actual outlier

[[Page 51796]]

payments for FY 2010 were approximately 4.7 percent of actual total 
DRG payments. Thus, the data indicate that, for FY 2010, the 
percentage of actual outlier payments relative to actual total 
payments is lower than we projected for FY 2010. Consistent with the 
policy and statutory interpretation we have maintained since the 
inception of the IPPS, we do not plan to make retroactive 
adjustments to outlier payments to ensure that total outlier 
payments for FY 2010 are equal to 5.1 percent of total DRG payments.
    We currently estimate that actual outlier payments for FY 2011 
will be approximately 4.8 percent of actual total DRG payments, 
approximately 0.3 percentage points lower than the 5.1 percent we 
projected when setting the outlier policies for FY 2011. This 
estimate of 4.8 percent is based on simulations using the FY 2010 
MedPAR file (discharge data for FY 2010 claims).
    Comment: Commenters disagreed with CMS' use of modeled data 
versus actual payment data to compute the outlier payment percentage 
for FY 2010. The commenters stated that they performed their own 
analysis using actual payment information in the MedPAR file which 
resulted in outlier payments being 4.36 percent of actual DRG 
payments for FY 2010. The commenters recommended that CMS determine 
the FY 2010 outlier payment percentage using actual payments rather 
than modeled payments.
    The commenters disagreed with CMS' reasons in the FY 2011 final 
rule (75 FR 50431) for using modeled data instead of actual data. In 
last year's final rule, CMS supported its decision to use modeled 
data in part because ``while accurate at the time the MedPAR file is 
constructed, claims can be cancelled, edited and resubmitted to NCH 
after the MedPAR file is built, and therefore the payment field 
shown on MedPAR is subject to change and does not necessarily 
represent the final payment on that claim.'' The commenters stated 
that while this is true, the argument applies equally to modeling 
payments from the MedPAR data. The commenters explained that if a 
claim is cancelled after the MedPAR file is built, the modeled 
payment for that claim will be included in overall estimates.
    The commenters further noted that, in last year's final rule, 
CMS expressed concern that SCHs and MDHs complicates the use of the 
payment field shown on the MedPAR file (75 FR 50431). The commenter 
disagreed with CMS and stated that CMS' argument is valid for 
determining the DRG-based operating payments needed to calculate 
outlier payment levels; however, the SCH/MDH argument does not apply 
to outlier payments. The commenters claimed that ``the PRICER 
program determines outlier payments for all hospitals, including 
SCH/MDHs, based on the Federal rate only.'' The commenters added 
that ``the outlier payments are recorded in the ``OUTLIER AMOUNT'' 
field (and not included in the DRG PRICE).'' Therefore, the 
commenters asserted that ``obtaining the outlier payments directly 
from the MedPAR file does not introduce complications related to the 
SCH/MDH status.'' Moreover, the commenters noted ``that SCH/MDH 
hospitals represent a small percent of hospitals overall.''
    The commenters also requested further clarification regarding 
how CMS conducted its analysis that showed an outlier payment 
percentage of 4.7 percent for FY 2010. The commenters specifically 
requested that CMS disclose what CCRs were used to develop the FY 
2010 estimate payment set forth in the proposed rule, and state 
whether the same CCRs or different CCRs were used to determine the 
FY 2010 payments as set forth in the FY 2011 proposed and final 
rules.
    Response: We continue to believe that modeling FY 2010 outlier 
payments is a reasonable approach to compute the outlier payment 
percentage for that year. Similar to our response in the FY 2011 
final rule, to determine the FY 2010 outlier estimate, we used the 
FY 2010 PRICER and the latest update of the FY 2010 MedPAR file to 
model actual outlier payments for FY 2009. Although the MedPAR does 
contain the actual payment amounts to hospitals, we still believe 
that modeling actual outlier payments for FY 2010 produces an 
enhanced accuracy of actual outlier payments. For example, we model 
which SCHs would have greater hospital-specific payment amounts 
versus their Federal payments, (similar to what is currently done at 
cost report settlement) and exclude those providers from our 
determination of FY 2010 actual outlier payments. Also, we believe 
modeling actual outlier payments for FY 2010 is consistent with our 
approach of using modeling for the rate setting for FY 2011 (which 
also models the FY 2010 payments for use in the FY 2011 rate 
setting).
    The commenters noted that that if a claim is cancelled after the 
MedPAR file is built, the modeled payment for that claim will also 
be included in overall estimates. While the commenter is correct, 
this concern is relevant regardless of whether we use actual data or 
modeled data to compute the outlier payment percentage. Therefore, 
we do not believe that this argument supports the use of actual 
payment data instead of modeled data. As stated above, we continue 
to believe that modeling that outlier payment percentage presents 
more accuracy.
    We disagree with the commenter that obtaining the outlier 
payments directly from the MedPAR file does not introduce 
complications related to the SCH/MDH status. Specifically, if an SCH 
or MDH is paid at the end of its cost reporting year based on its 
target amount, then including the payment in the ``Outlier Amount'' 
field in the outlier payment percentage would distort the 
computation of the outlier payment percentage because the hospital's 
actual payment was based on its target amount and not the federal 
standardized amount. Therefore, as mentioned above, we model which 
SCHs would have greater hospital-specific payment amounts versus 
payments based on the standardized amount (similar to what is 
currently done at cost report settlement), and we then exclude those 
providers from our determination of FY 2010 outlier percentage 
payout. Because we are modeling which SCHs would have greater 
hospital-specific payment amounts versus their Federal payments, we 
believe it is appropriate to model the outlier percentage payout.
    Without further detail from the commenters, we are unable to 
determine why the commenters were unable to duplicate our estimate 
of the FY 2010 outlier percentage payout. However, to provide 
further clarification of the CCRs used to model the FY 2010 outlier 
percentage payout, we used CCRs from the March 2010 update of the 
PSF. This is the same file that was used to compute the FY 2010 
outlier percentage payout in the FY 2011 proposed and final rules.

5. FY 2012 Standardized Amount

    The adjusted standardized amount is divided into labor-related 
and nonlabor-related portions. Tables 1A and 1B listed and published 
in section VI. of this Addendum (and available via the Internet) 
contain the national standardized amounts that we are applying to 
all hospitals, except hospitals located in Puerto Rico, for FY 2012. 
The Puerto Rico-specific amounts are shown in Table 1C listed and 
published in section VI. of this Addendum (and available via the 
Internet). The amounts shown in Tables 1A and 1B differ only in that 
the labor-related share applied to the standardized amounts in Table 
1A is the labor-related share of 68.8 percent, and Table 1B is 62 
percent. In accordance with sections 1886(d)(3)(E) and 
1886(d)(9)(C)(iv) of the Act, we are applying a labor-related share 
of 62 percent, unless application of that percentage would result in 
lower payments to a hospital than would otherwise be made. In 
effect, the statutory provision means that we will apply a labor-
related share of 62 percent for all hospitals (other than those in 
Puerto Rico) whose wage indices are less than or equal to 1.0000.
    In addition, Tables 1A and 1B include the standardized amounts 
reflecting the applicable percentage increase of 1.9 percent for FY 
2012, and an update of -0.1 percent for hospitals that fail to 
submit quality data consistent with section 1886(b)(3)(B)(viii) of 
the Act.
    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion 
of the Puerto Rico payment rate is based on the discharge-weighted 
average of the national large urban standardized amount (this amount 
is set forth in Table 1A). The labor-related and nonlabor-related 
portions of the national average standardized amounts for Puerto 
Rico hospitals for FY 2012 are set forth in Table 1C listed and 
published in section VI. of this Addendum (and available via the 
Internet). This table also includes the Puerto Rico standardized 
amounts. The labor-related share applied to the Puerto Rico specific 
standardized amount is the labor-related share of 62.1 percent, or 
62 percent, depending on which provides higher payments to the 
hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by 
section 403(b) of Public Law 108-173, provides that the labor-
related share for hospitals located in Puerto Rico be 62 percent, 
unless the application of that percentage would result in lower 
payments to the hospital.)
    The following table illustrates the changes from the FY 2011 
national standardized amount. The second column shows the changes 
from the FY 2011 standardized amounts for hospitals that satisfy the 
quality

[[Page 51797]]

data submission requirement and therefore receive the full update of 
1.9 percent. The third column shows the changes for hospitals 
receiving the reduced update of -0.1 percent. The first row of the 
table shows the updated (through FY 2011) average standardized 
amount after restoring the FY 2011 offsets for outlier payments, 
demonstration budget neutrality and the geographic reclassification 
budget neutrality. The DRG reclassification and recalibration wage 
index budget neutrality factors are cumulative. Therefore, the FY 
2011 factor is not removed from this table.

                       Comparison of FY 2011 Standardized Amounts to the FY 2012 Standardized Amount With Full and Reduced Update
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Full Update (1.5                                  Reduced Update (-0.1
                                                      Full Update (1.9       percent); Wage index is    Reduced Update (-0.1     percent); Wage index is
                                                   percent); Wage index is    less than or equal to    percent); Wage index is    less than or equal to
                                                     greater than 1.0000             1.0000              greater than 1.0000             1.0000
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2011 Base Rate, after removing geographic             Labor: $3,947.65          Labor: $3,557.48          Labor: $3,947.65          Labor: $3,557.48
 reclassification budget neutrality,                  Nonlabor: $1,790.21       Nonlabor: $2,180.39       Nonlabor: $1,790.21       Nonlabor: $2,180.39
 demonstration budget neutrality, cumulative FY
 2008 and FY 2009 documentation and coding
 adjustment, FY 2011 documentation and coding
 recoupment, and outlier offset (based on the
 labor-related share percentage for FY 2011)....
FY 2012 Update Factor...........................                    1.019                     1.019                     0.999                     0.999
Adjustment for Restoring Rural Floor Budget                         1.011                     1.011                     1.011                     1.011
 Neutrality.....................................
FY 2012 DRG Recalibration and Wage Index Budget                   0.99846                   0.99846                   0.99846                   0.99846
 Neutrality Factor..............................
FY 2012 Reclassification Budget Neutrality                       0.991493                  0.991493                  0.991493                  0.991493
 Factor.........................................
FY 2012 Rural Demonstration Budget Neutrality                    0.999487                  0.999487                  0.999487                  0.999487
 Factor.........................................
FY 2012 Outlier Factor..........................                 0.948990                  0.948990                  0.948990                  0.948990
Documentation and coding adjustments required                      0.9386                    0.9386                    0.9386                    0.9386
 under sections 7(b)(1)(A) and 7(b)(1)(B) of
 Public Law 110-90..............................
Final Rate for FY 2012..........................         Labor: $3,584.30          Labor: $3,230.04          Labor: $3,513.95          Labor: $3,166.64
                                                      Nonlabor: $1,625.44       Nonlabor: $1,979.70       Nonlabor: $1,593.54       Nonlabor: $1,940.85
--------------------------------------------------------------------------------------------------------------------------------------------------------

B. Adjustments for Area Wage Levels and Cost-of-Living

    Tables 1A through 1C, as published in section VI. of this 
Addendum (and available via the Internet), contain the labor-related 
and nonlabor-related shares that we used to calculate the 
prospective payment rates for hospitals located in the 50 States, 
the District of Columbia, and Puerto Rico for FY 2012. This section 
addresses two types of adjustments to the standardized amounts that 
are made in determining the prospective payment rates as described 
in this Addendum.

1. Adjustment for Area Wage Levels

    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that we make an adjustment to the labor-related portion of the 
national and Puerto Rico prospective payment rates, respectively, to 
account for area differences in hospital wage levels. This 
adjustment is made by multiplying the labor-related portion of the 
adjusted standardized amounts by the appropriate wage index for the 
area in which the hospital is located. In section III. of the 
preamble of this final rule, we discuss the data and methodology for 
the FY 2012 wage index.

2. Adjustment for Cost-of-Living in Alaska and Hawaii

    Section 1886(d)(5)(H) of the Act authorizes the Secretary to 
make an adjustment to take into account the unique circumstances of 
hospitals located in Alaska and Hawaii. Higher labor-related costs 
for these two States are taken into account in the adjustment for 
area wages described above. For FY 2011 and in prior fiscal years, 
we used the most recent updated cost of living adjustment (COLA) 
factors obtained from the U.S. Office of Personnel Management (OPM) 
Web site at http://www.opm.gov/oca/cola/rates.asp. We multiply the 
nonlabor-related portion of the standardized amount by the 
applicable adjustment factor.
    Sections 1911 through 1919 of the Nonforeign Area Retirement 
Equity Assurance Act, as contained in subtitle B of title XIX of the 
National Defense Authorization Act (NDAA) for Fiscal Year 2010 (Pub. 
L. 111-84, October 28, 2009) transitions the Alaska and Hawaii COLAs 
to locality pay. Under section 1914 of Public Law 111-84, locality 
pay is being phased in over a 3-year period beginning in January 
2010 with COLA rates frozen as of the date of enactment, October 28, 
2009, and then proportionately reduced to reflect the phase-in of 
locality pay.
    In the proposed rule, we stated that we did not believe it was 
appropriate to use either the 2010 or 2011 reduced factors for 
adjusting the nonlabor-related portion of the standardized amount 
for hospitals in Alaska and Hawaii for Medicare payment purposes. 
Therefore, for FY 2012, we proposed to continue to use the same COLA 
factors (published by OPM) that we used to adjust payments in FY 
2011 (which are based on OPMs 2009 COLA factors) to adjust the 
nonlabor-related portion of the standardized amount for hospitals 
located in Alaska and Hawaii. We stated that we believe using these 
COLAs will appropriately adjust the nonlabor-related portion of the 
standardized amount for hospitals in Alaska and Hawaii consistent 
with section 1886(d)(5)(H) of the Act.
    We did not receive any public comments on our proposal. 
Therefore, we are finalizing our proposal to use the same factors 
currently in use under the IPPS for FY 2011 for FY 2012. Below is a 
table of factors obtained from OPM that we are using for FY 2012.

[[Page 51798]]

 Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                         Cost of living
                         Area                              adjustment
                                                             factor
------------------------------------------------------------------------
Alaska:
    City of Anchorage and 80-kilometer (50-mile)                    1.23
     radius by road...................................
    City of Fairbanks and 80-kilometer (50-mile)                    1.23
     radius by road...................................
    City of Juneau and 80-kilometer (50-mile) radius                1.23
     by road..........................................
    Rest of Alaska....................................              1.25
Hawaii:
    City and County of Honolulu.......................              1.25
    County of Hawaii..................................              1.18
    County of Kauai...................................              1.25
    County of Maui and County of Kalawao..............              1.25
------------------------------------------------------------------------
 (The above factors are based on data obtained from the U.S. Office of
  Personnel Management Web site at: http://www.opm.gov/oca/cola/rates.asp.)

C. MS-DRG Relative Weights

    As discussed in section II.H. of the preamble of this final 
rule, we have developed relative weights for each MS-DRG that 
reflect the resource utilization of cases in each MS-DRG relative to 
Medicare cases in other MS-DRGs. Table 5 listed in section VI. of 
this Addendum (and available via the Internet) contains the relative 
weights that we are applying to discharges occurring in FY 2012. 
These factors have been recalibrated as explained in section II. of 
the preamble of this final rule.

D. Calculation of the Prospective Payment Rates

General Formula for Calculation of the Prospective Payment Rates for FY 
2012

    In general, the operating prospective payment rate for all 
hospitals paid under the IPPS located outside of Puerto Rico, except 
SCHs and MDHs, for FY 2012 equals the Federal rate.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: The Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; the updated hospital-specific rate based on FY 1996 
costs per discharge; or the updated hospital-specific rate based on 
the FY 2006 costs per discharge to determine the rate that yields 
the greatest aggregate payment.
    The prospective payment rate for SCHs for FY 2012 equals the 
higher of the applicable Federal rate, or the hospital-specific rate 
as described below. The prospective payment rate for MDHs for FY 
2012 equals the higher of the Federal rate, or the Federal rate plus 
75 percent of the difference between the Federal rate and the 
hospital-specific rate as described below. For MDHs, the updated 
hospital-specific rate is based on FY 1982, FY 1987 or FY 2002 costs 
per discharge, whichever yields the greatest aggregate payment.
    The prospective payment rate for hospitals located in Puerto 
Rico for FY 2012 equals 25 percent of the Puerto Rico rate plus 75 
percent of the applicable national rate.

1. Federal Rate

    The Federal rate is determined as follows:
    Step 1--Select the applicable average standardized amount 
depending on whether the hospital submitted qualifying quality data 
(full update for hospitals submitting quality data; update including 
a -2.0 percent adjustment for hospitals that did not submit these 
data).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--For hospitals in Alaska and Hawaii, multiply the 
nonlabor-related portion of the standardized amount by the 
applicable cost-of-living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount (adjusted, if applicable, under 
Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the applicable MS-DRG (Table 5 listed in 
section VI. of this Addendum and available via the Internet).
    The Federal rate as determined in Step 5 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act and 42 CFR 
412.101(b), the payment in Step 5 would be increased by the formula 
described in section IV.E. of the preamble of this final rule.

2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)

a. Calculation of Hospital-Specific Rate

    Section 1886(b)(3)(C) of the Act provides that currently SCHs 
are paid based on whichever of the following rates yields the 
greatest aggregate payment: the Federal rate; the updated hospital-
specific rate based on FY 1982 costs per discharge; the updated 
hospital-specific rate based on FY 1987 costs per discharge; the 
updated hospital-specific rate based on FY 1996 costs per discharge; 
or the updated hospital-specific rate based on the FY 2006 costs per 
discharge to determine the rate that yields the greatest aggregate 
payment.
    As discussed previously, currently MDHs are paid based on the 
Federal national rate or, if higher, the Federal national rate plus 
75 percent of the difference between the Federal national rate and 
the greater of the updated hospital-specific rates based on either 
FY 1982, FY 1987 or FY 2002 costs per discharge.
    Hospital-specific rates have been determined for each of these 
hospitals based on the FY 1982 costs per discharge, the FY 1987 
costs per discharge, or, for SCHs, the FY 1996 costs per discharge 
or the FY 2006 costs per discharge, and for MDHs, the FY 2002 cost 
per discharge. For a more detailed discussion of the calculation of 
the hospital-specific rates, we refer the reader to the FY 1984 IPPS 
interim final rule (48 FR 39772); the April 20, 1990 final rule with 
comment period (55 FR 15150); the FY 1991 IPPS final rule (55 FR 
35994); and the FY 2001 IPPS final rule (65 FR 47082).

b. Updating the FY 1982, FY 1987, FY 1996, FY 2002, and FY 2006 
Hospital-Specific Rates for FY 2012

    Section 1886(b)(3)(B)(iv) of the Act provides that the 
applicable percentage increase applicable to the hospital-specific 
rates for SCHs and MDHs equals the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act (that is, the same 
update factor as for all other hospitals subject to the IPPS). 
Because the Act sets the update factor for SCHs and MDHs equal to 
the update factor for all other IPPS hospitals, the update to the 
hospital specific rates for SCHs and MDHs is subject to the 
amendments to section 1886(b)(3)(B) of the Act made by sections 
3401(a) and 10319(a) of the Affordable Care Act. Accordingly, the 
applicable percentage increase to the hospital-specific rates 
applicable to SCHs and MDHs is 1.9 percent (that is, the FY 2012 
estimate of the market basket rate-of-increase of 3.0 percent less 
an adjustment of 1.0 percentage point for multifactor productivity 
and less 0.1 percentage point) for hospitals that submit quality 
data or -0.1 percent (that is, the FY 2012 estimate of the market 
basket rate-of-increase of 3.0 percent, less 2.0 percentage points 
for failure to submit data under the Hospital IQR Program, less an 
adjustment of 1.0 percentage point for multifactor productivity, and 
less 0.1 percentage point) for hospitals that fail to submit quality 
data. For a complete discussion of the applicable percentage 
increase applicable to the hospital-specific rates for SCHs and 
MDHs, we refer readers to section IV.H. of the preamble of this 
final rule.

[[Page 51799]]

    In addition, because SCHs and MDHs use the same MS-DRGs as other 
hospitals when they are paid based in whole or in part on the 
hospital-specific rate, the hospital-specific rate is adjusted by a 
budget neutrality factor to ensure that changes to the DRG 
classifications and the recalibration of the DRG relative weights 
are made in a manner so that aggregate IPPS payments are unaffected. 
Therefore, for both SCHs and MDHs, the hospital-specific rate is 
adjusted by the DRG reclassification and recalibration budget 
neutrality factor of 0.997903, as discussed in section III. of this 
Addendum. The resulting rate is used in determining the payment rate 
an SCH or MDH will receive for its discharges beginning on or after 
October 1, 2011.

c. Documentation and Coding Adjustment to the FY 2012 Hospital-Specific 
Rates for SCHs and MDHs

    As discussed in section II.D. of the preamble of this final 
rule, because hospitals (SCHs and MDHs) paid based in whole or in 
part on the hospital-specific rate use the same MS-DRG system as 
other hospitals, we believe they have the potential to realize 
increased payments from documentation and coding changes that do not 
reflect real increases in patients' severity of illness. Under 
section 1886(d)(3)(A)(vi) of the Act, Congress stipulated that 
hospitals paid based on the standardized amount should not receive 
additional payments based on the effect of documentation and coding 
changes that do not reflect real changes in case-mix. Similarly, we 
believe that hospitals paid based on the hospital-specific rate 
should not have the potential to realize increased payments due to 
documentation and coding changes that do not reflect real increases 
in patients' severity of illness. Therefore, as discussed in the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50426) and in section II.D. of 
the preamble of this final rule, we believe they should be equally 
subject to a prospective budget neutrality adjustment that we are 
applying for adoption of the MS-DRGs to all other hospitals. While 
we continue to believe that section 1886(d)(3)(A)(vi) of the Act 
does not provide explicit authority for application of the 
documentation and coding adjustment to the hospital-specific rates, 
we believe that we have the authority to apply the documentation and 
coding adjustment to the hospital-specific rates using our special 
exceptions and adjustment authority under section 1886(d)(5)(I)(i) 
of the Act.
    As we discuss in section II.D. of the preamble of this final 
rule, our best estimate, based on the most recently available data, 
is that a cumulative adjustment of -5.4 percent is required to 
eliminate the full effect of the documentation and coding changes on 
future payments to SCHs and MDHs. Unlike the case of standardized 
amounts paid to IPPS hospitals, prior to FY 2011 we had not made any 
previous adjustments to the hospital specific rates paid to SCHs and 
MDHs to account for documentation and coding changes. Consequently, 
in order to maintain consistency as far as possible with the 
adjustments applied to IPPS hospitals, we made an adjustment of -2.9 
percent in FY 2011 to the hospital-specific rates paid to SCHs and 
MDHs.
    As discussed above, we are making a -2.0 percent documentation 
and coding adjustment for IPPS hospitals in FY 2012 (-2.0 percent 
prospective adjustment plus a -2.9 percent recoupment adjustment in 
FY 2012, offset by the removal of the -2.9 percent recoupment 
adjustment for FY 2011). We believe that any adjustment to the 
hospital-specific rate due to documentation and coding effect should 
be as similar as possible to adjustments to the IPPS rate. 
Accordingly, we are making a -2.0 percent payment adjustment to the 
hospital-specific rate. We believe that a prospective adjustment of 
-2.0 percent allows CMS to maintain, to the extent possible, 
similarity and consistency in payment rates for different IPPS 
hospitals paid using the MS-DRG.

d. Adjustment To Restore Prior Rural Floor Budget Neutrality Offsets

    As discussed in section II.A.4.d. of this Addendum, in light of 
the Cape Cod decision, we are adjusting hospital-specific amounts by 
0.9 percent to restore to these amounts the offset for the rural 
floor and imputed floor in prior years. Our rationale and 
methodology for such adjustment are explained in section II.A.4.d of 
this Addendum. As with the standardized amount, we are returning 0.7 
percentage point for FYs 1998 through 2004, and 0.2 percentage point 
for FY 2005 to the hospital-specific rates. We note that, in the FY 
2006 IPPS final rule (70 FR 47429 and 47430), beginning in FY 2006, 
we changed our methodology and began applying only the DRG 
reclassification and recalibration budget neutrality factor to the 
hospital-specific rates. Because the rural floor budget neutrality 
adjustment was not applied to the hospital-specific rates in FYs 
2006 and 2007, we are not including FY 2006 and FY 2007 in our 
assessment. Therefore, to remove the effects of the rural floor from 
the hospital-specific rates for FYs 1998 through 2005, we are 
applying a one-time permanent adjustment of 0.9 percent to the 
hospital-specific rates (that is, a factor of 1.009). We received 
comments requesting complete explanations of the methodologies and 
data used in the calculation of the 1.1 and 0.9 percent adjustments 
to the standardized amount and hospital-specific rate. A complete 
summary and response to this comment can be found above in section 
II.A.4.d. of this Addendum.

3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning on or After October 1, 2011, 
and Before October 1, 2012

    Section 1886(d)(9)(E)(iv) of the Act provides that, effective 
for discharges occurring on or after October 1, 2004, hospitals 
located in Puerto Rico are paid based on a blend of 75 percent of 
the national prospective payment rate and 25 percent of the Puerto 
Rico-specific rate.

a. Puerto Rico Rate

    The Puerto Rico prospective payment rate is determined as 
follows:
    Step 1--Select the applicable average standardized amount 
considering the applicable wage index (Table 1C published in section 
VI. of this Addendum and available via the Internet).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable Puerto Rico-specific wage index.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 listed in section VI. of this Addendum and 
available via the Internet).
    Step 5--Multiply the result in Step 4 by 25 percent.

b. National Rate

    The national prospective payment rate is determined as follows:
    Step 1--Select the applicable average standardized amount.
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the national average standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 listed in section VI. of this Addendum and 
available via the Internet).
    Step 5--Multiply the result in Step 4 by 75 percent.
    The sum of the Puerto Rico rate and the national rate computed 
above equals the prospective payment for a given discharge for a 
hospital located in Puerto Rico. This rate is then further adjusted 
if the hospital qualifies for either the IME or DSH adjustment.

III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2012

    The PPS for acute care hospital inpatient capital-related costs 
was implemented for cost reporting periods beginning on or after 
October 1, 1991. Effective with that cost reporting period, 
hospitals were paid during a 10-year transition period (which 
extended through FY 2001) to change the payment methodology for 
Medicare acute care hospital inpatient capital-related costs from a 
reasonable cost-based methodology to a prospective methodology 
(based fully on the Federal rate).
    The basic methodology for determining Federal capital 
prospective rates is set forth in the regulations at 42 CFR 412.308 
through 412.352. Below we discuss the factors that we used to 
determine the capital Federal rate for FY 2012, which is effective 
for discharges occurring on or after October 1, 2011.
    The 10-year transition period ended with hospital cost reporting 
periods beginning on or after October 1, 2001 (FY 2002). Therefore, 
for cost reporting periods beginning in FY 2002, all hospitals 
(except ``new'' hospitals under Sec.  412.304(c)(2)) are paid based 
on the capital Federal rate. For FY 1992, we computed the standard 
Federal payment rate for capital-related costs under the IPPS by 
updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital

[[Page 51800]]

costs per case. Each year after FY 1992, we update the capital 
standard Federal rate, as provided at Sec.  412.308(c)(1), to 
account for capital input price increases and other factors. The 
regulations at Sec.  412.308(c)(2) also provide that the capital 
Federal rate be adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the capital Federal rate to 
total capital payments under the capital Federal rate. In addition, 
Sec.  412.308(c)(3) requires that the capital Federal rate be 
reduced by an adjustment factor equal to the estimated proportion of 
payments for (regular and special) exceptions under Sec.  412.348. 
Section 412.308(c)(4)(ii) requires that the capital standard Federal 
rate be adjusted so that the effects of the annual DRG 
reclassification and the recalibration of DRG weights and changes in 
the geographic adjustment factor (GAF) are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the 
capital Federal rate also be adjusted by a budget neutrality factor 
so that aggregate payments for inpatient hospital capital costs were 
projected to equal 90 percent of the payments that would have been 
made for capital-related costs on a reasonable cost basis during the 
respective fiscal year. That provision expired in FY 1996. Section 
412.308(b)(2) describes the 7.4 percent reduction to the capital 
Federal rate that was made in FY 1994, and Sec.  412.308(b)(3) 
describes the 0.28 percent reduction to the capital Federal rate 
made in FY 1996 as a result of the revised policy for paying for 
transfers. In FY 1998, we implemented section 4402 of Public Law 
105-33, which required that, for discharges occurring on or after 
October 1, 1997, the budget neutrality adjustment factor in effect 
as of September 30, 1995, be applied to the unadjusted capital 
standard Federal rate and the unadjusted hospital-specific rate. 
That factor was 0.8432, which was equivalent to a 15.68 percent 
reduction to the unadjusted capital payment rates. An additional 2.1 
percent reduction to the rates was effective from October 1, 1997 
through September 30, 2002, making the total reduction 17.78 
percent. As we discussed in the FY 2003 IPPS final rule (67 FR 
50102) and implemented in Sec.  412.308(b)(6), the 2.1 percent 
reduction was restored to the unadjusted capital payment rates 
effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare 
inpatient capital-related costs; that is, a model that projected 
changes in Medicare inpatient capital-related costs over time. With 
the expiration of the budget neutrality provision, the capital cost 
model was only used to estimate the regular exceptions payment 
adjustment and other factors during the transition period. As we 
explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in 
FY 2002, an adjustment for regular exception payments is no longer 
necessary because regular exception payments were only made for cost 
reporting periods beginning on or after October 1, 1991, and before 
October 1, 2001 (we refer readers to Sec.  412.348(b) of our 
regulations). Because payments are no longer made under the regular 
exception policy effective with cost reporting periods beginning in 
FY 2002, we discontinued use of the capital cost model. The capital 
cost model and its application during the transition period are 
described in Appendix B of the FY 2002 IPPS final rule (66 FR 
40099).
    Section 412.374 provides for blended payments to hospitals 
located in Puerto Rico under the IPPS for acute care hospital 
inpatient capital-related costs. Accordingly, under the capital PPS, 
we compute a separate payment rate specific to hospitals located in 
Puerto Rico using the same methodology used to compute the national 
Federal rate for capital-related costs. In accordance with section 
1886(d)(9)(A) of the Act, under the IPPS for acute care hospital 
operating costs, hospitals located in Puerto Rico are paid for 
operating costs under a special payment formula. Prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended operating rate 
that consisted of 75 percent of the applicable standardized amount 
specific to Puerto Rico hospitals and 25 percent of the applicable 
national average standardized amount. Similarly, prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended capital rate 
that consisted of 75 percent of the applicable capital Puerto Rico-
specific rate and 25 percent of the applicable capital Federal rate. 
However, effective October 1, 1997, in accordance with section 4406 
of Public Law 105-33, the methodology for operating payments made to 
hospitals located in Puerto Rico under the IPPS was revised to make 
payments based on a blend of 50 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 50 percent 
of the applicable national average standardized amount. In 
conjunction with this change to the operating blend percentage, 
effective with discharges occurring on or after October 1, 1997, we 
also revised the methodology for computing capital payments to 
hospitals located in Puerto Rico to be based on a blend of 50 
percent of the Puerto Rico capital rate and 50 percent of the 
national capital Federal rate.
    As we discussed in the FY 2005 IPPS final rule (69 FR 49185), 
section 504 of Public Law 108-173 increased the national portion of 
the operating IPPS payments for hospitals located in Puerto Rico 
from 50 percent to 62.5 percent and decreased the Puerto Rico 
portion of the operating IPPS payments from 50 percent to 37.5 
percent for discharges occurring on or after April 1, 2004 through 
September 30, 2004 (refer to the March 26, 2004 One-Time 
Notification (Change Request 3158)). In addition, section 504 of 
Public Law 108-173 provided that the national portion of operating 
IPPS payments for hospitals located in Puerto Rico is equal to 75 
percent and the Puerto Rico-specific portion of operating IPPS 
payments is equal to 25 percent for discharges occurring on or after 
October 1, 2004. Consistent with that change in operating IPPS 
payments to hospitals located in Puerto Rico, for FY 2005 we revised 
the methodology for computing capital payments to hospitals located 
in Puerto Rico to be based on a blend of 25 percent of the Puerto 
Rico-specific capital rate and 75 percent of the national capital 
Federal rate for discharges occurring on or after October 1, 2004 
(69 FR 49185).

A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update

    In the discussion that follows, we explain the factors that we 
used to determine the capital Federal rate for FY 2012. In 
particular, we explain why the FY 2012 capital Federal rate 
increases approximately 0.3 percent, compared to the FY 2011 capital 
Federal rate. As discussed in the impact analysis in Appendix A of 
this final rule, we estimate that capital payments per discharge 
will increase 1.8 percent during that same period. Because capital 
payments constitute about 10 percent of hospital payments, a percent 
change in the capital Federal rate yields only about a 0.1 percent 
change in actual payments to hospitals.

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into 
account changes in a capital input price index (CIPI) and several 
other policy adjustment factors. Specifically, we adjust the 
projected CIPI rate-of-increase as appropriate each year for case-
mix index-related changes, for intensity, and for errors in previous 
CIPI forecasts. The update factor for FY 2012 under that framework 
is 1.5 percent based on the best data available at this time. The 
update factor under that framework is based on a projected 1.5 
percent increase in the CIPI, a 0.0 percent adjustment for 
intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent 
adjustment for the FY 2010 DRG reclassification and recalibration, 
and a forecast error correction of 0.0 percent. As discussed below 
in section III.C. of this Addendum, we continue to believe that the 
CIPI is the most appropriate input price index for capital costs to 
measure capital price changes in a given year. We also explain the 
basis for the FY 2012 CIPI projection in that same section of this 
Addendum. We note, as discussed in section VI.E.1. of the preamble 
of this final rule, we are applying a -1.0 percent adjustment to the 
capital rate in FY 2012 to account for the effect of changes in 
documentation and coding under the MS-DRGs that do not correspond to 
changes in real increases in patients' severity of illness. Below we 
describe the policy adjustments that we are applying in the update 
framework for FY 2012.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the 
case-mix index corresponds to an equal percentage increase in 
hospital payments.
    The case-mix index can change for any of several reasons:
     The average resource use of Medicare patients changes 
(``real'' case-mix change);
     Changes in hospital documentation and coding of patient 
records result in higher

[[Page 51801]]

weight DRG assignments (``coding effects''); and
     The annual DRG reclassification and recalibration 
changes may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
documentation and coding behavior that result in assignment of cases 
to higher weighted DRGs but do not reflect higher resource 
requirements. The capital update framework includes the same case-
mix index adjustment used in the former operating IPPS update 
framework (as discussed in the May 18, 2004 IPPS proposed rule for 
FY 2005 (69 FR 28816)). (We no longer use an update framework to 
make a recommendation for updating the operating IPPS standardized 
amounts as discussed in section II. of Appendix B in the FY 2006 
IPPS final rule (70 FR 47707).)
    For FY 2012, we are projecting a 1.0 percent total increase in 
the case-mix index. We estimated that the real case-mix increase 
will also equal 1.0 percent for FY 2012. The net adjustment for 
change in case-mix is the difference between the projected real 
increase in case-mix and the projected total increase in case-mix. 
Therefore, as we proposed, the net adjustment for case-mix change in 
FY 2012 is 0.0 percentage point.
    The capital update framework also contains an adjustment for the 
effects of DRG reclassification and recalibration. This adjustment 
is intended to remove the effect on total payments of prior year's 
changes to the DRG classifications and relative weights, in order to 
retain budget neutrality for all case-mix index-related changes 
other than those due to patient severity. Due to the lag time in the 
availability of data, there is a 2-year lag in data used to 
determine the adjustment for the effects of DRG reclassification and 
recalibration. For example, we have data available to evaluate the 
effects of the FY 2010 DRG reclassification and recalibration as 
part of our update for FY 2012. To adjust for reclassification and 
recalibration effects, under our historical methodology, we would 
run the FY 2010 cases through the FY 2009 GROUPER and through the FY 
2010 GROUPER. If the resulting ratio of the case-mix indices did not 
equate to 1.0, in the update framework for FY 2012, we would make an 
adjustment to account for the reclassification and recalibration 
effects in FY 2010. In the update framework for FY 2011 (the FY 2011 
IPPS final rule (75 FR 50435)), we did not adjust for 
reclassification and recalibration effects from FY 2009 because it 
was accounted for in the documentation and coding adjustment to the 
capital Federal rates for FY 2011. For FY 2012, we are not 
performing an analysis of changes in case-mix in FY 2010 due to the 
effect of documentation and coding, as this would be most consistent 
with our approach under the operating IPPS. Therefore, at this time, 
under our broad authority in section 1886(g) of the Act, as we 
proposed, we are making a 0.0 percent adjustment for 
reclassification and recalibration in the update framework. We may 
evaluate the effect of FY 2010 reclassification and recalibration if 
we perform an analysis of the documentation and coding effect in FY 
2010 in future rulemaking.
    The capital update framework also contains an adjustment for 
forecast error. The input price index forecast is based on 
historical trends and relationships ascertainable at the time the 
update factor is established for the upcoming year. In any given 
year, there may be unanticipated price fluctuations that may result 
in differences between the actual increase in prices and the 
forecast used in calculating the update factors. In setting a 
prospective payment rate under the framework, we make an adjustment 
for forecast error only if our estimate of the change in the capital 
input price index for any year is off by 0.25 percentage point or 
more. There is a 2-year lag between the forecast and the 
availability of data to develop a measurement of the forecast error. 
A forecast error of -0.2 percentage point was calculated for the FY 
2012 update. That is, current historical data indicate that the 
forecasted FY 2010 CIPI (1.2 percent) used in calculating the FY 
2010 update factor was 0.2 percentage point higher than the actual 
realized price increases (1.0 percent). The two primary contributing 
factors for the FY 2010 CIPI forecast being slightly higher than the 
actual FY 2010 increase in the CIPI were that the prices for the 
nonprofit and government interest cost category grew slower than 
what had been forecasted, and the prices for the other capital 
expenses cost category also grew slower than what had been 
forecasted. Because the estimation of the FY 2010 forecast error for 
the CIPI is not greater than 0.25 percentage point, as we proposed, 
we are making a 0.0 percent adjustment for forecast error in the 
update for FY 2012.
    Under the capital IPPS update framework, we also make an 
adjustment for changes in intensity. Historically, we calculated 
this adjustment using the same methodology and data that were used 
in the past under the framework for operating IPPS. The intensity 
factor for the operating update framework reflected how hospital 
services are utilized to produce the final product, that is, the 
discharge. This component accounts for changes in the use of 
quality-enhancing services, for changes within DRG severity, and for 
expected modification of practice patterns to remove non-cost-
effective services. Our intensity measure is based on a 5-year 
average.
    Historically, we calculated case-mix constant intensity as the 
change in total charges per admission, adjusted for price level 
changes (the CIPI for hospital and related services) and changes in 
real case-mix. Without reliable estimates of the proportions of the 
overall annual intensity increases that are due, respectively, to 
ineffective practice patterns and the combination of quality-
enhancing new technologies and complexity within the DRG system, we 
assume that one-half of the annual increase is due to each of these 
factors. The capital update framework thus provides an add-on to the 
input price index rate of increase of one-half of the estimated 
annual increase in intensity, to allow for increases within DRG 
severity and the adoption of quality-enhancing technology.
    We developed a Medicare-specific intensity measure based on a 5-
year average. Past studies of case-mix change by the RAND 
Corporation (Has DRG Creep Crept Up? Decomposing the Case Mix Index 
Change Between 1987 and 1988 by G. M. Carter, J. P. Newhouse, and D. 
A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix 
change was not dependent on total change, but was usually a fairly 
steady increase of 1.0 to 1.5 percent per year. However, we used 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment.
    In accordance with Sec.  412.308(c)(1)(ii), we began updating 
the capital standard Federal rate in FY 1996 using an update 
framework that takes into account, among other things, allowable 
changes in the intensity of hospital services, as noted above. For 
much of the last decade, we found that the charge data appeared to 
be skewed as a result of hospitals attempting to maximize outlier 
payments, while lessening costs, and we established a 0.0 percent 
adjustment for intensity in each of those years. Therefore, for FY 
2011, in an effort to further refine the intensity adjustment and 
more accurately reflect allowable changes in hospital intensity, we 
revised our intensity measure to use changes in hospital costs per 
discharge over a 5-year average rather than changes in hospital 
charges, which had been the basis of the intensity adjustment in 
prior years. The unique nature of capital--how and when it is 
purchased, its longevity, and how it is financed--creates a greater 
degree of variance in capital cost among hospitals than does 
operating cost. As discussed in the FY 2011 IPPS/LTCH PPS final rule 
(75 FR 50436), we believe that using changes in capital costs per 
discharge as the basis for the intensity adjustment in lieu of 
changes in charges will decrease some of the variability of this 
adjustment. In this final rule, for FY 2012, as we proposed, we are 
using an intensity measure that is based on a 5-year adjusted 
average of cost per discharge, as we did for FY 2011. Therefore, the 
intensity measure for FY 2012 is based on an average of cost per 
discharge data from the 5-year period beginning with FY 2005 and 
extending through FY 2009. Based on these data, we estimated that 
case-mix constant intensity declined during FYs 2005 through 2009. 
In the past, when we found intensity to be declining, we believed a 
zero (rather than negative) intensity adjustment was appropriate. 
Consistent with this approach, because we estimate that intensity 
declined during that 5-year period, we believe it is appropriate to 
continue to apply a zero intensity adjustment for FY 2012. 
Therefore, as we proposed, we are making a 0.0 percent adjustment 
for intensity in the update for FY 2012.
    Above, we described the basis of the components used to develop 
the 1.5 percent capital update factor under the capital update 
framework for FY 2012 as shown in the table below.

[[Page 51802]]

          CMS FY 2012 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Capital Input Price Index..................................          1.5
Intensity:.................................................          0.0
Case-Mix Adjustment Factors:
    Real Across DRG Change.................................         -1.0
    Projected Case-Mix Change..............................          1.0
                                                            ------------
        Subtotal...........................................          1.5
Effect of FY 2010 Reclassification and Recalibration.......          0.0
Forecast Error Correction..................................          0.0
                                                            ------------
    Total Update...........................................          1.5
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation

    In its March 2011 Report to Congress, MedPAC did not make a 
specific update recommendation for capital IPPS payments for FY 
2012. (MedPAC's Report to the Congress: Medicare Payment Policy, 
March 2011, Chapter 3).

2. Outlier Payment Adjustment Factor

    Section 412.312(c) establishes a unified outlier payment 
methodology for inpatient operating and inpatient capital-related 
costs. A single set of thresholds is used to identify outlier cases 
for both inpatient operating and inpatient capital-related payments. 
Section 412.308(c)(2) provides that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of capital-related outlier 
payments to total inpatient capital-related PPS payments. The 
outlier thresholds are set so that operating outlier payments are 
projected to be 5.1 percent of total operating IPPS DRG payments.
    For FY 2011, we estimated that outlier payments for capital 
would equal 5.96 percent of inpatient capital-related payments based 
on the capital Federal rate in FY 2011. Based on the thresholds as 
set forth in section II.A. of this Addendum, we estimate that 
outlier payments for capital-related costs will equal 6.18 percent 
for inpatient capital-related payments based on the capital Federal 
rate in FY 2012. Therefore, we are applying an outlier adjustment 
factor of 0.9382 in determining the capital Federal rate. Thus, we 
estimate that the percentage of capital outlier payments to total 
capital standard payments for FY 2012 will be slightly higher than 
the percentage for FY 2011. This slight increase in estimated 
capital outlier payments is primarily due to the decrease in the 
outlier threshold used to identify outlier cases for both inpatient 
operating and inpatient capital-related payments, which is discussed 
in section II.A. of this Addendum. That is, because the outlier 
threshold used to identify outlier cases is lower, cases will 
receive higher outlier payments and more cases will qualify for 
outlier payments.
    The outlier reduction factors are not built permanently into the 
capital rates; that is, they are not applied cumulatively in 
determining the capital Federal rate. The FY 2012 outlier adjustment 
of 0.9382 is a -0.23 percent change from the FY 2011 outlier 
adjustment of 0.9404. Therefore, the net change in the outlier 
adjustment to the capital Federal rate for FY 2012 is 0.9977 
(0.9382/0.9404). Thus, the outlier adjustment will decrease the FY 
2012 capital Federal rate by 0.23 percent compared with the FY 2011 
outlier adjustment.

3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF

    Section 412.308(c)(4)(ii) requires that the capital Federal rate 
be adjusted so that aggregate payments for the fiscal year based on 
the capital Federal rate after any changes resulting from the annual 
DRG reclassification and recalibration and changes in the GAF are 
projected to equal aggregate payments that would have been made on 
the basis of the capital Federal rate without such changes. Because 
we implemented a separate GAF for Puerto Rico, we apply separate 
budget neutrality adjustments for the national GAF and the Puerto 
Rico GAF. We apply the same budget neutrality factor for DRG 
reclassifications and recalibration nationally and for Puerto Rico. 
Separate adjustments were unnecessary for FY 1998 and earlier 
because the GAF for Puerto Rico was implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described 
in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
estimate the aggregate payments that would have been made on the 
basis of the capital Federal rate with and without changes in the 
DRG classifications and weights and in the GAF to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the GAF. During the transition period, the capital 
cost model was also used to estimate the regular exception payment 
adjustment factor. As we explained in section III.A. of this 
Addendum, beginning in FY 2002, an adjustment for regular exception 
payments was no longer necessary. Therefore, we no longer use the 
capital cost model. Furthermore, as discussed below, special 
exceptions payments will no longer be made in FY 2012, and an 
exceptions payment adjustment factor will no longer be necessary, as 
there are no remaining hospitals eligible to receive special 
exceptions payments.
    To determine the proposed factors for FY 2012, we compared 
(separately for the national capital rate and the Puerto Rico 
capital rate) estimated aggregate capital Federal rate payments 
based on the FY 2011 MS-DRG classifications and relative weights and 
the FY 2011 GAF to estimated aggregate capital Federal rate payments 
based on the FY 2011 MS-DRG classifications and relative weights and 
the FY 2012 GAFs. To achieve budget neutrality for the changes in 
the national GAFs, based on calculations using updated data, we are 
applying an incremental budget neutrality adjustment of 1.0010 for 
FY 2012 to the previous cumulative FY 2011 adjustment of 0.9902, 
yielding an adjustment of 0.9912, through FY 2012. For the Puerto 
Rico GAFs, we are applying an incremental budget neutrality 
adjustment of 1.0085 for FY 2012 to the previous cumulative FY 2011 
adjustment of 0.9965, yielding a cumulative adjustment of 1.0049 
through FY 2012.
    We then compared estimated aggregate capital Federal rate 
payments based on the FY 2011 DRG relative weights and the FY 2012 
GAFs to estimate aggregate capital Federal rate payments based on 
the cumulative effects of the FY 2012 MS-DRG classifications and 
relative weights and the FY 2012 GAFs. The incremental adjustment 
for DRG classifications and changes in relative weights is 0.9994 
both nationally and for Puerto Rico. The cumulative adjustments for 
MS-DRG classifications and changes in relative weights and for 
changes in the GAFs through FY 2012 are 0.9905 nationally and 1.0043 
for Puerto Rico. We note that all the values are calculated with 
unrounded numbers. The following table summarizes the adjustment 
factors for each fiscal year:

[[Page 51803]]

                     Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          National                                                   Puerto Rico
                               -------------------------------------------------------------------------------------------------------------------------
                                            Incremental adjustment                                       Incremental adjustmant
          Fiscal year          -----------------------------------------------              -----------------------------------------------
                                 Geographic          DRG                        Cumulative    Geographic          DRG                        Cumulative
                                 adjustment   Reclassifications    Combined                   adjustment   Reclassifications    Combined
                                   factor     and recalibration                                 factor     and recalibration
--------------------------------------------------------------------------------------------------------------------------------------------------------
1992..........................  ............  .................  ............       1.00000  ............  .................  ............  ............
1993..........................  ............  .................       0.99800       0.99800  ............  .................  ............  ............
1994..........................  ............  .................       1.00531       1.00330  ............  .................  ............  ............
1995..........................  ............  .................       0.99980       1.00310  ............  .................  ............  ............
1996..........................  ............  .................       0.99940       1.00250  ............  .................  ............  ............
1997..........................  ............  .................       0.99873       1.00123  ............  .................  ............  ............
1998..........................  ............  .................       0.99892       1.00015  ............  .................  ............       1.00000
1999..........................       0.99944          1.00335         1.00279       1.00294       0.99898          1.00335         1.00233       1.00233
2000..........................       0.99857          0.99991         0.99848       1.00142       0.99910          0.99991         0.99901       1.00134
2001 \1\......................       0.99782          1.00009         0.99791       0.99933       1.00365          1.00009         1.00374       1.00508
2001 \2\......................   0.99771 \3\      1.00009 \3\     0.99780 \3\       0.99922   1.00365 \3\      1.00009 \3\     1.00374 \3\       1.00508
2002..........................   0.99666 \4\      0.99668 \4\     0.99335 \4\       0.99268   0.98991 \4\      0.99668 \4\     0.99662 \4\       0.99164
2003 \5\......................       0.99915          0.99662         0.99577       0.98848       1.00809          0.99662         1.00468       0.99628
2003 \6\......................   0.99896 \7\      0.99662 \7\     0.99558 \7\       0.98830       1.00809          0.99662         1.00468       0.99628
2004 \8\......................   1.00175 \9\      1.00081 \9\     1.00256 \9\       0.99083       1.00028          1.00081         1.00109       0.99736
2004 \10\.....................   1.00164 \9\      1.00081 \9\     1.00245 \9\       0.99072       1.00028          1.00081         1.00109       0.99736
2005 \11\.....................  0.99967 \12\          1.00094    1.00061 \12\       0.99137       0.99115          1.00094         0.99208       0.98946
2005 \13\.....................  0.99946 \12\          1.00094    1.00040 \12\       0.99117       0.99115          1.00094         0.99208       0.98946
2006..........................  1.00185 \14\          0.99892    1.00076 \14\       0.99198       1.00762          0.99892         1.00653       0.99592
2007..........................       1.00000          0.99858         0.99858       0.99057       1.00234          0.99858         1.00092       0.99683
2008..........................       1.00172          0.99792         0.99963       0.99021       1.00079          0.99792         0.99870       0.99554
2009 \15\.....................       1.00206          0.99945         1.00150       0.99170       1.00097          0.99945         1.00041       0.99595
2010 \16\.....................       0.99989          0.99945         0.99941       0.99112       1.00141          0.99953         1.00094       0.99688
2011 \17\.....................       0.99989          0.99914         0.99903       0.99016       1.00050          0.99914        0.999564       0.99652
2012 \18\.....................       1.00104          0.99935         1.00039       0.99054       1.00845          0.99935         1.00780       1.00429
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001).
\2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001).
\3\ Incremental factors are applied to FY 2000 cumulative factors.
\4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001.
\5\ Factors effective for the first half of FY 2003 (October 2002 through March 2003).
\6\ Factors effective for the second half of FY 2003 (April 2003 through September 2003).
\7\ Incremental factors are applied to FY 2002 cumulative factors.
\8\ Factors effective for the first half of FY 2004 (October 2003 through March 2004).
\9\ Incremental factors are applied to the cumulative factors for the second half of FY 2003.
\10\ Factors effective for the second half of FY 2004 (April 2004 through September 2004).
\11\ Factors effective for the first quarter of FY 2005 (September 2004 through December 2004).
\12\ Incremental factors are applied to average of the cumulative factors for the first half (October 1, 2003 through March 31, 2004) and second half
  (April 1, 2004 through September 30, 2004) of FY 2004.
\13\ Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005).
\14\ Incremental factors are applied to average of the cumulative factors for 2005.
\15\ Final factors for FY 2009, including the implementation of section 124 of Public Law 110-275, which affects wage indices and GAFs for FY 2009.
\16\ Final revised factors for FY 2010 which reflect the effect of the provisions of the Affordable Care Act.
\17\ Final factors for FY 2011.
\18\ Final factors for FY 2012.

    The methodology used to determine the recalibration and 
geographic adjustment factor (GAF/DRG) budget neutrality adjustment 
is similar to the methodology used in establishing budget neutrality 
adjustments under the IPPS for operating costs. One difference is 
that, under the operating IPPS, the budget neutrality adjustments 
for the effect of geographic reclassifications are determined 
separately from the effects of other changes in the hospital wage 
index and the DRG relative weights. Under the capital IPPS, there is 
a single GAF/DRG budget neutrality adjustment factor (the national 
capital rate and the Puerto Rico capital rate are determined 
separately) for changes in the GAF (including geographic 
reclassification) and the DRG relative weights. In addition, there 
is no adjustment for the effects that geographic reclassification 
has on the other payment parameters, such as the payments for DSH or 
IME.
    For FY 2011, we established a GAF/DRG budget neutrality factor 
of 0.9990 (75 FR 50437). For FY 2012, we are establishing a GAF/DRG 
budget neutrality factor of 1.0004. The GAF/DRG budget neutrality 
factors are built permanently into the capital rates; that is, they 
are applied cumulatively in determining the capital Federal rate. 
This follows the requirement that estimated aggregate payments each 
year be no more or less than they would have been in the absence of 
the annual DRG reclassification and recalibration and changes in the 
GAFs. The incremental change in the adjustment from FY 2011 to FY 
2012 is 1.0004. The cumulative change in the capital Federal rate 
due to this adjustment is 0.9905 (the product of the incremental 
factors for FYs 1995 through 2011 and the incremental factor of 
1.0004 for FY 2012). (We note that averages of the incremental 
factors that were in effect during FYs 2005 and 2006, respectively, 
were used in the calculation of the cumulative adjustment of 0.9905 
for FY 2012.)
    The factor accounts for the MS-DRG reclassifications and 
recalibration and for changes in the GAFs. It also incorporates the 
effects on the GAFs of FY 2012 geographic reclassification decisions 
made by the MGCRB compared to FY 2011 decisions. However, it does 
not account for changes in payments due to changes in the DSH and 
IME adjustment factors.

[[Page 51804]]

4. Exceptions Payment Adjustment Factor

    Section 412.308(c)(3) of our regulations requires that the 
capital standard Federal rate be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for both 
regular exceptions and special exceptions under Sec.  412.348 
relative to total capital PPS payments. In estimating the proportion 
of regular exception payments to total capital PPS payments during 
the transition period, we used the actuarial capital cost model 
originally developed for determining budget neutrality (described in 
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
determine the exceptions payment adjustment factor, which was 
applied to both the Federal and hospital-specific capital rates.
    Since FY 2002, an adjustment for regular exception payments was 
no longer necessary in determining the capital Federal rate because, 
in accordance with Sec.  412.348(b), regular exception payments were 
only made for cost reporting periods beginning on or after October 
1, 1991 and before October 1, 2001. Accordingly, in FY 2002 and 
subsequent fiscal years, no payments are made under the regular 
exceptions provision (66 FR 39949). Furthermore, there are no longer 
any remaining hospitals eligible to receive a special exceptions 
payment under Sec.  412.348(g) because they have reached the 
limitation on the period for exception payments under Sec.  
412.348(g)(7). A hospital qualifying for a special exceptions 
payment could receive exceptions payments for up to 10 years from 
the year in which it completed a project that met the applicable 
criteria under Sec.  412.348(g). However, the project had to be 
completed no later than the end of the hospital's last cost 
reporting period beginning before October 1, 2001. Therefore, FY 
2012 will be the final year any hospital could have received a 
special exceptions payment. However, as we indicated above, based on 
the date the projects were completed, there are no remaining 
hospitals eligible to receive a special exceptions payment in FY 
2012, which negates the need for a special exceptions adjustment for 
FY 2012. Furthermore, we note that special exceptions adjustments 
will no longer be made in subsequent years because FY 2012 is the 
final year payments could have been made to eligible hospitals in 
accordance with Sec.  412.348(g)(7).
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50439), we 
estimated that total (special) exceptions payments for FY 2011 would 
equal 0.04 percent of aggregate payments based on the capital 
Federal rate. Therefore, we applied an exceptions adjustment factor 
of 0.9996 (1 - 0.0004) to determine the FY 2011 capital Federal 
rate. As we stated above, because there are no special exceptions 
payments in FY 2012, we are no longer applying an exceptions payment 
adjustment factor to the capital Federal rate for FY 2012. However, 
the exceptions reduction factors were not built permanently into the 
capital rates; that is, the factors were not applied cumulatively in 
determining the capital Federal rate. Therefore, we are applying a 
permanent factor of 1.0004 (1/0.9996) in determining the FY 2012 
capital Federal rate to restore the reduction that resulted from the 
0.9996 exceptions adjustment factor that was applied in determining 
the FY 2011 capital Federal rate.

5. Capital Standard Federal Rate for FY 2012

    For FY 2011, we established a capital Federal rate of $420.01 
(75 FR 50439). We are establishing an update of 1.5 percent in 
determining the FY 2012 capital Federal rate for all hospitals. 
However, as discussed in greater detail in section V.E. of the 
preamble of this final rule, under the statutory authority at 
section 1886(g) of the Act, consistent with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, 
we are making an additional 1.0 percent reduction to the national 
capital Federal payment rate in FY 2012 to account for the effect of 
changes in case-mix resulting from documentation and coding changes 
that do not reflect real changes in the case-mix in light of the 
adoption of MS-DRGs. Accordingly, we are applying a cumulative 
documentation and coding adjustment factor of 0.9479 in determining 
the FY 2012 capital Federal rate (that is, the existing -0.6 percent 
adjustment in FY 2008 plus the -0.9 percent adjustment in FY 2009, 
plus the -2.9 percent adjustment for FY 2011, plus the -1.0 percent 
adjustment for FY 2012, computed as 1 divided by (1.006 x 1.009 x 
1.029 x 1.010). (We note that we did not apply a documentation and 
coding adjustment to the capital Federal rate in FY 2010 (74 FR 
43927).) As a result of the 1.5 percent update and other budget 
neutrality factors discussed above, we are establishing a national 
capital Federal rate of $421.42 for FY 2012. The national capital 
Federal rate for FY 2012 was calculated as follows:
     The FY 2012 update factor is 1.015, that is, the update 
is 1.5 percent.
     The FY 2012 budget neutrality adjustment factor that is 
applied to the capital standard Federal payment rate for changes in 
the MS-DRG classifications and relative weights and changes in the 
GAFs is 1.004.
     The FY 2012 outlier adjustment factor is 0.9382.
     The FY 2012 (special) exceptions payment adjustment 
factor is 1.0000 because we project that there will be no exceptions 
payments made in FY 2012 as discussed above in section III.A. of 
this Addendum. However, we are applying a permanent factor of 1.0004 
(1/0.9996) in determining the FY 2012 capital Federal rate to 
restore the reduction that resulted from the 0.9996 exceptions 
adjustment factor applied in determining the FY 2011 capital Federal 
rate.
     The cumulative adjustment factor for FY 2012 applied to 
the national capital Federal rate for changes in documentation and 
coding under the MS-DRGs is 0.9479.
    Because the capital Federal rate has already been adjusted for 
differences in case-mix, wages, cost-of-living, indirect medical 
education costs, and payments to hospitals serving a 
disproportionate share of low-income patients, we are not making 
additional adjustments in the capital standard Federal rate for 
these factors, other than the budget neutrality factor for changes 
in the MS-DRG classifications and relative weights and for changes 
in the GAFs.
    We are providing the following chart that shows how each of the 
factors and adjustments for FY 2012 affects the computation of the 
FY 2012 national capital Federal rate in comparison to the FY 2011 
national capital Federal rate. The FY 2012 update factor has the 
effect of increasing the capital Federal rate by 1.5 percent 
compared to the FY 2011 capital Federal rate. The GAF/DRG budget 
neutrality factor of 1.0004 has the effect of increasing the capital 
Federal rate by 0.04 percent. The FY 2012 outlier adjustment factor 
has the effect of decreasing the capital Federal rate by 0.23 
percent compared to the FY 2011 capital Federal rate. The FY 2012 
special exceptions payment adjustment factor to restore the FY 2011 
exceptions adjustment factor of 0.9996 has the net effect of 
increasing the FY 2012 national capital Federal rate by 0.04 percent 
as compared to the FY 2011 national capital Federal rate. The 
combined effect of all the changes will increase the national 
capital Federal rate by approximately 0.34 percent compared to the 
FY 2011 national capital Federal rate.

      Comparison of Factors and Adjustments: FY 2011 Capital Federal Rate and FY 2012 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                      FY 2011         FY 2012         Change      Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...............................          1.0150          1.0150          1.0150            1.50
GAF/DRG Adjustment Factor \1\...................          0.9990          1.0004          1.0004            0.04
Outlier Adjustment Factor \2\...................          0.9404          0.9382          0.9977           -0.23
Exceptions Adjustment Factor \3\................          0.9996          1.0000          1.0004            0.04
MS-DRG Documentation and Coding Adjustment            0.9574 \4\      0.9479 \5\      0.9901 \6\           -0.99
 Factor.........................................
Capital Federal Rate \7\........................         $420.01         $421.42          1.0034            0.34
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
  Thus, for example, the incremental change from FY 2011 to FY 2012 resulting from the application of the 1.0004
  GAF/DRG budget neutrality factor for FY 2012 is a net change of 1.0004.

[[Page 51805]]

 
\2\ The outlier reduction factor is not built permanently into the capital rate; that is, the factor is not
  applied cumulatively in determining the capital rate. Thus, for example, the net change resulting from the
  application of the FY 2012 outlier adjustment factor is 0.9382/0.9404, or 0.9977.
\3\ There are no longer any hospitals eligible to receive special exception adjustments in FY 2012, but since
  the exceptions payment adjustment is not cumulative, we are restoring the 0.9996 special exceptions adjustment
  applied to the FY 2011 capital rate.
\4\ The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY
  2009, no additional reduction in FY 2010, and the -2.9 percent in FY 2011.
\5\ The documentation and coding adjustment factor includes the -0.6 percent in FY 2008, -0.9 percent in FY
  2009, no additional reduction in FY 2010, the -2.9 percent in FY 2011, and the proposed -1.0 percent in FY
  2012.
\6\ The change is measured from the FY 2011 cumulative factor of 0.9574.
\7\ Sum of percent change may not sum due to rounding.

    In this final rule, we also are providing the following chart 
that shows how the final FY 2012 capital Federal rate differs from 
the proposed FY 2012 capital Federal rate as presented in the FY 
2012 IPPS/LTCH PPS proposed rule.

 Comparison of Factors and Adjustments: Proposed FY 2012 Capital Federal Rate and Final FY 2012 Capital Federal
                                                      Rate
----------------------------------------------------------------------------------------------------------------
                                                                    Proposed FY
                                                                       2012        Final FY 2012  Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor...................................................          1.0150          1.0150            0.00
GAF/DRG Adjustment Factor.......................................          1.0005          1.0004           -0.01
Outlier Adjustment Factor.......................................          0.9406          0.9382           -0.26
Exceptions Adjustment Factor....................................          1.0000          1.0000            0.00
MS-DRG Documentation and Coding Adjustment Factor...............          0.9479          0.9479            0.00
Capital Federal Rate............................................         $422.54         $421.42           -0.27
----------------------------------------------------------------------------------------------------------------

6. Special Capital Rate for Puerto Rico Hospitals

    Section 412.374 provides for the use of a blended payment system 
for payments to hospitals located in Puerto Rico under the PPS for 
acute care hospital inpatient capital-related costs. Accordingly, 
under the capital PPS, we compute a separate payment rate specific 
to hospitals located in Puerto Rico using the same methodology used 
to compute the national Federal rate for capital-related costs. 
Under the broad authority of section 1886(g) of the Act, as 
discussed in section V. of the preamble of this final rule, 
beginning with discharges occurring on or after October 1, 2004, 
capital payments to hospitals located in Puerto Rico are based on a 
blend of 25 percent of the Puerto Rico capital rate and 75 percent 
of the capital Federal rate. The Puerto Rico capital rate is derived 
from the costs of Puerto Rico hospitals only, while the capital 
Federal rate is derived from the costs of all acute care hospitals 
participating in the IPPS (including Puerto Rico).
    To adjust hospitals' capital payments for geographic variations 
in capital costs, we apply a GAF to both portions of the blended 
capital rate. The GAF is calculated using the operating IPPS wage 
index, and varies depending on the labor market area or rural area 
in which the hospital is located. We use the Puerto Rico wage index 
to determine the GAF for the Puerto Rico part of the capital-blended 
rate and the national wage index to determine the GAF for the 
national part of the blended capital rate.
    Because we implemented a separate GAF for Puerto Rico in FY 
1998, we also apply separate budget neutrality adjustments for the 
national GAF and for the Puerto Rico GAF. However, we apply the same 
budget neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. The budget neutrality adjustments 
for the national GAF and for the Puerto Rico GAF, and the budget 
neutrality factor for MS-DRG reclassifications and recalibration 
(which is the same nationally and for Puerto Rico) is discussed 
above in section III.A.3. of this Addendum.
    In computing the payment for a particular Puerto Rico hospital, 
the Puerto Rico portion of the capital rate (25 percent) is 
multiplied by the Puerto Rico-specific GAF for the labor market area 
in which the hospital is located, and the national portion of the 
capital rate (75 percent) is multiplied by the national GAF for the 
labor market area in which the hospital is located (which is 
computed from national data for all hospitals in the United States 
and Puerto Rico). In FY 1998, we implemented a 17.78 percent 
reduction to the Puerto Rico capital rate as a result of Public Law 
105-33. In FY 2003, a small part of that reduction was restored.
    For FY 2011, the special capital rate for hospitals located in 
Puerto Rico was $197.66 (75 FR 50441). Consistent with our 
adjustment to the FY 2011 Puerto Rico-specific standardized amount, 
under the Secretary's broad authority under section 1886(g) of the 
Act, we established an adjustment to the Puerto Rico-specific 
capital rate of -2.6 percent in FY 2011 for the cumulative increase 
in case-mix due to changes in documentation and coding under the MS-
DRGs for FYs 2008 and 2009. The -2.6 percent adjustment to the 
capital Puerto Rico-specific rate that we made in FY 2011 reflects 
the entire amount of our current estimate of the effects of 
documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FYs 2008 and 2009 from hospitals 
located in Puerto Rico. Consequently, in this final rule, we are not 
making any additional adjustments for the effect of documentation 
and coding that did not reflect real changes in case-mix to the 
capital Puerto Rico-specific rate for FY 2012. Therefore, with the 
changes we are making to the other factors used to determine the 
capital rate, the FY 2012 special capital rate for hospitals in 
Puerto Rico is $203.86.

B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2012

    Because the 10-year capital PPS transition period ended in FY 
2001, all hospitals (except ``new'' hospitals under Sec.  412.324(b) 
and under Sec.  412.304(c)(2)) are paid based on 100 percent of the 
capital Federal rate in FY 2012.
    For purposes of calculating payments for each discharge during 
FY 2012, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals 
located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME 
Adjustment Factor, if applicable). The result is the adjusted 
capital Federal rate.
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. 
Section 412.312(c) provides for a single set of thresholds to 
identify outlier cases for both inpatient operating and inpatient 
capital-related payments. The outlier thresholds for FY 2012 are in 
section II.A. of this Addendum. For FY 2012, a case would qualify as 
a cost outlier if the cost for the case plus the (operating) IME and 
DSH payments is greater than the prospective payment rate for the 
MS-DRG plus the fixed-loss amount of $22,385.
    Currently, as provided in Sec.  412.304(c)(2), we pay a new 
hospital 85 percent of its reasonable costs during the first 2 years 
of operation unless it elects to receive payment based on 100 
percent of the capital Federal rate. Effective with the third year 
of operation, we pay the hospital based on 100 percent of the 
capital Federal rate (that is, the same methodology used to pay all 
other hospitals subject to the capital PPS).

C. Capital Input Price Index

1. Background

    Like the operating input price index, the capital input price 
index (CIPI) is a fixed-weight price index that measures the price

[[Page 51806]]

changes associated with capital costs during a given year. The CIPI 
differs from the operating input price index in one important 
aspect--the CIPI reflects the vintage nature of capital, which is 
the acquisition and use of capital over time. Capital expenses in 
any given year are determined by the stock of capital in that year 
(that is, capital that remains on hand from all current and prior 
capital acquisitions). An index measuring capital price changes 
needs to reflect this vintage nature of capital. Therefore, the CIPI 
was developed to capture the vintage nature of capital by using a 
weighted-average of past capital purchase prices up to and including 
the current year.
    We periodically update the base year for the operating and 
capital input price indexes to reflect the changing composition of 
inputs for operating and capital expenses. In the FY 2010 IPPS/RY 
2010 LTCH PPS final rule (74 FR 44021), we rebased and revised the 
CIPI to a FY 2006 base year to reflect the more current structure of 
capital costs in hospitals. A complete discussion of this rebasing 
is provided in section IV. of the preamble of that final rule.

2. Forecast of the CIPI for FY 2012

    Based on the latest forecast by IHS Global Insight, Inc. (second 
quarter of 2011), we are forecasting the FY 2006-based CIPI to 
increase 1.5 percent in FY 2012. This reflects a projected 1.9 
percent increase in vintage-weighted depreciation prices (building 
and fixed equipment, and movable equipment), and a projected 2.0 
percent increase in other capital expense prices in FY 2012, 
partially offset by a projected 1.3 percent decline in vintage-
weighted interest expenses in FY 2012. The weighted average of these 
three factors produces the 1.5 percent increase for the FY 2006-
based CIPI as a whole in FY 2012.

IV. Changes to Payment Rates for Excluded Hospitals: Rate-of-Increase 
Percentages

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to 
a rate-of-increase ceiling. An annual per discharge limit (the 
target amount as defined in Sec.  413.40(a)) was set for each 
hospital or hospital unit based on the hospital's own cost 
experience in its base year, and updated annually by a rate-of-
increase percentage. The updated target amount for that period was 
multiplied by the Medicare discharges during that period and applied 
as an aggregate upper limit (the ceiling as defined in Sec.  
413.40(a)) on total inpatient operating costs for a hospital's cost 
reporting period. Prior to October 1, 1997, these payment provisions 
applied consistently to all categories of excluded providers 
(rehabilitation hospitals and units (now referred to as IRFs), 
psychiatric hospitals and units (now referred to as IPFs), LTCHs, 
children's hospitals, and cancer hospitals).
    Payments for services furnished in children's hospitals and 
cancer hospitals that are excluded from the IPPS continue to be 
subject to the rate-of-increase ceiling based on the hospital's own 
historical cost experience. (We note that, in accordance with Sec.  
403.752(a), RNHCIs are also subject to the rate-of-increase limits 
established under Sec.  413.40 of the regulations.)
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 26037), we 
proposed that the FY 2012 rate-of-increase percentage for updating 
the target amounts for cancer and children's hospitals and RNHCIs be 
the estimated percentage increase in the FY 2012 IPPS operating 
market basket, estimated to be 2.8 percent, in accordance with 
applicable regulations at Sec.  413.40. We also proposed to use the 
most recent data available to determine the estimated percentage 
increase for the FY 2012 IPPS operating market basket. For this 
final rule, we are using the most recent data available to determine 
the FY 2012 IPPS operating market basket update. Based on IHS Global 
Insight, Inc.'s second quarter 2011 forecast, with historical data 
through the 2011 first quarter, the IPPS operating market basket 
update is 3.0 percent for FY 2012. Therefore, for cancer and 
children's hospitals and RNHCIs, the FY 2012 rate-of-increase 
percentage that is applied to the FY 2011 target amounts in order to 
determine the FY 2012 target amount is 3.0 percent.
    IRFs, IPFs, and LTCHs were previously paid under the reasonable 
cost methodology. However, the statute was amended to provide for 
the implementation of prospective payment systems for IRFs, IPFs, 
and LTCHs. In general, the prospective payment systems for IRFs, 
IPFs, and LTCHs provide transitioning periods of varying lengths of 
time during which a portion of the prospective payment is based on 
cost-based reimbursement rules under 42 CFR Part 413 (certain 
providers do not receive a transitioning period or may elect to 
bypass the transition as applicable under 42 CFR Part 412, Subparts 
N, O, and P.) We note that all of the various transitioning periods 
provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have 
ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. 
We refer readers to section VII. of the preamble and section V. of 
the Addendum to this final rule for the update changes to the 
Federal payment rates for LTCHs under the LTCH PPS for FY 2012. The 
annual updates for the IRF PPS and the IPF PPS are issued by the 
agency in separate Federal Register documents.
    We did not receive any public comments on our proposals under 
this section.

V. Changes to the Payment Rate for the LTCH PPS for FY 2012

A. LTCH PPS Standard Federal Rate for FY 2012

1. Background

    In section VII. of the preamble of this final rule, we discuss 
our changes to the payment rates, factors, and specific policies 
under the LTCH PPS for FY 2012.
    Under Sec.  412.523(c)(3)(ii) of the regulations, for LTCH PPS 
rate years beginning RY 2004 through RY 2006, we updated the 
standard Federal rate annually by a factor to adjust for the most 
recent estimate of the increases in prices of an appropriate market 
basket of goods and services for LTCHs. We established this policy 
of annually updating the standard Federal rate because, at that 
time, we believed that was the most appropriate method for updating 
the LTCH PPS standard Federal rate for years after the initial 
implementation of the LTCH PPS in FY 2003. Thus, under Sec.  
412.523(c)(3)(ii), for RYs 2004 through 2006, the annual update to 
the LTCH PPS standard Federal rate was equal to the previous rate 
year's Federal rate updated by the most recent estimate of increases 
in the appropriate market basket of goods and services included in 
covered inpatient LTCH services.
    In determining the annual update to the standard Federal rate 
for RY 2007, based on our ongoing monitoring activity, we believed 
that, rather than solely using the most recent estimate of the LTCH 
PPS market basket update as the basis of the annual update factor, 
it was appropriate to adjust the standard Federal rate to account 
for the effect of documentation and coding in a prior period that 
was unrelated to patients' severity of illness (71 FR 27818). 
Accordingly, we established under Sec.  412.523(c)(3)(iii) that the 
annual update to the standard Federal rate for RY 2007 was zero 
percent based on the most recent estimate of the LTCH PPS market 
basket at that time, offset by an adjustment to account for changes 
in case-mix in prior periods due to the effect of documentation and 
coding that were unrelated to patients' severity of illness. For RY 
2008 through FY 2011, we also considered the effect of documentation 
and coding that was unrelated to patients' severity of illness in 
establishing the annual update to the standard Federal rate as set 
forth in the regulations at Sec.  412.523(c)(3)(iv) through 
(c)(3)(vii).
    Several provisions of the Affordable Care Act revised the annual 
update to the standard Federal rate, beginning in RY 2010. 
Specifically, section 1886(m)(3)(A) of the Act, as added by section 
3401(c) of the Affordable Care Act, specifies that, for rate year 
2010 and each subsequent rate year, any annual update to the 
standard Federal rate shall be reduced:
     For rate year 2010 through 2019, by the other 
adjustment specified in section 1886(m)(3)(A)(ii) and (m)(4) of the 
Act; and
     For rate year 2012 and each subsequent year, by the 
productivity adjustment described in section 1886(b)(3)(B)(xi)(II) 
of the Act (which we refer to as ``the multifactor productivity 
(MFP) adjustment'') as discussed in section VII.E.2.d. of the 
preamble of this final rule.
    Section 1886(m)(3)(B) of the Act provides that the application 
of paragraph (3) of section 1886(m) of the Act may result in the 
annual update being less than zero for a rate year, and may result 
in payment rates for a rate year being less than such payment rates 
for the preceding rate year. (As noted in section VII.E.2.d. of the 
preamble of this final rule, the annual update to the LTCH PPS 
occurs on October 1 and we have adopted the term ``fiscal year'' 
(FY) rather than ``rate year'' (RY) under the LTCH PPS beginning 
October 1, 2010. Therefore, for purposes of clarity, when discussing 
the annual update for the LTCH PPS, including the provisions of the 
Affordable Care Act, we employ ``fiscal year'' rather than ``rate 
year'' for 2011 and subsequent years.)

[[Page 51807]]

    For FY 2011, consistent with our historical practice, we 
established an update to the LTCH PPS standard Federal rate based on 
the full estimated LTCH PPS market basket increase of 2.5 percent, 
the 0.50 percentage point reduction required by sections 
1886(m)(3)(A)(i) and (m)(4)(B) of the Act, and an adjustment to 
account for the increase in case-mix in prior periods (FYs 2008 and 
2009) that resulted from the effect of documentation and coding 
practices of -2.5 percent. Accordingly, at Sec.  412.523(c)(vii) of 
the regulations, we established an annual update of -0.49 percent to 
the standard Federal rate for FY 2011 (75 FR 50443 through 50444).
    In this final rule, for FY 2012, as discussed in greater detail 
in section VII.E.2. of the preamble of this final rule, we are 
establishing an annual update to the LTCH PPS standard Federal rate 
of 1.8 percent based on the full estimated increase in the LTCH PPS 
market basket of 2.9 percent less the MFP adjustment of 1.0 
percentage point required under 1886(m)(3)(A)(ii) of the Act and 
less the 0.1 percentage point required by sections 1886(m)(3)(A)(i) 
and (m)(4)(C) of the Act. As discussed in greater detail below, for 
FY 2012, we are not making an adjustment to account for the increase 
in case-mix in a prior period (FY 2010) resulting from the effect of 
documentation and coding.

2. Development of the FY 2012 LTCH PPS Standard Federal Rate

    We continue to believe that the annual update to the LTCH PPS 
standard Federal rate should be based on the most recent estimate of 
the increase in the LTCH PPS market basket, including any statutory 
adjustments. We also continue to believe it is appropriate that the 
standard Federal rate be offset by an adjustment to account for any 
effect of documentation and coding practices that does not reflect 
increased severity of illness. Such an adjustment protects the 
integrity of the Medicare Trust Funds by ensuring that the LTCH PPS 
payment rates better reflect the true costs of treating LTCH 
patients.
    Consistent with past LTCH payment policy, we have continued to 
monitor the most recent available LTCH data. In the FY 2012 IPPS/
LTCH PPS proposed rule (76 FR 26038), we stated that, based on an 
analysis of FY 2010 LTCH claims from the December 2010 update of the 
MedPAR files, it did not appear that an adjustment for the effect of 
documentation and coding in FY 2010 was warranted. Therefore, we did 
not propose to make an adjustment for the effect of documentation 
and coding during FY 2010 in our proposed annual update to the LTCH 
PPS standard Federal rate for FY 2012. Furthermore, we proposed 
that, consistent with our historical practice of using the best 
available data, if more recent data subsequently became available, 
we would examine such data for the final rule to determine if an 
adjustment for the effect of documentation and coding during FY 2010 
is warranted.
    For this final rule, based on an analysis of the most recent 
available data, that is FY 2010 LTCH claims from the March 2011 
update of the MedPAR file, it does not appear that an adjustment for 
the effect of documentation and coding in FY 2010 is warranted. 
Therefore, in this final rule, as we proposed, we are not making an 
adjustment for the effect of documentation and coding during FY 2010 
in our annual update to the LTCH PPS standard Federal rate for FY 
2012.
    In the FY 2011 IPPS/LTCH PPS final rule (75 FR 50443 through 
50444), we established an annual update to the LTCH PPS standard 
Federal rate for FY 2011 based on the full estimated LTCH PPS market 
basket increase of 2.5 percent, the 0.50 percentage point reduction 
required by sections 1886(m)(3)(A)(i), (m)(3)(A)(ii), and (m)(4)(B) 
of the Act, and an adjustment to account for the increase in case-
mix in prior periods (FYs 2008 and 2009) that resulted from the 
effect of documentation and coding practices of -2.5 percent. 
Accordingly, at Sec.  412.523(c)(vii), we established an annual 
update to the standard Federal rate for FY 2011 of -0.49 percent. 
That is, we applied an update factor of 0.9951 (calculated as 1.020 
x 1 divided by 1.025 = 0.9951 or -0.49 percent) to the RY 2010 
Federal rate of $39,794.95 (as established in the June 2, 2010 FY 
2010 IPPS/RY 2010 LTCH PPS notice (75 FR 31128 through 31129)) to 
determine the FY 2011 standard Federal rate. Consequently, we 
established a standard Federal rate for FY 2011 of $39,599.95, which 
is applicable to LTCH PPS discharges occurring on or after October 
1, 2010, through September 30, 2011.
    In the FY 2012 IPPS/LTCH PPS proposed rule, for FY 2012, as 
noted above and as discussed in greater detail in section VII.E.2. 
of the preamble of the proposed rule, consistent with our historical 
practice, we proposed to establish an annual update to the LTCH PPS 
standard Federal rate of 1.5 percent, based on the full estimated 
increase in the proposed LTCH PPS market basket of 2.8 percent less 
the proposed MFP adjustment of 1.2 percentage points required under 
1886(m)(3)(A)(ii) and less the 0.1 percentage point required by 
sections 1886(m)(3)(A)(i) and(m)(4)(C) of the Act. Accordingly, we 
proposed an update factor to the standard Federal rate for FY 2012 
of 1.5 percent. That is, under proposed Sec.  412.523(c)(viii), we 
proposed to apply a factor of 1.015 to the FY 2011 standard Federal 
rate of $39,599.95 (as established in the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50444)) to determine the FY 2012 standard Federal 
rate. Furthermore, as discussed in greater detail in section 
VII.E.3. of the preamble of the proposed rule, for FY 2012, we 
proposed to apply an area wage level budget neutrality factor of 
0.99723 to the standard Federal rate to ensure that any changes to 
the area wage level adjustment (that is, the annual update of the 
wage index values and labor-related share) would not result in any 
change (increase or decrease) in estimated aggregate LTCH PPS 
payments. Consequently, we proposed to establish a standard Federal 
rate for FY 2012 of $40,082.61 (calculated as $39,599.95 x 1.015 x 
0.99723), which would be applicable to LTCH PPS discharges occurring 
on or after October 1, 2011, through September 30, 2012.
    Comment: Several commenters expressed general support for the 
development of the proposed standard Federal rate. In particular, 
commenters agreed that an adjustment for the effect of documentation 
and coding during FY 2010 was not warranted.
    Response: We appreciate the commenters' support for the 
development of the proposed standard Federal rate. We are finalizing 
our proposed approach for the development of the standard Federal 
rate for FY 2012 (based on the latest available data) without 
modification in this final rule.
    In this final rule, for FY 2012, as noted above and as discussed 
in greater detail in section VII.E.2. of the preamble of the final 
rule, consistent with our historical practice, we are establishing 
an annual update to the LTCH PPS standard Federal rate of 1.8 
percent, based on the full estimated increase in the LTCH PPS market 
basket of 2.9 percent less the MFP adjustment of 1.0 percentage 
point required under section 1886(m)(3)(A)(ii) of the Act and less 
the 0.1 percentage point required by sections 1886(m)(3)(A)(i) 
and(m)(4)(C) of the Act. Accordingly, the update factor to the 
standard Federal rate for FY 2012 is 1.8 percent. That is, under 
Sec.  412.523(c)(viii), we apply a factor of 1.018 to the FY 2011 
standard Federal rate of $39,599.95 (as established in the FY 2011 
IPPS/LTCH PPS final rule (75 FR 50444)) to determine the FY 2012 
standard Federal rate. Furthermore, as discussed in greater detail 
in section VII.E.3. of the preamble of this final rule, for FY 2012, 
we are applying an area wage level budget neutrality factor of 
0.99775 to the standard Federal rate to ensure that any changes to 
the area wage level adjustment (that is, the annual update of the 
wage index values and labor-related share) will not result in any 
change (increase or decrease) in estimated aggregate LTCH PPS 
payments. Consequently, we are establishing a standard Federal rate 
for FY 2012 of $40,222.05 (calculated as $39,599.95 x 1.018 x 
0.99775), which will be applicable to LTCH PPS discharges occurring 
on or after October 1, 2011, through September 30, 2012.

B. Adjustment for Area Wage Levels Under the LTCH PPS for FY 2012

1. Background

    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS standard Federal rate to account for differences in LTCH area 
wage levels at Sec.  412.525(c). The labor-related share of the LTCH 
PPS standard Federal rate is adjusted to account for geographic 
differences in area wage levels by applying the applicable LTCH PPS 
wage index. The applicable LTCH PPS wage index is computed using 
wage data from inpatient acute care hospitals without regard to 
reclassification under section 1886(d)(8) or section 1886(d)(10) of 
the Act.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 
FR 56015), when we implemented the LTCH PPS, we established a 5-year 
transition to the full area wage index level adjustment. The area 
wage level adjustment was completely phased-in for cost reporting 
periods beginning in FY 2007. Therefore, for cost reporting periods 
beginning on or after October 1, 2006, the applicable LTCH wage 
index values are the full LTCH PPS wage index values calculated 
based on acute care hospital inpatient wage

[[Page 51808]]

index data without taking into account geographic reclassification 
under section 1886(d)(8) and section 1886(d)(10) of the Act. For 
additional information on the phase-in of the area wage level 
adjustment under the LTCH PPS, we refer readers to the August 30, 
2002 LTCH PPS final rule (67 FR 56017 through 56019) and the RY 2008 
LTCH PPS final rule (72 FR 26891).

2. Geographic Classifications/Labor Market Area Definitions

    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in 
establishing an adjustment for area wage levels, the labor-related 
portion of a LTCH's Federal prospective payment is adjusted by using 
an appropriate wage index based on the labor market area in which 
the LTCH is located. Specifically, the application of the LTCH PPS 
area wage level adjustment at existing Sec.  412.525(c) is made on 
the basis of the location of the LTCH in either an urban area or a 
rural area as defined in Sec.  412.503. Currently under the LTCH PPS 
at Sec.  412.503, an ``urban area'' is defined as a Metropolitan 
Statistical Area (which would include a metropolitan division, where 
applicable) as defined by the Executive OMB and a ``rural area'' is 
defined as any area outside of an urban area.
    In the RY 2006 LTCH PPS final rule (70 FR 24184 through 24185), 
in regulations at Sec.  412.525(c), we revised the labor market area 
definitions used under the LTCH PPS effective for discharges 
occurring on or after July 1, 2005, based on the Executive OMB's 
CBSA designations, which are based on 2000 Census data. We made this 
revision because we believe that the CBSA-based labor market area 
definitions will ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. We note that these are the 
same CBSA-based designations implemented for acute care hospitals 
under the IPPS at Sec.  412.64(b), effective October 1, 2004 (69 FR 
49026 through 49034). (For further discussion of the CBSA-based 
labor market area (geographic classification) definitions currently 
used under the LTCH PPS, we refer readers to the RY 2006 LTCH PPS 
final rule (70 FR 24182 through 24191).) We have updated the LTCH 
PPS CBSA-based labor market area definitions annually since they 
were adopted for RY 2006 (73 FR 26812 through 26814, 74 FR 44023 
through 44204, and 75 FR 50444 through 50445).
    As we discussed in the FY 2012 IPPS/LTCH PPS proposed rule (76 
FR 26039), in OMB Bulletin No. 10-2, issued on December 1, 2009, OMB 
announced that the CBSA changes in that bulletin would be the final 
update prior to the 2010 Census of Population and Housing. We 
adopted those changes under the LTCH PPS in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 50444 through 50445), effective beginning 
October 1, 2010, and they are also reflected in this FY 2012 final 
rule. In 2013, OMB plans to announce new area delineations based on 
its 2010 standards (75 FR 37246) and the 2010 Census data.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB-go to ``Agency Information'' and click on 
``Bulletins''.

3. LTCH PPS Labor-Related Share

    Under the adjustment for differences in area wage levels at 
Sec.  412.525(c), the labor-related share of a LTCH's PPS Federal 
prospective payment is adjusted by the applicable wage index for the 
labor market area in which the LTCH is located. The LTCH PPS labor-
related share currently represents the sum of the labor-related 
portion of operating costs (wages and salaries, employee benefits, 
professional fees, and all other labor-intensive services) and a 
labor-related portion of capital costs using the applicable LTCH PPS 
market basket. Currently, as established in the RY 2007 LTCH PPS 
final rule (71 FR 27829 through 27830), the LTCH PPS labor-related 
share is based on the relative importance of the labor-related share 
of operating costs and capital costs of the rehabilitation, 
psychiatric, and long-term care hospital (RPL) market basket based 
on FY 2002 data, as those were the best available data at that time 
that reflected the cost structure of LTCHs. For the past 4 years (RY 
2008, RY 2009, RY 2010, and FY 2011), we updated the LTCH PPS labor-
related share annually based on the latest available data for the FY 
2002-based RPL market basket. For FY 2011, in the FY 2011 IPPS/LTCH 
PPS final rule (75 FR 20445), we established a labor-related share 
of 75.271 percent based on the best available data at that time for 
the FY 2002-based RPL market basket for FY 2011. (Additional 
background information on the historical development of the labor-
related share under the LTCH PPS and the development of the RPL 
market basket can be found in the RY 2007 LTCH PPS final rule (71 FR 
27810 through 27817 and 27829 through 27830).)
    As discussed in section VII.D. of the preamble of this final 
rule, we are finalizing our proposal to revise and rebase the market 
basket used under the LTCH PPS beginning in FY 2012 by adopting the 
newly created FY 2008-based RPL market basket. We also are 
finalizing our proposal to determine the labor-related share for FY 
2012 as the sum of the FY 2012 relative importance of each labor-
related cost category of the FY 2008-based RPL market basket. (The 
summary of comments we received on the proposed LTCH PPS labor-
related share for FY 2012 and our responses can be found in section 
VII.D.3.f. of the preamble of this final rule.)
    As we discuss in section VII.D.3.f. of the preamble of this 
final rule, we are establishing a labor-related share under the LTCH 
PPS for FY 2012 based on IHS Global Insight, Inc.'s second quarter 
2011 forecast of the FY 2008-based RPL market basket for FY 2012, as 
these are the most recent available data that reflect the cost 
structure of LTCHs. Consistent with our proposal, the labor-related 
share for FY 2012 is the sum of the FY 2012 relative importance of 
each labor-related cost category of the FY 2008-based RPL market 
basket, and reflects the different rates of price change for these 
cost categories between the base year (FY 2008) and FY 2012. As 
discussed in greater detail in section VII.D.3.f. of this preamble, 
the sum of the relative importance for FY 2012 for operating costs 
(Wages and Salaries, Employee Benefits, Professional Fees: Labor-
Related, Administrative and Business Support Services, and All-
Other: Labor-related Services) is 66.564 percent and the proposed 
labor-related share of capital costs is 3.635 percent. Therefore, in 
this final rule, under the authority set forth in section 123 of the 
BBRA as amended by section 307(b) of the BIPA, we are establishing a 
labor-related share of 70.199 percent (66.564 percent plus 3.635 
percent) under the LTCH PPS for the FY 2012, which will be effective 
for discharges occurring on or after October 1, 2011, and through 
September 30, 2012. (For additional details on the development of 
the LTCH PPS labor-related share for FY 2012, we refer readers to 
section VII.D.3.f. of the preamble of this final rule.)

4. LTCH PPS Wage Index for FY 2012

    Historically, under the LTCH PPS, we have established LTCH PPS 
wage index values calculated from acute care IPPS hospital wage data 
without taking into account geographic reclassification under 
sections 1886(d)(8) and 1886(d)(10) of the Act (67 FR 56019). The 
area wage level adjustment established under the LTCH PPS is based 
on a LTCH's actual location without regard to the urban or rural 
designation of any related or affiliated provider.
    In the FY 2011 LTCH PPS final rule (75 FR 50445 through 50446), 
we calculated the FY 2011 LTCH PPS wage index values using the same 
data used for the FY 2011 acute care hospital IPPS (that is, data 
from cost reporting periods beginning during FY 2007), without 
taking into account geographic reclassification under sections 
1886(d)(8) and 1886(d)(10) of the Act, as these were the most recent 
complete data available at that time. In that same final rule, we 
indicated that we computed the FY 2011 LTCH PPS wage index values 
consistent with the urban and rural geographic classifications 
(labor market areas) and consistent with the pre-reclassified IPPS 
wage index policy (that is, our historical policy of not taking into 
account IPPS geographic reclassifications in determining payments 
under the LTCH PPS). We also continued to use our existing policy 
for determining wage index values in areas where there are no IPPS 
wage data.
    Consistent with our historical methodology, to determine the 
applicable wage index values under the LTCH PPS for FY 2012, under 
the broad authority conferred upon the Secretary by section 123 of 
the BBRA, as amended by section 307(b) of BIPA, to determine 
appropriate adjustments under the LTCH PPS, we proposed to use wage 
data collected from cost reports submitted by IPPS hospitals for 
cost reporting periods beginning during FY 2008, without taking into 
account geographic reclassification under sections 1886(d)(8) and 
1886(d)(10) of the Act. We proposed to use FY 2008 data because 
these data are the most recent complete data available. These are 
the same data used to compute the FY 2012 acute care hospital 
inpatient wage index, as discussed in section III. of the preamble 
of this final rule. (For our rationale for using IPPS hospital wage 
data as a proxy for determining the wage index values used under the 
LTCH PPS, we refer

[[Page 51809]]

readers to the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 44024 
through 44025).)
    The FY 2012 LTCH PPS wage index values we are presenting in this 
final rule are computed consistent with the urban and rural 
geographic classifications (labor market areas) discussed above in 
section V.B.2. of the Addendum to this final rule and consistent 
with the pre-reclassified IPPS wage index policy (that is, our 
historical policy of not taking into account IPPS geographic 
reclassifications under sections 1886(d)(8) and 1886(d)(10) of the 
Act in determining payments under the LTCH PPS). As with the IPPS 
wage index, wage data for multicampus hospitals with campuses 
located in different labor market areas (CBSAs) are apportioned to 
each CBSA where the campus or campuses are located (as discussed in 
section III.F. of the preamble of this final rule). Furthermore, in 
determining the FY 2012 LTCH PPS wage index values in this final 
rule, we are continuing to use our existing policy for determining 
wage index values in areas where there are no IPPS wage data.
    As discussed in the FY 2011 IPPS/LTCH PPS final rule (75 FR 
50446), we established a methodology for determining LTCH PPS wage 
index values for areas that have no IPPS wage data in the RY 2009 
LTCH PPS final rule, and as we proposed, we are continuing to use 
this methodology for FY 2012. As was the case in FY 2011, there are 
currently no LTCHs located in labor areas without IPPS hospital wage 
data (or IPPS hospitals) for FY 2012. However, we calculate LTCH PPS 
wage index values for these areas using our established methodology 
in the event that, in the future, a LTCH should open in one of those 
areas. Under our existing methodology, the LTCH PPS wage index value 
for urban CBSAs with no IPPS wage data is determined by using an 
average of all of the urban areas within the State, and the LTCH PPS 
wage index value for rural areas with no IPPS wage data is 
determined by using the unweighted average of the wage indices from 
all of the CBSAs that are contiguous to the rural counties of the 
State. (We refer readers to 73 FR 26817 through 26818 for an 
explanation of and rationale for our policy.)
    Comment: One commenter pointed out that it is not necessary to 
use our methodology for determining a LTCH PPS wage index value for 
areas with no IPPS wage data to determine a LTCH PPS wage index 
value for the rural area of Massachusetts for FY 2012, as we 
proposed, because there are, in fact, data for rural Massachusetts 
(CBSA code 22) in the FY 2008 IPPS wage data that we proposed to use 
to determine the FY 2012 LTCH PPS wage index values in the proposed 
rule.
    Response: We appreciate the commenter pointing out that we 
mistakenly stated in the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 
26040) that there was no IPPS wage data for the rural area of 
Massachusetts in the FY 2008 IPPS wage data that we proposed to use 
to determine the FY 2012 LTCH PPS wage index values. We note that, 
although our proposal incorrectly stated that we would use our 
established methodology for rural areas with no IPPS wage data to 
compute the FY 2012 LTCH PPS wage index for the rural area of 
Massachusetts, the proposed FY 2012 LTCH PPS wage index for the 
rural area of Massachusetts (CBSA code 22, as shown in Table 12B of 
that same proposed rule) was computed based on the proposed FY 2008 
IPPS wage data (and was not computed using our policy for rural 
areas with no IPPS wage data as our proposal indicated). 
Accordingly, in this final rule, we determined the FY 2012 LTCH PPS 
wage index value for the rural area of Massachusetts (CBSA code 22) 
using the FY 2008 IPPS wage data that we are generally using to 
determine all of the FY 2012 LTCH PPS wage index values in this 
final rule.
    Based on the FY 2008 IPPS wage data that we used to determine 
the FY 2012 LTCH PPS wage index values in this final rule, there are 
no IPPS wage data for the urban area Hinesville-Fort Stewart, GA 
(CBSA 25980). Consistent with the methodology discussed above and as 
we proposed, we calculated the FY 2012 wage index value for CBSA 
25980 as the average of the wage index values for all of the other 
urban areas within the State of Georgia (that is, CBSAs 10500, 
12020, 12060, 12260, 15260, 16860, 17980, 19140, 23580, 31420, 
40660, 42340, 46660 and 47580), as shown in Table 12A, which is 
listed in section VI. of the Addendum to this final rule and 
available via the Internet). We note that, as IPPS wage data are 
dynamic, it is possible that urban areas without IPPS wage data will 
vary in the future.
    The FY 2012 LTCH wage index values that will be applicable for 
LTCH discharges occurring on or after October 1, 2011, through 
September 30, 2012, are presented in Table 12A (for urban areas) and 
Table 12B (for rural areas), which are listed in section VI. of the 
Addendum of this final rule and available via the Internet.

e. Budget Neutrality Adjustment for Changes to the Area Wage Level 
Adjustment

    Historically, the LTCH PPS wage index and labor-related share 
are updated annually based on the latest available data. However, 
there are currently no statutory or regulatory requirements that the 
annual update to the LTCH PPS area wage level adjustment at existing 
Sec.  412.525(c) (that is, the wage index and the labor-related 
share) be budget neutral such that estimated aggregate LTCH PPS 
payments would be unaffected (that is, would be neither greater than 
nor less than estimated aggregate LTCH PPS payments without such 
changes). In section VII.E.3. of the preamble of this final rule, as 
we proposed, under new Sec.  412.525(c)(2), we are providing that, 
beginning in FY 2012, any changes to the wage index values or labor-
related share will be made in a budget neutral manner such that 
estimated aggregate LTCH PPS payments are unaffected, that is, will 
be neither greater than nor less than estimated aggregate LTCH PPS 
payments without such changes to the area wage level adjustment. 
Under this policy, as we proposed, we have also determined an area 
wage level adjustment budget neutrality factor that is applied to 
the standard Federal rate to ensure that any changes to the area 
wage level adjustment are budget neutral such that any changes to 
the wage index values or labor-related share will not result in any 
change (increase or decrease) in estimated aggregate LTCH PPS 
payments. Therefore, under Sec.  412.523(d)(4), we are applying an 
area wage level adjustment budget neutrality factor of 0.99775 
(determined under the methodology described in section VII.E.3. of 
the preamble of this final rule) to determine the FY 2012 LTCH PPS 
standard Federal rate. (The development of the LTCH PPS standard 
Federal rate for FY 2012 is discussed in section V.A.2. of this 
Addendum.)

C. LTCH PPS Cost-of-Living Adjustment for LTCHs Located in Alaska 
and Hawaii

    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs 
incurred in those States. Specifically, we apply a COLA to payments 
to LTCHs located in Alaska and Hawaii by multiplying the nonlabor-
related portion of the standard Federal payment rate by the 
applicable COLA factors established annually by CMS. Higher labor-
related costs for LTCHs located in Alaska and Hawaii are taken into 
account in the adjustment for area wage levels described above.
    For FY 2011 and in prior years, we used the most recent updated 
COLA factors obtained from the U.S. Office of Personnel Management 
(OPM) Web site at http://www.opm.gov/oca/cola/rates.asp to adjust 
the payments for LTCHs in Alaska and Hawaii. Sections 1911 through 
1919 of the Nonforeign Area Retirement Equity Assurance Act, as 
contained in subtitle B of title XIX of the National Defense 
Authorization Act (NDAA) for Fiscal Year 2010 (Pub. L. 111-84, 
October 28, 2009) transitions the Alaska and Hawaii COLAs to 
locality pay. Under section 1914 of Public Law 111-84, locality pay 
is being phased in over a 3-year period beginning in January 2010 
with COLA rates frozen as of the date of enactment, October 28, 
2009, and then proportionately reduced to reflect the phase-in of 
locality.
    As we discussed in the FY 2012 IPPS/LTCH PPS proposed rule (76 
FR 26040), we do not believe it is appropriate to use either the 
2010 or 2011 reduced factors for adjusting the nonlabor-related 
portion of the standard Federal rate for LTCHs in Alaska or Hawaii. 
Therefore, for FY 2012, we proposed to continue to use the same COLA 
factors (published by OPM) that we used to adjust payments in FY 
2011 (which are based on OPM's 2009 COLA factors) to adjust the 
nonlabor-related portion of the standard Federal rate for LTCHs 
located in Alaska and Hawaii, and we invited public comment on this 
proposal. We believe using these COLA factors would appropriately 
adjust the nonlabor-related portion of the standard Federal rate for 
LTCHs in Alaska and Hawaii consistent with Sec.  412.525(b). We did 
not receive any public comments on this proposal.
    In this final rule, for FY 2012, under the broad authority 
conferred upon the Secretary by section 123 of the BBRA, as amended 
by section 307(b) of BIPA, to determine appropriate adjustments 
under the LTCH PPS, as we proposed, we will continue to use the same 
COLA factors (published by OPM)

[[Page 51810]]

that we use to adjust LTCH PPS payments in FY 2011. We believe using 
these COLA factors will appropriately adjust the nonlabor-related 
portion of the standard Federal rate for LTCHs in Alaska and Hawaii 
consistent with Sec.  412.525(b). (We note that this policy is 
consistent with the proposed adjustment for cost-of-living in Alaska 
and Hawaii for IPPS hospitals discussed in section II.B.2. of this 
Addendum). Therefore, consistent with our current policy, under 
Sec.  412.525(b), for FY 2012 we are applying a COLA to payments to 
LTCHs located in Alaska and Hawaii by multiplying the nonlabor-
related portion of the standard Federal payment rate by the factors 
listed in the chart below because they are the most recent available 
data at this time. As discussed above, these factors were obtained 
from the OPM and are also used under the IPPS for FY 2012.

  Cost-of-Living Adjustment Factors for Alaska and Hawaii Hospitals for
                        the LTCH PPS for FY 2012
------------------------------------------------------------------------
                                                               --
------------------------------------------------------------------------
Alaska:                                                .................
    City of Anchorage and 80-kilometer (50[dash]mile)               1.23
     radius by road..................................
    City of Fairbanks and 80-kilometer (50[dash]mile)               1.23
     radius by road..................................
    City of Juneau and 80-kilometer (50[dash]mile)                  1.23
     radius by road..................................
    All other areas of Alaska........................               1.25
Hawaii:                                                .................
    City and County of Honolulu......................               1.25
    County of Hawaii.................................               1.18
    County of Kauai..................................               1.25
    County of Maui and County of Kalawao.............               1.25
------------------------------------------------------------------------
 (The above factors are based on data obtained from the U.S. Office of
  Personnel Management Web site at: http://www.opm.gov/oca/cola/rates.asp.)

D. Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background

    Under the broad authority conferred upon the Secretary by 
section 123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. We refer to these 
cases as high cost outliers (HCOs). Providing additional payments 
for outliers strongly improves the accuracy of the LTCH PPS in 
determining resource costs at the patient and hospital level. These 
additional payments reduce the financial losses that would otherwise 
be incurred when treating patients who require more costly care and, 
therefore, reduce the incentives to underserve these patients. We 
set the outlier threshold before the beginning of the applicable 
rate year so that total estimated outlier payments are projected to 
equal 8 percent of total estimated payments under the LTCH PPS.
    Under Sec.  412.525(a) in the regulations (in conjunction with 
Sec.  412.503), we make outlier payments for any discharges if the 
estimated cost of a case exceeds the adjusted LTCH PPS payment for 
the MS-LTC-DRG plus a fixed-loss amount. Specifically, in accordance 
with Sec.  412.525(a)(3) (in conjunction with Sec.  412.503), we 
make an additional payment to an HCO case that is equal to 80 
percent of the difference between the estimated cost of the patient 
case and the outlier threshold, which is the sum of the adjusted 
Federal prospective payment for the MS-LTC-DRG and the fixed-loss 
amount. The fixed-loss amount is the amount used to limit the loss 
that a hospital will incur under the outlier policy for a case with 
unusually high costs. This results in Medicare and the LTCH sharing 
financial risk in the treatment of extraordinarily costly cases. 
Under the LTCH PPS HCO policy, the LTCH's loss is limited to the 
fixed-loss amount and a fixed percentage of costs above the outlier 
threshold (adjusted MS-LTC-DRG payment plus the fixed-loss amount). 
The fixed percentage of costs is called the marginal cost factor. We 
calculate the estimated cost of a case by multiplying the Medicare 
allowable covered charge by the hospital's overall hospital cost-to-
charge ratio (CCR).
    Under the LTCH PPS HCO policy at Sec.  412.525(a), we determine 
a fixed-loss amount, that is, the maximum loss that a LTCH can incur 
under the LTCH PPS for a case with unusually high costs before the 
LTCH will receive any additional payments. We calculate the fixed-
loss amount by estimating aggregate payments with and without an 
outlier policy. The fixed-loss amount results in estimated total 
outlier payments being projected to be equal to 8 percent of 
projected total LTCH PPS payments. Currently, MedPAR claims data and 
CCRs based on data from the most recent Provider-Specific File (PSF) 
(or from the applicable statewide average CCR if a LTCH's CCR data 
are faulty or unavailable) are used to establish a fixed-loss 
threshold amount under the LTCH PPS.

2. Determining LTCH CCRs Under the LTCH PPS

a. Background

    The following is a discussion of CCRs that are used in 
determining payments for HCO and SSO cases under the LTCH PPS, at 
Sec.  412.525(a) and Sec.  412.529, respectively. Although this 
section is specific to HCO cases, because CCRs and the policies and 
methodologies pertaining to them are used in determining payments 
for both HCO and SSO cases (to determine the estimated cost of the 
case at Sec.  412.529(d)(2)), we are discussing the determination of 
CCRs under the LTCH PPS for both of these types of cases 
simultaneously.
    In determining both HCO payments (at Sec.  412.525(a)) and SSO 
payments (at Sec.  412.529), we calculate the estimated cost of the 
case by multiplying the LTCH's overall CCR by the Medicare allowable 
charges for the case. In general, we use the LTCH's overall CCR, 
which is computed based on either the most recently settled cost 
report or the most recent tentatively settled cost report, whichever 
is from the latest cost reporting period, in accordance with Sec.  
412.525(a)(4)(iv)(B) and Sec.  412.529(f)(4)(ii) for HCOs and SSOs, 
respectively. (We note that, in some instances, we use an 
alternative CCR, such as the statewide average CCR in accordance 
with the regulations at Sec.  412.525(a)(4)(iv)(C) and Sec.  
412.529(f)(4)(iii), or a CCR that is specified by CMS or that is 
requested by the hospital under the provisions of the regulations at 
Sec.  412.525(a)(4)(iv)(A) and Sec.  412.529(f)(4)(i).) Under the 
LTCH PPS, a single prospective payment per discharge is made for 
both inpatient operating and capital-related costs. Therefore, we 
compute a single ``overall'' or ``total'' LTCH-specific CCR based on 
the sum of LTCH operating and capital costs (as described in Section 
150.24, Chapter 3, of the Medicare Claims Processing Manual (Pub. 
100-4)) as compared to total charges. Specifically, a LTCH's CCR is 
calculated by dividing a LTCH's total Medicare costs (that is, the 
sum of its operating and capital inpatient routine and ancillary 
costs) by its total Medicare charges (that is, the sum of its 
operating and capital inpatient routine and ancillary charges).

b. LTCH Total CCR Ceiling

    Generally, a LTCH is assigned the applicable statewide average 
CCR if, among other things, a LTCH's CCR is found to be in excess of 
the applicable maximum CCR threshold (that is, the LTCH CCR 
ceiling). This is because CCRs above this threshold are most likely 
due to faulty data reporting or entry, and, therefore, CCRs based on 
erroneous data should not be used to identify and make payments for 
outlier cases. Thus, under our established policy, generally, if a 
LTCH's calculated CCR is above the applicable ceiling, the 
applicable LTCH PPS statewide average CCR is assigned to the LTCH 
instead of the CCR computed from its most recent (settled or 
tentatively settled) cost report data.
    In accordance with Sec.  412.525(a)(4)(iv)(C)(2) for HCOs and 
Sec.  412.529(f)(4)(iii)(B) for SSOs, in the proposed rule, using 
our established methodology for determining the LTCH total CCR 
ceiling (described above), based on IPPS total CCR data from the 
December 2010 update of the PSF, we proposed to establish

[[Page 51811]]

a total CCR ceiling of 1.210 under the LTCH PPS that would be 
effective for discharges occurring on or after October 1, 2011, 
through September 30, 2012. Consistent with our historical policy of 
using the best available data, we also proposed that if more recent 
data became available, we would use such data to establish a total 
CCR ceiling for FY 2012 in the final rule. Consistent with that 
proposal, in accordance with Sec.  412.525(a)(4)(iv)(C)(2) for HCOs 
and Sec.  412.529(f)(4)(iii)(B) for SSOs, in this final rule, using 
our established methodology for determining the LTCH total CCR 
ceiling (described above), based on IPPS total CCR data from the 
March 2011 update of the PSF, we are establishing a total CCR 
ceiling of 1.215 under the LTCH PPS that will be effective for 
discharges occurring on or after October 1, 2011, through September 
30, 2012.

c. LTCH Statewide Average CCRs

    Our general methodology established for determining the 
statewide average CCRs used under the LTCH PPS is similar to our 
established methodology for determining the LTCH total CCR ceiling 
(described above) because it is based on ``total'' IPPS CCR data. 
Under the LTCH PPS HCO policy at Sec.  412.525(a)(4)(iv)(C) and the 
SSO policy at Sec.  412.529(f)(4)(iii), the fiscal intermediary or 
MAC may use a statewide average CCR, which is established annually 
by CMS, if it is unable to determine an accurate CCR for a LTCH in 
one of the following circumstances: (1) new LTCHs that have not yet 
submitted their first Medicare cost report (for this purpose, 
consistent with current policy, a new LTCH is defined as an entity 
that has not accepted assignment of an existing hospital's provider 
agreement in accordance with Sec.  489.18); (2) LTCHs whose CCR is 
in excess of the LTCH CCR ceiling; and (3) other LTCHs for whom data 
with which to calculate a CCR are not available (for example, 
missing or faulty data). (Other sources of data that the fiscal 
intermediary or MAC may consider in determining a LTCH's CCR include 
data from a different cost reporting period for the LTCH, data from 
the cost reporting period preceding the period in which the hospital 
began to be paid as a LTCH (that is, the period of at least 6 months 
that it was paid as a short-term, acute care hospital), or data from 
other comparable LTCHs, such as LTCHs in the same chain or in the 
same region.)
    In the proposed rule, using our established methodology for 
determining the LTCH statewide average CCRs, based on the most 
recent complete IPPS total CCR data from the December 2010 update of 
the PSF, we proposed LTCH PPS statewide average total CCRs for urban 
and rural hospitals that would be effective for discharges occurring 
on or after October 1, 2011, through September 30, 2012, in Table 8C 
which is listed in section VI. of the Addendum to that proposed rule 
and available via the Internet. Consistent with our historical 
practice of using the best available data, in this final rule, using 
our established methodology for determining the LTCH statewide 
average CCRs, based on the most recent complete IPPS total CCR data 
from the March 2011 update of the PSF, we are establishing LTCH PPS 
statewide average total CCRs for urban and rural hospitals that will 
be effective for discharges occurring on or after October 1, 2011, 
through September 30, 2012, in Table 8C which is listed in section 
VI. of the Addendum to this final rule and available via the 
Internet.
    As we explained in the proposed rule (76 FR 26042), all areas in 
the District of Columbia, New Jersey, and Rhode Island are 
classified as urban. Therefore, there are no rural statewide average 
total CCRs listed for those jurisdictions in Table 8C listed in 
section VI. of the Addendum to this final rule and available via the 
Internet. This policy is consistent with the policy that we 
established when we revised our methodology for determining the 
applicable LTCH statewide average CCRs in the FY 2007 IPPS final 
rule (71 FR 48119 through 48121) and is the same as the policy 
applied under the IPPS. In addition, although North Dakota has areas 
that are designated as rural, there are no short-term, acute care 
IPPS hospitals or LTCHs located in those areas as of March 2011. 
Therefore, there is no rural statewide average total CCR listed for 
rural North Dakota in Table 8C listed in section VI. of the Addendum 
to this final rule and available via the Internet.
    In addition, consistent with our existing methodology and as we 
proposed, in determining the urban and rural statewide average total 
CCRs for Maryland LTCHs paid under the LTCH PPS, in this final rule, 
we used, as a proxy, the national average total CCR for urban IPPS 
hospitals and the national average total CCR for rural IPPS 
hospitals, respectively. We used this proxy because we believe that 
the CCR data on the PSF for Maryland hospitals may not be entirely 
accurate (as discussed in greater detail in the FY 2007 IPPS final 
rule (71 FR 48120)).

d. Reconciliation of LTCH HCO and SSO Payments

    We note that under the LTCH PPS HCO policy at Sec.  
412.525(a)(4)(iv)(D) and the LTCH PPS SSO policy at Sec.  
412.529(f)(4)(iv), the payments for HCO and SSO cases, respectively, 
are subject to reconciliation. Specifically, any reconciliation of 
outlier payments is based on the CCR that is calculated based on a 
ratio of cost-to-charge data computed from the relevant cost report 
determined at the time the cost report coinciding with the discharge 
is settled. For additional information, we refer readers to sections 
150.26 through 150.28 of the Medicare Claims Processing Manual (Pub. 
100-4) as added by Change Request 7192 (Transmittal 2111; December 
3, 2010) and the RY 2009 LTCH PPS final rule (73 FR 26820 through 
26821).

3. Establishment of the LTCH PPS Fixed-Loss Amount for FY 2012

    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56022 through 56026), under the 
broad authority of section 123 of the BBRA as amended by section 
307(b) of BIPA, we established a fixed-loss amount so that total 
estimated outlier payments are projected to equal 8 percent of total 
estimated payments under the LTCH PPS. To determine the fixed-loss 
amount, we estimate outlier payments and total LTCH PPS payments for 
each case using claims data from the MedPAR files. Specifically, to 
determine the outlier payment for each case, we estimate the cost of 
the case by multiplying the Medicare covered charges from the claim 
by the LTCH's CCR. Under Sec.  412.525(a)(3) (in conjunction with 
Sec.  412.503), if the estimated cost of the case exceeds the 
outlier threshold, we make an outlier payment equal to 80 percent of 
the difference between the estimated cost of the case and the 
outlier threshold (that is, the sum of the adjusted Federal 
prospective payment for the MS-LTC-DRG and the fixed-loss amount).
    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 26042), we 
proposed to continue to use our existing methodology to calculate 
the fixed-loss amount for FY 2012 (based on data and the rates and 
policies presented in that proposed rule) in order to maintain 
estimated HCO payments at the projected 8 percent of total estimated 
LTCH PPS payments. Consistent with our historical practice of using 
the best data available, in determining the fixed-loss amount for FY 
2012, we used the most recent available LTCH claims data and CCR 
data at this time. Specifically, for the proposed rule, we used LTCH 
claims data from the December 2010 update of the FY 2010 MedPAR file 
and CCRs from the December 2010 update of the PSF to determine a 
fixed-loss amount that would result in estimated outlier payments 
projected to be equal to 8 percent of total estimated payments in FY 
2012 because these data were the most recent complete LTCH data 
available at that time. We also proposed to determine the FY 2012 
fixed-loss amount based on the proposed MS-LTC-DRG classifications 
and proposed relative weights from the version of the GROUPER that 
would be in effect as of the beginning of FY 2012, that is, Version 
29.0 of the GROUPER. In that same proposed rule, under the broad 
authority of section 123(a)(1) of the BBRA and section 307(b)(1) of 
BIPA, we proposed to establish a fixed-loss amount of $19,270 for FY 
2012. Thus, we proposed to make an additional payment to an HCO case 
that is equal to 80 percent of the difference between the estimated 
cost of the case and the proposed outlier threshold (the sum of the 
adjusted proposed Federal LTCH payment for the proposed MS-LTC-DRG 
and the proposed fixed-loss amount of $19.270).
    In this final rule, as we proposed, we are continuing to use our 
existing methodology to calculate the fixed-loss amount for FY 2012 
(based on updated data and the rates and policies presented in this 
final rule) in order to maintain estimated HCO payments at the 
projected 8 percent of total estimated LTCH PPS payments. (For an 
explanation of our rationale for establishing an HCO payment 
``target'' of 8 percent of total estimated LTCH payments, we refer 
readers to the August 30, 2002 LTCH PPS final rule (67 FR 56022 
through 56024).) Consistent with our historical practice of using 
the best data available, in determining the fixed-loss amount for FY 
2012, we used the most recent available LTCH claims data and CCR 
data at this time. Specifically, for this final rule, we used LTCH 
claims data from the March 2011 update of the FY 2010 MedPAR file 
and

[[Page 51812]]

CCRs from the March 2011 update of the PSF to determine a fixed-loss 
amount that would result in estimated outlier payments projected to 
be equal to 8 percent of total estimated payments in FY 2012 because 
these data are the most recent complete LTCH data currently 
available. Furthermore, we determined the FY 2012 fixed-loss amount 
based on the MS-LTC-DRG classifications and relative weights from 
the version of the GROUPER that is in effect as of the beginning of 
FY 2012, that is, Version 29.0 of the GROUPER.
    Under the broad authority of section 123(a)(1) of the BBRA and 
section 307(b)(1) of BIPA, we are establishing a fixed-loss amount 
of $17,931 for FY 2012. Thus, we will make an additional payment to 
an HCO case that is equal to 80 percent of the difference between 
the estimated cost of the case and the outlier threshold (the sum of 
the adjusted Federal LTCH payment for the MS-LTC-DRG and the fixed-
loss amount of $17.931). We also note that the fixed-loss amount of 
$17,931 for FY 2012 is lower than the FY 2011 fixed-loss amount of 
$18,785, and is also somewhat lower than the proposed FY 2012 fixed-
loss amount of $19,270 (which was determined using LTCH claims data 
from the December 2010 update of the FY 2010 MedPAR file and CCRs 
from the December 2010 update of the PSF because these data were the 
most recent complete data available at that time). Based on our 
payment simulations using the most recent available data at this 
time, the decrease in the fixed-loss amount for FY 2012 is necessary 
to maintain the existing requirement that estimated outlier payments 
would equal 8 percent of estimated total LTCH PPS payments. (For 
further information on the existing 8 percent HCO ``target'' 
requirement, as noted above, we refer readers to the August 30, 2002 
LTCH PPS final rule (67 FR 56022 through 56024.) Maintaining the 
fixed-loss amount at the current level would result in HCO payments 
that are less than the current regulatory 8-percent requirement 
because a higher fixed-loss amount would result in fewer cases 
qualifying as outlier cases. In addition, maintaining the higher 
fixed-loss amount would result in a decrease in the amount of the 
additional payment for an HCO case because the maximum loss that a 
LTCH must incur before receiving an HCO payment (that is, the fixed-
loss amount) would be larger. For these reasons, we believe that 
lowering the fixed-loss amount is appropriate and necessary to 
maintain that estimated outlier payments would equal 8 percent of 
estimated total LTCH PPS payments as required under Sec.  
412.525(a).

4. Application of Outlier Policy to SSO Cases

    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a 
SSO case (as defined in the regulations at Sec.  412.529 in 
conjunction with Sec.  412.503) and also as a HCO case. In this 
scenario, a patient could be hospitalized for less than five-sixths 
of the geometric average length of stay for the specific MS-LTC-DRG, 
and yet incur extraordinarily high treatment costs. If the estimated 
costs exceeded the HCO threshold (that is, the SSO payment plus the 
fixed-loss amount), the discharge is eligible for payment as a HCO. 
Thus, for a SSO case in FY 2012, the HCO payment would be 80 percent 
of the difference between the estimated cost of the case and the 
outlier threshold (the sum of the fixed-loss amount of $17,931 and 
the amount paid under the SSO policy as specified in Sec.  412.529).

E. Computing the Adjusted LTCH PPS Federal Prospective Payments for 
FY 2012

    Section 412.525 sets forth the adjustments to the LTCH PPS 
standard Federal rate. Under Sec.  412.525(c), the standard Federal 
rate is adjusted to account for differences in area wages by 
multiplying the labor-related share of the standard Federal rate by 
the appropriate LTCH PPS wage index (as shown in Tables 12A and 12B 
listed in section VI. of the Addendum of this final rule and 
available via the Internet). The standard Federal rate is also 
adjusted to account for the higher costs of hospitals in Alaska and 
Hawaii by multiplying the nonlabor-related portion of the standard 
Federal rate by the appropriate cost-of-living factor (shown in the 
chart in section V.C.5. of the Addendum of this final rule) in 
accordance with Sec.  412.525(b). In this final rule, we are 
establishing a standard Federal rate for FY 2012 of $40,222.05, as 
discussed above in section V.A.2. of the Addendum of this final 
rule. We illustrate the methodology to adjust the LTCH PPS Federal 
rate for FY 2012 in the following example:
    Example:
    During FY 2012, a Medicare patient is in a LTCH located in 
Chicago, Illinois (CBSA 16974). The FY 2012 LTCH PPS wage index 
value for CBSA 16974 is 1.0600 (Table 12A listed in section VI. of 
the Addendum of this final rule and available via the Internet). The 
Medicare patient is classified into proposed MS-LTC-DRG 28 (Spinal 
Procedures with MCC), which has a relative weight for FY 2012 of 
1.7420 (Table 11 listed in section VI. of the Addendum of this final 
rule and available via the Internet).
    To calculate the LTCH's total adjusted Federal prospective 
payment for this Medicare patient in FY 2012, we computed the wage-
adjusted Federal prospective payment amount by multiplying the 
unadjusted standard Federal rate ($40,222.05) by the labor-related 
share (70.199 percent) and the wage index value (1.0600). This wage-
adjusted amount is then added to the nonlabor-related portion of the 
unadjusted standard Federal rate (29.801 percent; adjusted for cost 
of living, if applicable) to determine the adjusted Federal rate, 
which is then multiplied by the MS-LTC-DRG relative weight (1.7420) 
to calculate the total adjusted Federal LTCH PPS prospective payment 
for FY 2012 ($73,017.99). The table below illustrates the components 
of the calculations in this example.

Unadjusted Standard Federal Prospective Payment Rate.         $40,222.05
Labor-Related Share..................................          x 0.70199
                                                      ------------------
Labor-Related Portion of the Federal Rate............       = $28,235.48
Wage Index (CBSA 16974)..............................           x 1.0600
                                                      ------------------
Wage-Adjusted Labor Share of Federal Rate............       = $29,929.61
Nonlabor-Related Portion of the Federal Rate                + $11,986.57
 ($40,222.08 x 0.29801)..............................
                                                      ------------------
Adjusted Federal Rate Amount.........................       = $41,916.18
MS-LTC-DRG 28 Relative Weight........................           x 1.7420
                                                      ------------------
Total Adjusted Federal Prospective Payment...........       = $73,017.99
 

VI. Tables Referenced in This Final Rule and Available Only Through the 
Internet on the CMS Web Site

    This section lists the tables referred to throughout the 
preamble of this final rule and in this Addendum. In the past, a 
majority of these tables were published in the Federal Register as 
part of the annual proposed and final rules. However, beginning in 
FY 2012, IPPS tables 2, 3A, 3B, 4A, 4B, 4C, 4D, 4E, 4F, 4J, 5, 6A, 
6B, 6C, 6D, 6E, 6F, 7A, 7B, 8A, 8B, 9A, 9C, and 10, and LTCH PPS 
tables 8C, 11, 12A, and 12B will no longer be published as part of 
the annual IPPS/LTCH PPS proposed and final rulemakings. Instead, 
these tables, along with new LTCH PPS tables 13A and 13B, and new 
IPPS table 14 will be available only through the Internet. IPPS 
tables 1A, 1B, 1C, and 1D, and LTCH PPS table 1E, displayed at the 
end of this section, will continue to be published in the Federal 
Register as part of the annual proposed and final rules. We note 
that previously tables 6G, 6H, 6I, 6I.1, 6I.2, 6J, 6J.1, 6J.2, and 
6K were already made available only through the Internet. We will 
continue to post these tables through the Internet.
    Readers who experience any problems accessing any of the tables 
that are posted on the CMS Web sites identified below should contact 
Ing Jye Cheng at (410) 786-4548.
    The following IPPS tables for this FY 2012 final rule are 
available only through the

[[Page 51813]]

Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. Click on the link on the left 
side of the screen titled, ``FY 2012 IPPS Final Rule Home Page'' or 
``Acute Inpatient--Files for Download''.
    Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2010; Hospital Wage Indexes for 
Federal Fiscal Year 2012; Hospital Average Hourly Wages for Federal 
Fiscal Years 2010 (2006 Wage Data), 2011 (2007 Wage Data), and 2012 
(2008 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
    Table 3A.--FY 2012 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Urban Areas by CBSA
    Table 3B.--FY 2012 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Rural Areas by CBSA
    Table 4A.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--
FY 2012
    Table 4B.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--
FY 2012
    Table 4C.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by 
State--FY 2012
    Table 4D.--States Designated as Frontier, with Acute Care 
Hospitals Receiving at a Minimum the Frontier State Floor Wage 
Index\1\; Urban Areas with Acute Care Hospitals Receiving the 
Statewide Rural Floor Wage Index--FY 2012
    Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2012
    Table 4F.--Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2012
    Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 
2012
    Table 5.--List of Medicare Severity Diagnosis-Related Groups 
(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic 
Mean Length of Stay--FY 2012
    Table 6A.--New Diagnosis Codes--FY 2012
    Table 6B.--New Procedure Codes--FY 2012
    Table 6C.--Invalid Diagnosis Codes--FY 2012
    Table 6D.--Invalid Procedure Codes--FY 2012
    Table 6E.--Revised Diagnosis Code Titles--FY 2012
    Table 6F.--Revised Procedure Code Titles--FY 2012
    Table 6G.--Additions to the CC Exclusions List--FY 2012
    Table 6H.--Deletions from the CC Exclusions List--FY 2012
    Table 6I.--Complete MCC List--FY 2012
    Table 6I.1.--Additions to the MCC List--FY 2012
    Table 6I.2.--Deletions to the MCC List--FY 2012
    Table 6J.--Complete CC List--FY 2012
    Table 6J.1.--Additions to the CC List--FY 2012
    Table 6J.2.--Deletions to the CC List--FY 2012
    Table 6K.--Complete List of CC Exclusions--FY 2012
    Table 7A.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2010 MedPAR Update--March 2011 
GROUPER V28.0 MS-DRGs
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2010 MedPAR Update--March 2011 
GROUPER V29.0 MS-DRGs
    Table 8A.--FY 2012 Statewide Average Operating Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals (Urban and Rural)
    Table 8B.--FY 2012 Statewide Average Capital Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2012
    Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2012
    Table 10.--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Groups (MS-DRGs)
    Table 14.--List of Hospitals with Fewer than 1,600 Medicare 
Discharges Based on the March 2011 Update of the FY 2010 MedPAR File 
and Their FY 2012 Low-Volume Payment Adjustment
    The following LTCH PPS tables for this FY 2012 final rule are 
available only through the Internet on the CMS Web site at http://www.cms.gov/LongTermCareHospitalPPS/LTCHPPSRN/list.asp under the 
list item for Regulation Number CMS-1518-P.
    Table 8C.--FY 2012 Statewide Average Total Cost-to-Charge Ratios 
(CCRs) for LTCHs (Urban and Rural)
    Table 11.--MS-LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and Short-Stay Outlier (SSO) Threshold for 
Discharges Occurring from October 1, 2011 through September 30, 2012 
under the LTCH PPS
    Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges 
Occurring from October 1, 2011 through September 30, 2012
    Table 12B.--LTCH PPS Wage Index for Rural Areas for Discharges 
Occurring From October 1, 2011 through September 20, 2012
    Table 13A.--Composition of Low-Volume Quintiles for MS-LTC-
DRGs--FY 2012
    Table 13B.--No-Volume MS-LTC-DRG Crosswalk for FY 2012

    Table 1A--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (68.8 Percent Labor Share/31.2
                        Percent Nonlabor Share if Wage Index Is Greater Than 1)--FY 2012
----------------------------------------------------------------------------------------------------------------
               Full update (1.90 percent)                             Reduced update (-0.10 percent)
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related
----------------------------------------------------------------------------------------------------------------
            $3,584.30                    $1,625.44                    $3,513.95                   $1,593.54
----------------------------------------------------------------------------------------------------------------

  Table 1B--National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent
                        Nonlabor Share if Wage Index Is Less Than or Equal to 1)--FY 2012
----------------------------------------------------------------------------------------------------------------
               Full update (1.90 percent)                             Reduced update (-0.10 percent)
----------------------------------------------------------------------------------------------------------------
       Labor-related               Nonlabor-related              Labor-related             Nonlabor-related
----------------------------------------------------------------------------------------------------------------
            $3,230.04                    $1,979.70                    $3,166.64                   $1,940.85
----------------------------------------------------------------------------------------------------------------

           Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor--FY 2012
----------------------------------------------------------------------------------------------------------------
                                      Rates if wage index is  greater than  Rates if wage index is  less than or
                                                        1                                equal to 1
                                     ---------------------------------------------------------------------------
                                            Labor             Nonlabor            Labor             Nonlabor
----------------------------------------------------------------------------------------------------------------
National............................         $3,584.30          $1,625.44          $3,230.04          $1,979.70
Puerto Rico.........................          1,553.29             947.98           1,550.79             950.48
----------------------------------------------------------------------------------------------------------------

[[Page 51814]]

        Table 1D--Capital Standard Federal Payment Rate--FY 2012
------------------------------------------------------------------------
                                                                 Rate
------------------------------------------------------------------------
National...................................................      $421.42
Puerto Rico................................................       203.86
------------------------------------------------------------------------

    Table 1E--LTCH Standard Federal Prospective Payment Rate--FY 2012
------------------------------------------------------------------------
                                                                 Rate
------------------------------------------------------------------------
Standard Federal Rate......................................   $40,222.05
------------------------------------------------------------------------

Appendix A: Economic Analyses

I. Regulatory Impact Analysis

A. Introduction

    We have examined the impacts of this final rule as required by 
Executive Order 12866 on Regulatory Planning and Review (September 
30, 1993), Executive Order 13563 on Improving Regulation and 
Regulatory Review (February 2, 2011) the Regulatory Flexibility Act 
(RFA) (September 19, 1980, Pub. L. 96-354), section 1102(b) of the 
Social Security Act, section 202 of the Unfunded Mandates Reform Act 
of 1995 (March 22, 1995, Pub. L. 104-4), Executive Order 13132 on 
Federalism (August 4, 1999), and the Congressional Review Act (5 
U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct 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). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, of reducing costs, of harmonizing rules, and of 
promoting flexibility. A regulatory impact analysis (RIA) must be 
prepared for major rules with economically significant effects ($100 
million or more in any 1 year).
    We have determined that this final rule is a major rule as 
defined in 5 U.S.C. 804(2). We estimate that the changes for FY 2012 
acute care hospital operating and capital payments will redistribute 
amounts in excess of $100 million among different types of inpatient 
cases. The applicable percentage increase to the IPPS rates required 
by the statute, in conjunction with other payment changes in this 
final rule, will result in an estimated $1.13 billion increase in FY 
2012 operating payments (or 1.1 percent change) and an estimated 
$151 million increase in FY 2012 capital payments (or 1.8 percent 
change). The impact analysis of the capital payments can be found in 
section I.I. of this Appendix. In addition, as described in section 
I.J. of this Appendix, LTCHs are expected to experience a change in 
payments by $126 million (or 2.5 percent).
    Our operating impact estimate includes the -2.0 percent 
documentation and coding adjustment applied to the hospital-specific 
rates and to the IPPS standardized amounts. In addition, our 
operating impact estimate includes the 1.9 percent hospital update 
to the standardized amount (which includes the 3.0 percent market 
basket update with the reduction of 1.0 percentage point for the 
multifactor productivity adjustment and the 0.1 percentage point 
reduction required under the Affordable Care Act). Finally, our 
operating impact estimate includes the 1.1 percent update to the 
standardized amount and the 0.9 percent update to the hospital-
specific rates in light of DC Circuit's decision in Cape Cod v. 
Sebelius (630 F.3d 203 (DC Cir. 2011)). The estimates of IPPS 
operating payments to acute care hospitals do not reflect any 
changes in hospital admissions or real case-mix intensity, which 
would also affect overall payment changes.
    The analysis in this Appendix, in conjunction with the remainder 
of this document, demonstrates that this final rule is consistent 
with the regulatory philosophy and principles identified in 
Executive Orders 12866 and 13563, the RFA, and section 1102(b) of 
the Act. The final rule will affect payments to a substantial number 
of small rural hospitals, as well as other classes of hospitals, and 
the effects on some hospitals may be significant.

B. Need

    This final rule is necessary in order to make payment and policy 
changes under the Medicare IPPS for Medicare acute care hospital 
inpatient services for operating and capital-related costs as well 
as for certain hospitals and hospital units excluded from the IPPS. 
This final rule also is necessary to make payment and policy changes 
for Medicare hospitals under the LTCH PPS payment system.

C. Objectives of the IPPS

    The primary objective of the IPPS is to create incentives for 
hospitals to operate efficiently and minimize unnecessary costs 
while at the same time ensuring that payments are sufficient to 
adequately compensate hospitals for their legitimate costs. In 
addition, we share national goals of preserving the Medicare 
Hospital Insurance Trust Fund.
    We believe the changes in this final rule will further each of 
these goals while maintaining the financial viability of the 
hospital industry and ensuring access to high quality health care 
for Medicare beneficiaries. We expect that these changes will ensure 
that the outcomes of the prospective payment systems are reasonable 
and equitable while avoiding or minimizing unintended adverse 
consequences.

D. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our policy changes, as well as statutory changes 
effective for FY 2012, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but, generally, we do not attempt to make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix.

E. Hospitals Included in and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs of acute care hospitals encompass most 
general short-term, acute care hospitals that participate in the 
Medicare program. There were 32 Indian Health Service hospitals in 
our database, which we excluded from the analysis due to the special 
characteristics of the prospective payment methodology for these 
hospitals. Among other short-term, acute care hospitals, only the 46 
such hospitals in Maryland remain excluded from the IPPS pursuant to 
the waiver under section 1814(b)(3) of the Act.
    As of July 2011, there are 3,423 IPPS acute care hospitals to be 
included in our analysis. This represents about 64 percent of all 
Medicare-participating hospitals. The majority of this impact 
analysis focuses on this set of hospitals. There also are 
approximately 1,346 CAHs. These small, limited service hospitals are 
paid on the basis of reasonable costs rather than under the IPPS. 
(We refer readers to section I.H.15. of this Appendix for a further 
description of the impact of CAH-related policy changes.) There are 
also 1,290 IPPS-excluded hospitals and 2,119 IPPS-excluded hospital 
units. These IPPS-excluded hospitals and units include IPFs, IRFs, 
LTCHs, RNHCIs, children's hospitals, and cancer hospitals, which are 
paid under separate payment systems. Changes in the prospective 
payment systems for IPFs and IRFs are made through separate 
rulemaking. Payment impacts for these IPPS-excluded hospitals and 
units are not included in this final rule. The impact of the update 
and policy changes to the LTCH PPS for FY 2012 is discussed in 
section I.J. of this Appendix.

F. Effects on Hospitals and Hospital Units Excluded From the IPPS

    As of July 2011, there were 3,409 hospitals and hospital units 
excluded from the IPPS. Of these, 78 children's hospitals, 11 cancer 
hospitals, and 17 RNHCIs are being paid on a reasonable cost basis 
subject to the rate-of-increase ceiling under Sec.  413.40. The 
remaining providers, 235 rehabilitation hospitals and 940 
rehabilitation units, and 437 LTCHs, are paid the Federal 
prospective per discharge rate under the IRF PPS and the LTCH PPS, 
respectively, and 512 psychiatric hospitals and 1,179 psychiatric 
units are paid the Federal per diem amount under the IPF PPS. As 
stated above, IRFs and IPFs are not affected by the rate updates 
discussed in this final rule. The impacts of the changes to LTCHs 
are discussed in section I.J. of this Appendix.
    In the past, certain hospitals and units excluded from the IPPS 
have been paid based on their reasonable costs subject to limits as 
established by the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). Cancer and children's hospitals continue to be paid on a 
reasonable cost basis subject to TEFRA limits for FY 2012. For these 
hospitals (cancer and children's hospitals), consistent with the 
authority provided in section 1886(b)(3)(B)(ii) of the Act, the 
update is the FY 2012 percentage increase in the IPPS

[[Page 51815]]

operating market basket. In compliance with section 404 of the MMA, 
in the FY 2010 IPPS/RY 2010 LTCH PPS final rule (74 FR 43930), we 
replaced the FY 2002-based IPPS operating and capital market baskets 
with the revised and rebased FY 2006-based IPPS operating and 
capital market baskets. Therefore, consistent with current law, 
based on IHS Global Insight, Inc.'s 2011 second quarter forecast, 
with historical data through the 2011 first quarter, we are 
estimating that the FY 2012 update based on the IPPS operating 
market basket is 3.0 percent (that is, the current estimate of the 
market basket rate-of-increase). However, the Affordable Care Act 
requires an adjustment for multifactor productivity (currently 
estimated to be 1.0 percentage point) and a 0.1 percentage point 
reduction to the market basket update resulting in a 1.9 percent 
applicable percentage increase for IPPS hospitals. RNCHIs, 
children's hospitals and cancer hospitals are not subject to the 
reductions in the applicable percentage increase required under the 
Affordable Care Act. In accordance with Sec.  403.752(a) of the 
regulations, RNHCIs are paid under Sec.  413.40. Therefore, for 
RNHCIs, the update is the same as for children's and cancer 
hospitals, which is the percentage increase in the FY 2012 IPPS 
operating market basket, estimated at 3.0 percent, without the 
reductions required under the Affordable Care Act.
    The impact of the update in the rate-of-increase limit on those 
excluded hospitals depends on the cumulative cost increases 
experienced by each excluded hospital since its applicable base 
period. For excluded hospitals that have maintained their cost 
increases at a level below the rate-of-increase limits since their 
base period, the major effect is on the level of incentive payments 
these excluded hospitals receive. Conversely, for excluded hospitals 
with per-case cost increases above the cumulative update in their 
rate-of-increase limits, the major effect is the amount of excess 
costs that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital 
that continues to be paid under the TEFRA system and whose costs 
exceed 110 percent of its rate-of-increase limit receives its rate-
of-increase limit plus 50 percent of the difference between its 
reasonable costs and 110 percent of the limit, not to exceed 110 
percent of its limit. In addition, under the various provisions set 
forth in Sec.  413.40, cancer and children's hospitals can obtain 
payment adjustments for justifiable increases in operating costs 
that exceed the limit.

G. Quantitative Effects of the Policy Changes Under the IPPS for 
Operating Costs

1. Basis and Methodology of Estimates

    In this final rule, we are announcing policy changes and payment 
rate updates for the IPPS for FY 2012 for operating costs of acute 
care hospitals. FY 2012 updates to the capital payments to acute 
care hospitals are discussed in section I.I. of this Appendix.
    Based on the overall percentage change in payments per case 
estimated using our payment simulation model, we estimate that total 
FY 2012 operating payments will increase by 1.1 percent compared to 
FY 2011, largely due to the documentation and coding adjustments and 
the applicable percentage increase applied to the IPPS rates. In 
addition to the applicable percentage increase, this amount reflects 
the FY 2012 adjustments for documentation and coding and recoupment 
described in section II.D. of the preamble of this final rule: - 2.0 
percent for the IPPS national standardized amounts and the IPPS 
hospital-specific rates. The impacts do not illustrate changes in 
hospital admissions or real case-mix intensity, which will also 
affect overall payment changes.
    We have prepared separate impact analyses of the changes to each 
system. This section deals with changes to the operating inpatient 
prospective payment system for acute care hospitals. Our payment 
simulation model relies on the most recent available data to enable 
us to estimate the impacts on payments per case of certain changes 
in this final rule. However, there are other changes for which we do 
not have data available that would allow us to estimate the payment 
impacts using this model. For those changes, we have attempted to 
predict the payment impacts based upon our experience and other more 
limited data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2010 
MedPAR file and the most current Provider-Specific File (PSF) that 
is used for payment purposes. Although the analyses of the changes 
to the operating PPS do not incorporate cost data, data from the 
most recently available hospital cost reports were used to 
categorize hospitals. Our analysis has several qualifications. 
First, in this analysis, we do not make adjustments for future 
changes in such variables as admissions, lengths of stay, or 
underlying growth in real case-mix. Second, due to the 
interdependent nature of the IPPS payment components, it is very 
difficult to precisely quantify the impact associated with each 
change. Third, we use various data sources to categorize hospitals 
in the tables. In some cases, particularly the number of beds, there 
is a fair degree of variation in the data from the different 
sources. We have attempted to construct these variables with the 
best available source overall. However, for individual hospitals, 
some miscategorizations are possible.
    Using cases from the FY 2010 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. As described above, Indian Health Service hospitals and 
hospitals in Maryland were excluded from the simulations. The impact 
of payments under the capital IPPS, or the impact of payments for 
costs other than inpatient operating costs, are not analyzed in this 
section. Estimated payment impacts of the capital IPPS for FY 2012 
are discussed in section I.I. of this Appendix.
    We discuss the following changes below:
     Effects of the application of the documentation and 
coding adjustment and applicable percentage increase (including the 
market basket update, the multifactor productivity adjustment and 
the applicable percentage reduction in accordance with the 
Affordable Care Act) to the standardized amount and hospital-
specific rates.
     Effects of the increase to the standardized amount and 
hospital-specific rates in light of D.C. Circuit's decision in Cape 
Cod v. Sebelius, 630 F.3d 203 (DC Cir. 2011).
     The effects of the annual reclassification of diagnoses 
and procedures, full implementation of the MS-DRG system and 100 
percent cost-based MS-DRG relative weights.
     The effects of the changes in hospitals' wage index 
values reflecting updated wage data from hospitals' cost reporting 
periods beginning during FY 2008, compared to the FY 2007 wage data.
     The effects of the recalibration of the MS-DRG relative 
weights as required by section 1886(d)(4)(C) of the Act, including 
the wage and recalibration budget neutrality factors.
     The effects of the geographic reclassifications by the 
MGCRB that will be effective in FY 2012.
     The effects of the rural floor and imputed floor with 
the application of the national budget neutrality factor applied to 
the wage index, as required by the Affordable Care Act.
     The effects of the frontier State wage index provision 
that requires that hospitals located in States that qualify as 
frontier States cannot have a wage index less than 1.0. This 
provision is not budget neutral.
     The effects of section 505 of Public Law 108-173, which 
provides for an increase in a hospital's wage index if the hospital 
qualifies by meeting a threshold percentage of residents of the 
county where the hospital is located who commute to work at 
hospitals in counties with higher wage indexes.
     The total estimated change in payments based on the FY 
2012 policies relative to payments based on FY 2011 policies that 
include the applicable percentage increase of 1.9 percent (or 3.0 
percent market basket update with a reduction of 1.0 percentage 
point for the multifactor productivity adjustment, and a 0.1 
percentage point reduction, as required under the Affordable Care 
Act).
    To illustrate the impact of the FY 2012 changes, our analysis 
begins with a FY 2011 baseline simulation model using: The FY 2012 
applicable percentage increase of 1.9 percent and the documentation 
and coding adjustment of -2.0 percent; the FY 2011 MS-DRG GROUPER 
(Version 28.0); the most current CBSA designations for hospitals 
based on OMB's MSA definitions; the FY 2011 wage index; and no MGCRB 
reclassifications. Outlier payments are set at 5.1 percent of total 
operating MS-DRG and outlier payments for modeling purposes.
    Section 1886(b)(3)(B)(viii) of the Act, as added by section 
5001(a) of Public Law 109-171, as amended by section 4102(b)(1)(A) 
of the ARRA (Pub. L. 111-5) and by section 3401(a)(2) of the 
Affordable Care Act (Pub. L. 111-148), provides that, for FY 2007 
through FY 2014, the update factor will include a reduction of 2.0 
percentage points for any hospital that does not submit quality data 
in a form and manner and at a time specified by the Secretary. 
(Beginning in FY 2015, the reduction is one-quarter of such 
applicable percentage increase determined without

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regard to section 1886(b)(3)(B)(ix), (xi), or (xii) of the Act.) At 
the time that this impact was prepared, 57 hospitals did not receive 
the full market basket rate-of-increase for FY 2011 because they 
failed the quality data submission process or did not choose to 
participate. For purposes of the simulations shown below, we modeled 
the payment changes for FY 2012 using a reduced update for these 57 
hospitals. However, we do not have enough information at this time 
to determine which hospitals will not receive the full update factor 
for FY 2012.
    Each policy change, statutory or otherwise, is then added 
incrementally to this baseline, finally arriving at an FY 2012 model 
incorporating all of the changes. This simulation allows us to 
isolate the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2011 to FY 2012. Three factors not discussed 
separately have significant impacts here. The first factor is the 
update to the standardized amount. In accordance with section 
1886(b)(3)(B)(i) of the Act, we are updating the standardized 
amounts for FY 2012 using an applicable percentage increase of 1.9 
percent. This includes our forecasted IPPS operating hospital market 
basket increase of 3.0 percent with a reduction of 1.0 percentage 
point for the multifactor productivity adjustment and a 0.1 
percentage point reduction as required under the Affordable Care 
Act. (Hospitals that fail to comply with the quality data submission 
requirements will receive an update of -0.1 percent (this update 
includes the 2.0 percentage point reduction for failure to submit 
these data)). Under section 1886(b)(3)(B)(iv) of the Act, the 
updates to the hospital-specific amounts for SCHs and for MDHs are 
also equal to the applicable percentage increase, or 1.9 percent. In 
addition, we are updating the Puerto Rico-specific amount by an 
applicable percentage increase of 1.9 percent.
    A second significant factor that affects the changes in 
hospitals' payments per case from FY 2011 to FY 2012 is the change 
in hospitals' geographic reclassification status from one year to 
the next. That is, payments may be reduced for hospitals 
reclassified in FY 2011 that are no longer reclassified in FY 2012. 
Conversely, payments may increase for hospitals not reclassified in 
FY 2011 that are reclassified in FY 2012.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2011 will be 4.8 percent of total 
MS-DRG payments. Our updated FY 2011 outlier estimate accounts for 
changes to the FY 2011 IPPS payments required under the Affordable 
Care Act. When the FY 2011 final rule was published, we projected FY 
2011 outlier payments would be 5.1 percent of total MS-DRG plus 
outlier payments; the average standardized amounts were offset 
correspondingly. The effects of the lower than expected outlier 
payments during FY 2011 (as discussed in the Addendum to this final 
rule) are reflected in the analyses below comparing our current 
estimates of FY 2011 payments per case to estimated FY 2012 payments 
per case (with outlier payments projected to equal 5.1 percent of 
total MS-DRG payments).
    Comment: One commenter noted that in examining the IPPS Impact 
File associated with the FY 2012 IPPS/LTCH PPS proposed rule posted 
on the CMS Web site, it found that approximately 27,000 claims were 
included in the calculation of the case-mix index and case counts 
(fields such as BILLS, TACMIV29, and CASETA29) which may be Medicare 
Advantage (MA) patient claims submitted by teaching hospitals in 
order to receive their IME payments. These claims only had an IME 
payments listed. The commenter stated that if these claims are MA 
claims, they are not eligible for outlier payments under the IPPS 
and, as agreed by CMS, must not be included as part of the 
calculation of the outlier thresholds or be included in the 
statistics posted in the IPPS Impact File. Accordingly, the 
commenter requested that CMS review these 27,000 ``IME only'' claims 
to determine whether they represent MA claims.
    Response: We have reviewed our MedPAR claims file used to 
calculate outlier thresholds and used to report hospital case counts 
and case-mix values and have determined that there are MA claims 
that may be submitted by teaching hospitals that do not have a GHO 
Paid indicator with a value of 1,'' which is the indicator for MA 
claims. However, we can identify those claims as likely to be MA 
claims because the IME payment field is equal to the DRG payment 
field. We agree with the commenter that MA claims submitted by 
teaching hospitals for the purpose of the IME payment should not be 
included in the calculation of the outlier threshold and have 
excluded those claims from the outlier calculation that have a GHO 
Paid indicator with a value of ``1'' or do not have a GHO Paid 
indicator with a value of ``1'' but do have an IMEPAY field equal to 
the DRGPAY field because these are probably MA claims that are 
likely not paid under the IPPS and therefore would not incur an 
outlier payment. Claims that are trimmed using the criteria 
discussed above are not part of the calculation of the outlier 
threshold, hospital case count or fee-for-service case mix values 
reported on the IPPS Impact File in this final rule.
    Comment: One commenter requested that CMS provide a table 
indicating the State-by-State impact of the rural floor provision 
for providers in each State, including a schedule of what the area 
wage indexes would be if the rural floor was not applied. The 
commenter also suggested that CMS publish this information annually.
    Response: In this final rule, we are including in this impact 
section a table indicating State level impacts of the rural floor 
and imputed floor provision. Also, we are revising Table 4D of the 
Addendum, which specifies the wage index for States or urban areas 
receiving the frontier State wage index or rural and imputed floors, 
to include a column indicating the pre-floor area wage index.

2. Analysis of Table I

    Table I displays the results of our analysis of the changes for 
FY 2012. The table categorizes hospitals by various geographic and 
special payment consideration groups to illustrate the varying 
impacts on different types of hospitals. The top row of the table 
shows the overall impact on the 3,423 acute care hospitals included 
in the analysis.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location: all urban, which is further 
divided into large urban and other urban; and rural. There are 2,498 
hospitals located in urban areas included in our analysis. Among 
these, there are 1,371 hospitals located in large urban areas 
(populations over 1 million), and 1,127 hospitals in other urban 
areas (populations of 1 million or fewer). In addition, there are 
925 hospitals in rural areas. The next two groupings are by bed-size 
categories, shown separately for urban and rural hospitals. The 
final groupings by geographic location are by census divisions, also 
shown separately for urban and rural hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 2012 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the numbers of hospitals paid based on these categorizations 
after consideration of geographic reclassifications (including 
reclassifications under sections 1886(d)(8)(B) and 1886(d)(8)(E) of 
the Act that have implications for capital payments) are 2,519; 
1,384; 1,135; and 904, respectively.
    The next three groupings examine the impacts of the changes on 
hospitals grouped by whether or not they have GME residency programs 
(teaching hospitals that receive an IME adjustment) or receive DSH 
payments, or some combination of these two adjustments. There are 
2,391 nonteaching hospitals in our analysis, 792 teaching hospitals 
with fewer than 100 residents, and 240 teaching hospitals with 100 
or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
for DSH purposes. The next category groups together hospitals 
considered urban or rural, in terms of whether they receive the IME 
adjustment, the DSH adjustment, both, or neither.
    The next five rows examine the impacts of the changes on rural 
hospitals by special payment groups (SCHs, RRCs, and MDHs). There 
were 175 RRCs, 320 SCHs, 193 MDHs, and 120 hospitals that are both 
SCHs and RRCs, and 18 hospitals that are both MDHs and RRCs.
    The next series of groupings are based on the type of ownership 
and the hospital's Medicare utilization expressed as a percent of 
total patient days. These data were taken from the FY 2008 or FY 
2007 Medicare cost reports.
    The next two groupings concern the geographic reclassification 
status of hospitals. The first grouping displays all urban hospitals 
that were reclassified by the MGCRB for FY 2012. The second grouping 
shows the MGCRB rural reclassifications. The final category shows 
the impact of the policy changes on the 19 cardiac hospitals.
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BILLING CODE 4120-01-C

a. Effects of the Hospital Update and Documentation and Coding 
Adjustment (Column 2)

    As discussed in section II.D. of the preamble of this final 
rule, this column includes the hospital update, including the 3.0 
percent market basket update, the reduction of 1.0 percentage point 
for the multifactor productivity adjustment, and the 0.1 percentage 
point reduction in accordance with the Affordable Care Act. In 
addition, this column includes the FY 2012 documentation and coding 
adjustment of -2.0 percent on the national standardized amount and 
the hospital-specific rates. As a result, we are applying a -0.1 
percent adjustment to the national standardized amount and the 
hospital specific rate. Overall, hospitals will experience a -0.1 
percent decrease in payments due to the effects of the hospital 
update and documentation and coding adjustment on the national 
standardized amount. Puerto Rico hospitals will experience a 0.3 
percent increase in payments because we are not making any 
documentation and coding adjustment to the Puerto Rico-specific 
rate, which is 25 percent of Puerto Rico's payment rate.

b. Effects of the Adjustment to the Standardized Amount for Cape Cod 
Hospital v. Sebelius (Column 3)

    Column 3 shows the impact of the 1.1 percent adjustment to the 
national standardized amount and the 0.9 percent adjustment to the 
hospital-specific rate in light of the decision in Cape Cod Hospital 
v. Sebelius, as discussed in section II. of the Addendum to this 
final rule.
    Overall, hospitals will experience a 1.1 percent increase in 
payments due to the effects of the adjustment on the national 
standardized amount. Hospital categories that experience less than a 
1.1 percent increase in payments include hospitals that are paid 
under the hospital-specific rate, which we are increasing by 0.9 
percent. Rural hospitals will experience a 1.0 percent increase in 
payments because many rural hospitals are paid under the hospital-
specific rate, which we are increasing by 0.9 percent.

c. Effects of the Changes to the MS-DRG Reclassifications and Relative 
Cost-Based Weights With Recalibration Budget Neutrality (Column 4)

    Column 4 shows the effects of the changes to the MS-DRGs and 
relative weights with the application of the recalibration budget 
neutrality factor to the standardized amounts. Section 
1886(d)(4)(C)(i) of the Act requires us annually to make appropriate 
classification changes in order to reflect changes in treatment 
patterns, technology, and any other factors that may change the 
relative use of hospital resources. Consistent with section 
1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration 
budget neutrality factor to account for the changes in MS-DRGs and 
relative weights to ensure that the overall payment impact is budget 
neutral.
    As discussed in section II.E. of the preamble of this rule, the 
FY 2012 MS-DRG relative weights will be 100 percent cost-based and 
100 percent MS-DRGs. For FY 2012, the MS-DRGs are calculated using 
the FY 2010 MedPAR data grouped to the Version 29.0 (FY 2012) MS-
DRGs. The methods of calculating the relative weights and the 
reclassification changes to the GROUPER are described in more detail 
in section II.H. of the preamble of this final rule.
    The ``All Hospitals'' line in Column 4 indicates that changes 
due to MS-DRGs and relative weights will result in a 0.0 percent 
change in payments with the application of the recalibration budget 
neutrality factor of 0.997903 on to the standardized amount. Due to 
changes to the MS-DRG GROUPER in this final rule, there were some 
shifts in payments due to changes in the relative weights with rural 
hospitals experiencing a 0.2 percent decrease in payments and large 
urban hospitals experiencing a 0.1 percent increase in payments.

d. Effects of Wage Index Changes (Column 5)

    Column 5 shows the impact of updated wage data with the 
application of the wage budget neutrality factor. Section 
1886(d)(3)(E) of the Act requires that, beginning October 1, 1993, 
we annually update the wage data used to calculate the wage index. 
In accordance with this requirement, the wage index for acute care 
hospitals for FY 2012 is based on data submitted for hospital cost 
reporting periods beginning on or after October 1, 2007 and before 
October 1, 2008. The estimated impact of the updated wage data and 
labor share on hospital payments is isolated in Column 5 by holding 
the other payment parameters constant in this simulation. That is, 
Column 5 shows the percentage change in payments when going from a 
model using the FY 2011 wage index, based on FY 2007 wage data, the 
current labor-related share and having a 100-percent occupational 
mix adjustment applied, to a model using the FY 2012 pre-
reclassification wage index with the labor-related share, also 
having a 100-percent occupational mix adjustment applied, based on 
FY 2008 wage data (while holding other payment parameters such as 
use of the Version 29.0 MS-DRG GROUPER constant). The occupational 
mix adjustment is based on the 2007-2008 occupational mix survey.
    In addition, the column shows the impact of the application of 
wage budget neutrality to the national standardized amount. In FY 
2010, we began calculating separate wage budget neutrality and 
recalibration budget neutrality factors, in accordance with section 
1886(d)(3)(E) of the Act, which specifies that budget neutrality to 
account for wage changes or updates made under that subparagraph 
must be made without regard to the 62 percent labor-related share 
guaranteed under section 1886(d)(3)(E)(ii) of the Act. Therefore, 
for FY 2012, we are calculating the wage budget neutrality factor to 
ensure that payments under updated wage data and the labor-related 
share are budget neutral without regard to the lower labor-related 
share of 62 percent applied to hospitals with a wage index less than 
or equal to 1. In other words, the wage budget neutrality is 
calculated under the assumption that all hospitals receive the 
higher labor-related share of the standardized amount. The wage 
budget neutrality factor is 1.000558, and the overall payment change 
is 0 percent.
    Column 5 shows the impacts of updating the wage data using FY 
2008 cost reports. Overall, the new wage data will lead to a 0.0 
percent change for all hospitals before being combined with the wage 
budget neutrality adjustment shown in Column 5. Among the regions, 
the largest increase is in the rural New England region, which 
experiences a 0.7 percent increase due to increases in the wage 
index among rural Connecticut and rural Massachusetts hospitals. The 
largest decline from updating the wage data is seen in the rural 
East South Central region (-0.5 percent decrease).
    In looking at the wage data itself, the national average hourly 
wage increased 3.7 percent compared to FY 2011. Therefore, the

[[Page 51823]]

only manner in which to maintain or exceed the previous year's wage 
index was to match or exceed the national 3.7 percent increase in 
average hourly wage. Of the 3,428 hospitals with wage data for both 
FYs 2011 and 2012, 1,729, or 50.4 percent, experienced an average 
hourly wage increase of 3.4 percent or more.
    The following chart compares the shifts in wage index values for 
hospitals for FY 2012 relative to FY 2011. Among urban hospitals, 32 
will experience an increase of more than 5 percent and less than 10 
percent and 4 will experience an increase of more than 10 percent. 
Among rural hospitals, 1 will experience an increase of more than 5 
percent and less than 10 percent, and none will experience an 
increase of more than 10 percent. However, 924 rural hospitals will 
experience increases or decreases of less than 5 percent, while 
2,448 urban hospitals will experience increases or decreases of less 
than 5 percent. Sixteen urban hospitals will experience decreases in 
their wage index values of more than 5 percent and less than 10 
percent. Three urban hospitals will experience decreases in their 
wage index values of greater than 10 percent. No rural hospitals 
will experience a decrease of more than 10 percent. No rural 
hospitals will experience decreases in their wage index values of 
greater than 5 percent but less than 10 percent. These figures 
reflect changes in the wage index which is an adjustment to either 
68.8 percent or 62 percent of the labor-related share of a 
hospital's standardized amount, depending upon whether its wage 
index is greater than 1.0 or less than or equal to 1.0. Therefore, 
these figures illustrate a somewhat larger change in the wage index 
than will occur to the hospital's total payment.
    The following chart shows the projected impact for urban and 
rural hospitals.

------------------------------------------------------------------------
                                              Number of hospitals
Percentage change in area wage index -----------------------------------
               values                       Urban             Rural
------------------------------------------------------------------------
Increase more than 10 percent.......                 4                 0
Increase more than 5 percent and                    32                 0
 less than 10 percent...............
Increase or decrease less than 5                 2,448               924
 percent............................
Decrease more than 5 percent and                    16                 0
 less than 10 percent...............
Decrease more than 10 percent.......                 3                 0
------------------------------------------------------------------------

e. Combined Effects of the MS-DRG and Wage Index Changes (Column 6)

    Section 1886(d)(4)(C)(iii) of the Act requires that changes to 
MS-DRG reclassifications and the relative weights cannot increase or 
decrease aggregate payments. In addition, section 1886(d)(3)(E) of 
the Act specifies that any updates or adjustments to the wage index 
are to be budget neutral. We computed a wage budget neutrality 
factor of 1.000558, and a recalibration budget neutrality factor of 
0.997903 (which is applied to the Puerto Rico-specific standardized 
amount and the hospital-specific rates). The product of the two 
budget neutrality factors is the cumulative wage and recalibration 
budget neutrality factor. The cumulative wage and recalibration 
budget neutrality adjustment is 0.998460, or approximately -0.15 
percent, which is applied to the national standardized amounts. 
Because the wage budget neutrality and the recalibration budget 
neutrality are calculated under different methodologies according to 
the statute, when the two budget neutralities are combined and 
applied to the standardized amount, the overall payment impact is 
not necessarily budget neutral. However, in this final rule, we are 
estimating that the changes in the MS-DRG relative weights and 
updated wage data with wage and budget neutrality applied will 
result in a 0.0 change in payments.
    We estimate that the combined impact of the changes to the 
relative weights and MS-DRGs and the updated wage data with budget 
neutrality applied will result in no change in payments for urban 
hospitals and 0.1 percent decrease in payments for rural hospitals. 
Urban Pacific hospitals will experience a 0.3 percent increase in 
payments due to increases in their wages compared to the national 
average, while the urban East North Central area will experience a -
0.4 decrease in payments because of below average increases in 
wages. Among the rural hospital categories, rural New England 
hospitals will experience the greatest increase in payment (0.4 
percent) primarily due to above average increases in the wage data, 
while the rural East North Central area will experience a 0.6 
percent decrease in payments due to decreases in the wage data.

f. Effects of MGCRB Reclassifications (Column 7)

    Our impact analysis to this point has assumed acute care 
hospitals are paid on the basis of their actual geographic location 
(with the exception of ongoing policies that provide that certain 
hospitals receive payments on other bases than where they are 
geographically located). The changes in Column 7 reflect the per 
case payment impact of moving from this baseline to a simulation 
incorporating the MGCRB decisions for FY 2012 which affect 
hospitals' wage index area assignments.
    By spring of each year, the MGCRB makes reclassification 
determinations that will be effective for the next fiscal year, 
which begins on October 1. The MGCRB may approve a hospital's 
reclassification request for the purpose of using another area's 
wage index value. Hospitals may appeal denials of MGCRB decisions to 
the CMS Administrator. Further, hospitals have 45 days from 
publication of the IPPS rule in the Federal Register to decide 
whether to withdraw or terminate an approved geographic 
reclassification for the following year.
    The overall effect of geographic reclassification is required by 
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, 
for the purposes of this impact analysis, we are applying an 
adjustment of 0.991943 to ensure that the effects of the section 
1886(d)(10) reclassifications are budget neutral (section II.A. of 
the Addendum to this final rule). Geographic reclassification 
generally benefits hospitals in rural areas. We estimate that 
geographic reclassification will increase payments to rural 
hospitals by an average of 1.8 percent. By region, all the rural 
hospital categories, with the exception of the one rural Puerto Rico 
hospital, will experience increases in payments due to MGCRB 
reclassification. Rural hospitals in the East South Central region 
will experience a 2.6 percent increase in payments and rural 
hospitals in the Mountain region will experience a 0.5 percent 
increase in payments. Urban hospitals in New England and the Middle 
Atlantic will experience an increase in payments of 0.7 percent and 
0.3 percent, respectively, largely due to reclassifications of 
hospitals in Connecticut and New Jersey.
    Table 9A listed in section VI. of the Addendum to this final 
rule and available via the Internet reflects the approved 
reclassifications for FY 2012.
    g. Effects of the Rural and Imputed Floor, Including Application 
of National Budget Neutrality (Column 8)
    As discussed in section III.B. of the preamble of the FY 2009 
IPPS final rule, the FY 2010 IPPS/RY 2010 LTCH PPS final rule, the 
FY 2011 IPPS/LTCH PPS final rule and this final rule, section 4410 
of Public Law 105-33 established the rural floor by requiring that 
the wage index for a hospital in any urban area cannot be less than 
the wage index received by rural hospitals in the same State. 
Beginning with FY 2008, we apply a uniform budget neutrality 
adjustment is applied to the wage index. In addition, as discussed 
in section III.F.2. of the preamble of this final rule, the imputed 
floor, which is budget neutral, was set to expire with the FY 2011 
wage index but we are finalizing to extend the imputed floor for 2 
additional years. The imputed floor only benefits hospitals located 
in New Jersey. For FY 2012 (and in FY 2011), the Affordable Care Act 
requires that we apply one rural floor budget neutrality factor to 
the wage index, nationally and the imputed floor is part of the 
rural floor budget neutrality factor applied to the wage index, 
nationally. The FY 2012 rural floor budget neutrality factor applied 
to the wage index is 0.991007, which will reduce wage indexes by -
0.9 percent.
    Column 8 shows the projected impact of the rural floor and 
imputed floor with the national rural floor budget neutrality factor 
applied to the wage index. The column compares the post-
reclassification FY 2012

[[Page 51824]]

wage index of providers before the rural floor and imputed floor 
adjustment and the post-reclassification FY 2012 wage index of 
providers with the rural floor and imputed floor adjustment. Only 
urban hospitals can benefit from the rural floor provision. Because 
the provision is budget neutral, all other hospitals (that is, all 
rural hospitals and those urban hospitals to which the adjustment is 
not made) experience a decrease in payments due to the budget 
neutrality adjustment applied nationally to their wage index.
    We project that, in the aggregate, rural hospitals will 
experience a -0.3 percent decrease in payments as a result of the 
application of rural floor budget neutrality because the rural 
hospitals do not benefit from the rural floor, but have their wage 
indexes downwardly adjusted to ensure that the application of the 
rural floor is budget neutral overall. We project hospitals located 
in other urban areas (populations of 1 million or fewer) will 
experience a 0.1 percent increase in payments because those 
providers benefit from the rural floor. Urban hospitals in the New 
England region can expect a 5.3 percent increase in payments 
primarily due to the application of the rural floor in Massachusetts 
and the applicable national rural floor budget neutrality as 
required by the Affordable Care Act. All 60 urban providers in 
Massachusetts are expected to receive the rural floor wage index 
value, including rural floor budget neutrality, of 1.3452. During 
most past years, there have been no IPPS hospitals located in rural 
areas in Massachusetts. There was one urban IPPS hospital that was 
reclassified to rural Massachusetts under section 1886(d)(8)(E) of 
the Act which established the Massachusetts rural floor, but the 
wage index resulting from that hospital's data was not high enough 
for any urban hospital to benefit from the rural floor policy. 
However, beginning with the FY 2012 wage index, the rural floor for 
the State is established by the conversion of a CAH to an IPPS 
hospital that is geographically located in rural Massachusetts. 
Massachusetts hospitals can expect approximately an 8.7 percent 
increase in IPPS payments due to the application of the rural floor.
    Urban Puerto Rico hospitals are expected to experience a 0.1 
percent increase in payments as a result of the application of a 
Puerto Rico rural floor. Similar to Massachusetts, this is the first 
year in which urban Puerto Rico hospitals will receive a rural floor 
as a result of a new IPPS hospital located in rural Puerto Rico 
setting a rural floor. We are applying a rural floor budget 
neutrality factor to the Puerto Rico-specific wage index of 0.989417 
or 1.1 percent. The Puerto Rico-specific wage index adjusts the 
Puerto Rico-specific standardized amount, which represents 25 
percent of payments to Puerto Rico hospitals.
    There are 39 hospitals in New Jersey that benefit from the 
extension of the imputed floor and receive the imputed floor wage 
index value, including rural floor budget neutrality of 1.1264. 
Urban Middle Atlantic hospitals will experience a -0.1 percent 
decrease in payments which reflects the increase in payments for New 
Jersey hospitals receiving the imputed floor and a decrease for all 
other urban hospitals in the Middle Atlantic region.
    In response to a public comment, we are providing the payment 
impact of the rural floor and imputed floor with budget neutrality 
at the State level. Column 1 of the table displays the number of 
IPPS hospitals located in each State. Column 2 displays the number 
of hospitals in each State that will be receiving the rural floor or 
imputed floor wage index for FY 2012. Column 3 displays the 
percentage of total payments each State receives or contributes to 
fund the rural floor and imputed floor with national budget 
neutrality. The column compares the post-reclassification FY 2012 
wage index of providers before the rural floor and imputed floor 
adjustment and the post-reclassification FY 2012 wage index of 
providers with the rural floor and imputed floor adjustment. Column 
4 displays an estimated payment amount that each State will gain or 
lose due to the application of the rural floor and imputed floor 
with national budget neutrality.

                          FY 2012 IPPS Estimated Payments due to Rural Floor and Imputed Floor With National Budget Neutrality
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                           Percent change in
                                                                                 Number of hospitals        payments due to
                        State                           Number of hospitals     receiving rural floor     application of rural       Difference  (in
                                                                                   or imputed floor     floor and imputed floor         millions)
                                                                                                         with budget neutrality
--------------------------------------------------------------------------------------------------------------------------------------------------------
Alabama.............................................                       95                        3                     -0.4                    -$7.5
Alaska..............................................                        6                        4                      1.7                      2.3
Arizona.............................................                       57                        0                     -0.5                     -8.8
Arkansas............................................                       47                        0                     -0.4                     -5.0
California..........................................                      308                      100                      0.2                     20.3
Colorado............................................                       46                        7                      0.4                      4.3
Connecticut.........................................                       32                       12                      1.9                     30.0
Delaware............................................                        5                        0                     -0.5                     -2.0
Florida.............................................                      168                        5                     -0.4                    -29.1
Georgia.............................................                      108                        0                     -0.5                    -13.0
Hawaii..............................................                       14                        0                     -0.4                     -1.1
Idaho...............................................                       15                        0                     -0.4                     -1.0
Illinois............................................                      130                        0                     -0.5                    -26.3
Indiana.............................................                       89                        1                     -0.5                    -11.1
Iowa................................................                       34                        5                     -0.3                     -3.0
Kansas..............................................                       55                        1                     -0.4                     -3.5
Kentucky............................................                       65                        1                     -0.4                     -8.5
Louisiana...........................................                       97                       10                     -0.5                     -7.2
Maine...............................................                       20                        0                     -0.4                     -2.1
Massachusetts.......................................                       61                       60                      8.7                    274.8
Michigan............................................                      100                        0                     -0.5                    -21.4
Minnesota...........................................                       51                        0                     -0.5                     -8.1
Mississippi.........................................                       64                        0                     -0.5                     -5.6
Missouri............................................                       80                        4                     -0.4                    -10.5
Montana.............................................                       12                        1                     -0.3                     -0.8
Nebraska............................................                       23                        0                     -0.4                     -2.4
Nevada..............................................                       24                        0                     -0.5                     -3.7
New Hampshire.......................................                       13                        9                      1.5                      6.3
New Jersey..........................................                       67                       39                      1.4                     54.2
New Mexico..........................................                       28                        0                     -0.3                     -1.6
New York............................................                      170                        2                     -0.5                    -47.5
North Carolina......................................                       89                        4                     -0.4                    -15.5
North Dakota........................................                        6                        0                     -0.3                     -0.8

[[Page 51825]]

 
Ohio................................................                      138                        9                     -0.4                    -15.8
Oklahoma............................................                       85                        2                     -0.4                     -5.7
Oregon..............................................                       33                        3                     -0.4                     -3.5
Pennsylvania........................................                      152                       16                     -0.4                    -17.3
Puerto Rico.........................................                       51                       12                      0.1                      0.1
Rhode Island........................................                       11                        0                     -0.6                     -2.2
South Carolina......................................                       55                        0                     -0.4                     -7.2
South Dakota........................................                       19                        0                     -0.3                     -0.9
Tennessee...........................................                       99                       11                     -0.3                     -7.7
Texas...............................................                      320                        4                     -0.5                    -34.0
Utah................................................                       32                        2                     -0.4                     -1.7
Vermont.............................................                        6                        0                     -0.3                     -0.6
Virginia............................................                       81                        2                     -0.4                    -10.8
Washington..........................................                       48                        2                     -0.4                     -7.3
Washington, D.C.....................................                        7                        0                     -0.5                     -2.5
West Virginia.......................................                       32                        3                     -0.3                     -2.2
Wisconsin...........................................                       64                        2                     -0.4                     -6.4
Wyoming.............................................                       11                        0                        0                      0.0
--------------------------------------------------------------------------------------------------------------------------------------------------------

h. Effects of the Application of the Frontier State Wage Index (Column 
9)

    Section 10324(a) of the Affordable Care Act requires that we 
establish a minimum post-reclassified wage index of 1.00 for all 
hospitals located in ``frontier States.'' The term ``frontier 
States'' is defined in the statute as States in which at least 50 
percent of counties have a population density less than 6 persons 
per square mile. Based on these criteria, five States (Montana, 
North Dakota, Nevada, South Dakota, and Wyoming) are considered 
frontier States and 48 hospitals located in those States will 
receive a frontier wage index of 1.0. This provision is not budget 
neutral and is estimated to increase IPPS operating payments by 
approximately $50 million.
    Urban hospitals located in the West North Central region and 
urban hospitals located in the Mountain region will experience an 
increase in payments by 0.6 percent and 0.2 percent, respectively 
because many of the hospitals located in this region are frontier 
hospitals. Similarly, rural hospitals located in the Mountain region 
and rural hospitals in the West North Central region will experience 
an increase in payments by 0.6 percent and 0.1 percent, 
respectively.

i. Effects of the Wage Index Adjustment for Out-Migration (Column 10)

    Section 1886(d)(13) of the Act, as added by section 505 of 
Public Law 108-173, provides for an increase in the wage index for 
hospitals located in certain counties that have a relatively high 
percentage of hospital employees who reside in the county, but work 
in a different area with a higher wage index. Hospitals located in 
counties that qualify for the payment adjustment are to receive an 
increase in the wage index that is equal to a weighted average of 
the difference between the wage index of the resident county, post-
reclassification and the higher wage index work area(s), weighted by 
the overall percentage of workers who are employed in an area with a 
higher wage index. Overall, rural hospitals will experience a 0.1 
percent increase in payments as a result of the outmigration 
adjustment. Rural DSH providers will experience a 0.5 percent 
increase in payments. There are 255 providers that will receive the 
out-migration adjustment in FY 2012. This out-migration wage 
adjustment is not budget neutral, and we estimate the impact of 
these providers receiving the out-migration increase to be 
approximately $15 million.

j. Effects of the Expiration of Section 508 (Column 11)

    Column 11 shows our estimate of the changes in payments due to 
the expiration of section 508, a non-budget neutral reclassification 
provision, applied under the MMEA. Because this provision is not 
budget neutral, the expiration of this reclassification provision 
results in a -0.2 percent decrease in payments, overall. There are 
88 section 508 hospitals in this payment analysis. Section 508 
hospitals are generally urban hospitals, resulting in a -0.2 percent 
decrease in payments among the urban hospital category and a 0.0 
percent change in payments among rural hospitals. Urban Middle 
Atlantic and East North Central regions will experience a decrease 
in payments of -0.4 percent and -0.5 percent respectively because 
many section 508 hospitals are located in those regions. Urban 
teaching hospitals that do not receive DSH will experience a -0.4 
percent decrease in payments due to the expiration of section 508.

k. Effects of All FY 2012 Changes (Column 12)

    Column 12 shows our estimate of the changes in payments per 
discharge from FY 2011 and FY 2012, resulting from all changes 
reflected in this final rule for FY 2012. It includes combined 
effects of the previous columns in the table.
    The average increase in payments under the IPPS for all 
hospitals is approximately 1.1 percent for FY 2012 relative to FY 
2011. As discussed in section II.D. of the preamble of this final 
rule, this column includes the FY 2012 documentation and coding 
adjustment of -2.0 percent on the national standardized amount and 
on the hospital-specific rates. In addition, this column includes 
the annual hospital update of 1.9 percent to the national 
standardized amount. This annual hospital update includes the 3.0 
percent market basket update, the reduction of 1.0 percentage point 
for the multifactor productivity adjustment, and the 0.1 percentage 
point reduction under section 3401 of the Affordable Care Act. As 
described in Column 2, the annual hospital update, combined with the 
documentation and coding adjustment, results in a -0.1 percent 
decrease in payments in FY 2012 relative to FY 2011. As described in 
Column 3, the 1.1 percent adjustment to the national standardized 
amount and the 0.9 percent adjustment to the hospital specific rate 
in light of a recent court decision related to rural floor budget 
neutrality results in a 1.1 percent increase in payments in FY 2012 
relative to FY 2011. In addition, Column 11 describes a -0.2 percent 
decrease in payments due to the expiration of section 508 
reclassifications that had been extended for FY 2011 under the MMEA. 
Section 508 was not a budget-neutral provision. The impact of moving 
from our estimate of FY 2011 outlier payments, 4.8 percent, to the 
estimate of FY 2012 outlier payments, 5.1 percent, results in an 
increase of 0.3 percent in FY 2012 payments relative to FY 2011. 
There might also be interactive effects among the various factors 
comprising the payment system that we are not able to isolate. For 
these reasons, the values in Column 12 may not equal the sum of the 
percentage changes described above.

[[Page 51826]]

    The overall change in payments per discharge for hospitals paid 
under the IPPS in FY 2012 is estimated to increase by 1.1 percent. 
The payment increase among the hospital categories is largely 
attributed to the updates to the rate including the hospital update 
and the increase to the rate associated with a recent court decision 
related to rural floor budget neutrality. Hospitals in urban areas 
will experience an estimated 1.2 percent increase in payments per 
discharge in FY 2012 compared to FY 2011. Hospital payments per 
discharge in rural areas are estimated to increase by 0.2 percent in 
FY 2012 as compared to FY 2011.
    Among urban census divisions, the smallest estimated payment 
increase will be 0.2 percent in the East North Central region 
because many of the urban providers in this region had benefited 
from section 508 reclassifications in FY 2011 that have expired for 
FY 2012. Urban hospitals in New England will see the largest payment 
increases (5.6 percent) because the Massachusetts hospitals are 
benefitting from the rural floor in their State. Furthermore, urban 
Puerto Rico hospitals will experience a 1.2 percent increase in 
payments due to the application of the rural floor.
    Among the rural regions, the providers in the East South Central 
and West South Central regions will experience decreases in payments 
of -0.5 percent and 0.3 percent respectively, due to decreases in 
wage data and the downward adjustment applied to their wage index 
for rural floor budget neutrality. Rural hospitals in the Pacific 
region will experience an increase in payments of 0.7 percent 
because the rural providers in this region benefit from higher than 
average wage data and MGCRB reclassification.
    Among special categories of hospitals, MDHs will receive an 
estimated payment increase of 0.5 percent. MDHs are paid the higher 
of the IPPS rate based on the national standardized amount, that is, 
the Federal rate, or, if the hospital-specific rate exceeds the 
Federal rate, the Federal rate plus 75 percent of the difference 
between the Federal rate and the hospital-specific rate. SCHs are 
paid the higher of their Federal rate and the hospital-specific 
rate. Overall, SCHs will experience an estimated decrease in 
payments by 0.7 percent.
    Rural hospitals reclassified for FY 2012 are anticipated to 
receive a 0.5 percent payment increase. Rural hospitals that are not 
reclassifying are estimated to receive a payment decrease of 0.3 
percent due to lower wage data, changes to the relative weights and 
application of rural floor budget neutrality. Urban reclassified 
hospitals will experience the average payment increase at 1.1 
percent due to the benefits under MGCRB reclassification and the 
rural floor. Urban nonreclassified hospitals will experience a 
payment increase of 1.2 percent.
    Cardiac hospitals are expected to experience a payment decrease 
of 1.2 percent in FY 2012 relative to FY 2011.

3. Impact Analysis of Table II

    Table II presents the projected impact of the changes for FY 
2012 for urban and rural hospitals and for the different categories 
of hospitals shown in Table I. It compares the estimated average 
payments per discharge for FY 2011 with the average payments per 
discharge for FY 2012, as calculated under our models. Thus, this 
table presents, in terms of the average dollar amounts paid per 
discharge, the combined effects of the changes presented in Table I. 
The estimated percentage changes shown in the last column of Table 
II equal the estimated percentage changes in average payments per 
discharge from Column 12 of Table I.

    Table II--Impact Analysis of Changes for FY 2012 Acute Care Hospital Operating Prospective Payment System
                                            [Payments per discharge]
----------------------------------------------------------------------------------------------------------------
                                                               Average FY 2011  Average FY 2012
                                                 Number of       payment per      payment per      All FY 2012
                                                 hospitals        discharge        discharge         changes
                                              ...............              (2)              (3)              (4)
----------------------------------------------------------------------------------------------------------------
All hospitals...............................            3,423          $10,249          $10,359              1.1
By Geographic Location:
    Urban hospitals.........................            2,498           10,658           10,783              1.2
    Large urban areas (populations over 1               1,371           11,239           11,378              1.2
     million)...............................
    Other urban areas (populations of 1                 1,127            9,944           10,051              1.1
     million or fewer)......................
    Rural hospitals.........................              925            7,657            7,675              0.2
Bed Size (Urban):
    0-99 beds...............................              632            8,202            8,289              1.1
    100-199 beds............................              782            8,989            9,101              1.2
    200-299 beds............................              449            9,738            9,847              1.1
    300-499 beds............................              430           10,952           11,062                1
    500 or more beds........................              205           13,141           13,316              1.3
Bed Size (Rural):
    0-49 beds...............................              320            6,174            6,157             -0.3
    50-99 beds..............................              348            7,169            7,162             -0.1
    100-149 beds............................              152            7,424            7,449              0.3
    150-199 beds............................               58            8,416            8,458              0.5
    200 or more beds........................               47            9,438            9,501              0.7
Urban by Region:
    New England.............................              120           11,136           11,761              5.6
    Middle Atlantic.........................              320           11,772           11,877              0.9
    South Atlantic..........................              380            9,809            9,891              0.8
    East North Central......................              401           10,043           10,060              0.2
    East South Central......................              153            9,492            9,535              0.5
    West North Central......................              169           10,256           10,379              1.2
    West South Central......................              366            9,995           10,123              1.3
    Mountain................................              159           10,803           10,892              0.8
    Pacific.................................              380           13,112           13,316              1.6
    Puerto Rico.............................               50            5,299            5,362              1.2
Rural by Region:
    New England.............................               23           10,175           10,210              0.3
    Middle Atlantic.........................               69            8,037            8,096              0.7
    South Atlantic..........................              165            7,362            7,400              0.5
    East North Central......................              120            7,966            7,997              0.4
    East South Central......................              170            7,027            6,992             -0.5
    West North Central......................               99            8,145            8,196              0.6

[[Page 51827]]

 
    West South Central......................              183            6,737            6,720             -0.3
    Mountain................................               66            8,509            8,533              0.3
    Pacific.................................               29           10,235           10,307              0.7
    Puerto Rico.............................                1            2,280            2,299              0.8
By Payment Classification:
    Urban hospitals.........................            2,519           10,643           10,768              1.2
    Large urban areas (populations over 1               1,384           11,224           11,362              1.2
     million)...............................
    Other urban areas (populations of 1                 1,135            9,925           10,032              1.1
     million or fewer)......................
    Rural areas.............................              904            7,733            7,751              0.2
Teaching Status:
    Non-teaching............................             2391            8,592            8,676                1
    Fewer than 100 Residents................              792           10,136           10,233                1
    100 or more Residents...................              240           15,078           15,289              1.4
Urban DSH:
    Non-DSH.................................              739            8,951            9,026              0.8
    100 or more beds........................             1547           11,137           11,275              1.2
    Less than 100 beds......................              337            7,627            7,696              0.9
Rural DSH:
    SCH.....................................              417            7,117            7,069             -0.7
    RRC.....................................              222            8,471            8,526              0.7
    100 or more beds........................               27            6,372            6,384              0.2
    Less than 100 beds......................              134            5,928            5,952              0.4
Urban teaching and DSH:
    Both teaching and DSH...................              827           12,180           12,327              1.2
    Teaching and no DSH.....................              144            9,858            9,946              0.9
    No teaching and DSH.....................             1057            9,120            9,237              1.3
    No teaching and no DSH..................              491            8,529            8,600              0.8
Rural Hospital Types:
    RRC.....................................              175            8,561            8,616              0.6
    SCH.....................................              320            8,149            8,090             -0.7
    MDH.....................................              193            6,397            6,432              0.5
    SCH and RRC.............................              120            9,420            9,479              0.6
    MDH and RRC.............................               18            8,467            8,513              0.5
Type of Ownership:
    Voluntary...............................            1,985           10,394           10,512              1.1
    Proprietary.............................              870            9,115            9,195              0.9
    Government..............................              566           10,869           10,967              0.9
    Medicare Utilization as a Percent of
     Inpatient Days:........................
    0-25....................................              358           14,311           14,494              1.3
    25-50...................................            1,695           10,897           11,025              1.2
    50-65...................................            1,081            8,505            8,567              0.7
    Over 65.................................              198            7,456            7,522              0.9
Hospitals Reclassified by the Medicare
 Geographic Classification Review Board:
FY 2012 Reclassifications:
    All Reclassified Hospitals FY 2012......              655            9,793            9,881              0.9
    All Non-Reclassified Hospitals FY 2012..             2768           10,371           10,487              1.1
    Urban Reclassified Hospitals FY 2012:...              323           10,668           10,780              1.1
    Urban Non-reclassified Hospitals FY 2012             2142           10,673           10,800              1.2
    Rural Reclassified Hospitals FY 2012....              332            8,260            8,305              0.5
    Rural Nonreclassified Hospitals FY 2012:              532            6,825            6,803             -0.3
    All Section 401 Reclassified Hospitals:.               40            8,598            8,615              0.2
    Other Reclassified Hospitals (Section                  62            7,263            7,283              0.3
     1886(d)(8)(B)).........................
Specialty Hospitals:
    Cardiac Hospitals.......................               19           11,158           11,288              1.2
----------------------------------------------------------------------------------------------------------------

H. Effects of Other Policy Changes

    In addition to those policy changes discussed above that we are 
able to model using our IPPS payment simulation model, we are making 
various other changes in this final rule. Generally, we have limited 
or no specific data available with which to estimate the impacts of 
these changes. Our estimates of the likely impacts associated with 
these other changes are discussed below.

1. Effects of Proposed Policy on HACs, Including Infections

    In section II.F. of the preamble of this final rule, we discuss 
our implementation of section 1886(d)(4)(D) of the Act, which 
requires the Secretary to identify conditions that are: (1) High 
cost, high volume, or both; (2) result in the assignment of a case 
to an MS-DRG that has a higher payment when present as a secondary 
diagnosis; and (3) could reasonably have been prevented

[[Page 51828]]

through application of evidence-based guidelines. For discharges 
occurring on or after October 1, 2008, hospitals will not receive 
additional payment for cases in which one of the selected conditions 
was not present on admission, unless, based on data and clinical 
judgment, it cannot be determined at the time of admission whether a 
condition is present. That is, the case will be paid as though the 
secondary diagnosis were not present. However, the statute also 
requires the Secretary to continue counting the condition as a 
secondary diagnosis that results in a higher IPPS payment when doing 
the budget neutrality calculations for MS-DRG reclassifications and 
recalibration. Therefore, we will perform our budget neutrality 
calculations as though the payment provision did not apply, but 
Medicare will make a lower payment to the hospital for the specific 
case that includes the secondary diagnosis. Thus, the provision 
results in cost savings to the Medicare program.
    We note that the provision will only apply when one or more of 
the selected conditions are the only secondary diagnosis or 
diagnoses present on the claim that will lead to higher payment. 
Medicare beneficiaries will generally have multiple secondary 
diagnoses during a hospital stay, such that beneficiaries having one 
MCC or CC will frequently have additional conditions that also will 
generate higher payment. Only a small percentage of the cases will 
have only one secondary diagnosis that would lead to a higher 
payment. Therefore, if at least one nonselected secondary diagnosis 
that leads to higher payment is on the claim, the case will continue 
to be assigned to the higher paying MS-DRG and there will be no 
Medicare savings from that case. In addition, as discussed in 
section II.F.3.e. of the preamble of this final rule, it is possible 
to have two severity levels where the HAC does not affect the MS-DRG 
assignment or for an MS-DRG not to have severity levels. In either 
of these circumstances, the case will continue to be assigned to the 
higher paying MS-DRG and there will be no Medicare savings from that 
case.
    In section II.F. of the preamble of this final rule, we discuss 
our decision not to add one HAC for FY 2012: Contrast-Induced Acute 
Kidney Injury. Therefore, we have deleted the cost estimates for 
this proposed HAC from the proposed savings estimates for the next 5 
fiscal years.
    The HAC payment provision went into effect on October 1, 2008. 
Our savings estimates for the next 5 fiscal years are shown below:

------------------------------------------------------------------------
                                                           Savings (in
                         Year                               millions)
------------------------------------------------------------------------
FY 2012...............................................               $21
FY 2013...............................................                22
FY 2014...............................................                23
FY 2015...............................................                25
FY 2016...............................................                27
------------------------------------------------------------------------

2. Effects of Policy Relating to New Medical Service and Technology 
Add-On Payments

    In section II.I. of the preamble to this final rule, we discuss 
two applications for add-on payments for new medical services and 
technologies for FY 2012, as well as the status of the new 
technology that was approved to receive new technology add-on 
payments in FY 2011. As explained in that section, add-on payments 
for new technology under section 1886(d)(5)(K) of the Act are not 
required to be budget neutral. As discussed in section II.I.4. of 
the preamble of this final rule, we are not approving either of the 
two applications for new technology add-on payments for FY 2012. 
However, we are finalizing our proposal to continue to make new 
technology add-on payments in FY 2012 for the AutoLITT\TM\ (because 
the technology is still within the 3-year anniversary of the 
product's entry onto the market). We note that new technology add-on 
payments per case are limited to the lesser of (1) 50 percent of the 
costs of the new technology or (2) 50 percent of the amount by which 
the costs of the case exceed the standard MS-DRG payment for the 
case. Because it is difficult to predict the actual new technology 
add-on payment for each case, our estimate below is based on the 
increase in add-on payments for FY 2012 as if every claim that would 
qualify for a new technology add-on payment would receive the 
maximum add-on payment. For FY 2011, the applicant estimates that 
approximately 170 Medicare beneficiaries will be eligible for the 
AutoLITT\TM\. Therefore, based on the applicant's estimate from FY 
2011, we currently estimate that payments for the AutoLITT\TM\ will 
increase overall FY 2012 payments by $900,000.

3. Effects of Requirements for Hospital Inpatient Quality Reporting 
(IQR) Program

    In section VII.C. of Appendix A of the FY 2011 IPPS/LTCH PPS 
final rule (75 FR 50662 through 50663), we discussed the impact of 
the FY 2011 through FY 2014 Hospital Inpatient Quality Reporting 
(IQR) Program requirements we adopted in that final rule. We 
estimated that 95 hospitals would not receive the full payment 
update in any fiscal year from FY 2012 through FY 2014. At the time 
that analysis was prepared, 104 hospitals did not receive the full 
payment update in FY 2010.
    In section IV.A. of this final rule, we discuss our requirements 
for hospitals to report quality data under the Hospital IQR Program 
in order to receive the full update to the standardized amount for 
FY 2012 through FY 2015. We now estimate that approximately 104 
hospitals may not receive the full update in any fiscal year. (In 
section IV.A.2.b. of this final rule, we finalized that, for the FY 
2014 payment determination, we would retire four measures (AMI-4, 
HF-4, PN-4, and PN-5c) and suspend data collection for four measures 
(AMI-1, AMI-3, AMI-5, and SCIP-INF-6), beginning with January 1, 
2012 discharges. We believe that these changes will not have a 
significant effect on our estimate.) We believe that most of these 
hospitals will be either small rural or small urban hospitals. 
However, at this time, information is not available to determine the 
precise number of hospitals that will not meet the requirements to 
receive the full annual percentage increase for FY 2012 through FY 
2015.
    In section IV.A.7. of the FY 2011 IPPS/LTCH PPS final rule (75 
FR 50225 through 50229), we established Hospital IQR validation 
requirements for the FY 2012 and FY 2013 payment determinations. 
Beginning with the FY 2012 payment update, hospitals must pass our 
validation requirement of a minimum of 75 percent reliability, based 
upon our chart-audit validation process, for four quarters of data 
from the last quarter of CY 2011 through the third quarter of CY 
2012.
    In previous years, charts were requested by the CMS CDAC 
contractor and hospitals were given 45 days from the date of the 
request to submit the requested records. In section IV.A.6.a. of 
this final rule and in proposed Sec.  412.140(d)(1), beginning with 
the FY 2012 we are reducing the deadline from 45 days to 30 days for 
hospitals to return requested medical record documentation to 
support our validation requirement. This may be an additional 
administrative burden to hospitals selected for validation. However, 
this deadline is in line with our QIO regulations at Sec.  476.78 
and the burden will be 18 charts for each for the four quarters that 
must be copied and mailed in a 30 day period for FY 2012 and 
subsequent years.
    In addition, we are adding a new Sec.  478.78(b)(2)(ii) that 
will require the submission of medical information within 21 days in 
those situations in which a ``serious reportable event'' or other 
circumstance has been identified during the course of a QIO review. 
We do not believe this will cause a significantly higher 
administrative burden on the hospitals, because CMS reimburses 
providers returning medical records to QIOs at the rate of 12 cents 
per page for copying and approximately $4.00 per chart for postage. 
Given that we reimburse for the data collection effort, we believe 
that this requirement represents a minimal burden to providers. We 
have continued our efforts to ensure that QIOs provide assistance to 
all hospitals that wish to participate in the Hospital IQR Program.
    In section IV.A.6.b. of this final rule, for FY 2014 payment 
determinations and subsequent years, we are adding two strata to the 
current Hospital IQR validation sample of SCIP, AMI, HF, and PN 
cases. For the first stratum, we are selecting three cases per 
selected hospital per quarter to validate the CLABSI measure using a 
two step selection process that would target potential patients with 
positive infection from blood culture results and a Central Venous 
Catheter. The requirement of an additional 3 charts per hospital 
submitted for validation for the CLABSI measure will result in 
approximately 2,400 total additional charts per quarter being 
submitted to CMS by all selected hospitals. We reimburse hospitals 
for the cost of sending charts to the CDAC contractor at the rate of 
12 cents per page for copying and approximately $4.00 per chart for 
postage. Our experience shows that the average chart received by the 
CDAC contractor is approximately 275 pages. Thus, we will expend 
approximately $88,800 per quarter to collect the additional charts 
we need to validate the CLASBI measure. Additionally, we will 
collect the CLABSI-specific data elements from all charts currently 
requested for the Hospital IQR validation. We will validate a total 
of 15 records per quarter per

[[Page 51829]]

validated hospital in 5 strata (SCIP, AMI, HF, PN, CLABSI and the 
ED/Global Immunization measure).
    In section IV.A.6.b. of this final rule, for FY 2014 and 
subsequent years, we are adding a second stratum to our validation 
sample, which will enable us to validate the EDT and the 
Immunization for Influenza and Immunization for Pneumonia global 
measures. Thus, we will be validating a total of 18 records per 
quarter per selected hospital in 6 strata ((1) SCIP, (2) AMI, (3) 
HF, (4) PN, (5) CLABSI, and (6) EDT/immunization measures). Under 
the assumptions outlined above, we will expend approximately $88,800 
per quarter to collect the additional charts for the EDT/
immunization measures. The total requirement of 18 charts per 
hospital will result in approximately 14,400 charts per quarter 
being submitted to CMS. Using the assumptions discussed above, for 
the FY 2014 Hospital IQR Program, we estimate that CMS will have 
expenditures of approximately $532,800 per quarter related to the 
validation requirement. Additionally, we will collect the CLABSI-
specific data and the EDT/Immunization data elements from all charts 
currently requested for Hospital IQR validation. We will validate a 
total of 18 records per quarter per validated hospital in 6 strata 
(SCIP, AMI, HF, PN, CLABSI and the ED/Global Immunization measure). 
We do not believe this will be an additional burden on the hospitals 
because these data will be abstracted from records already 
submitted.
    Given that we reimburse for the data collection effort, we 
believe that a requirement for 18 charts per hospital per quarter 
represents a minimal burden to participating hospitals selected for 
validation.
    Finally, with respect to our validation requirements, we also 
are providing that, for FY 2015, we will select additional hospitals 
for validation if they were open under their current CCNs in FY 2012 
but not selected for validation in the three previous annual 
Hospital IQR Program validation selections. This provision could 
affect data collection costs and burdens, but we are unable to 
estimate any impact at this time.

4. Effects of Additional Hospital Value-Based Purchasing (VBP) Program 
Requirements

    Section 1886(o)(1)(B) of the Act directs the Secretary to begin 
making value-based incentive payments under the Hospital VBP Program 
to hospitals for discharges occurring on or after October 1, 2012. 
These incentive payments will be funded for FY 2013 through a 
reduction to the FY 2013 base operating MS-DRG payment for each 
discharge of 1 percent, as required by section 1886(o)(7)(B)(i) of 
the Act. The applicable percentage for FY 2014 is 1.25 percent, for 
FY 2015 is 1.5 percent, for FY 2016 is 1.75 percent, and for FY 2017 
and subsequent years is 2 percent.
    In section IV.B. of the preamble of this final rule, we are 
adding requirements for the FY 2014 Hospital VBP Program. 
Specifically, we are adding a Medicare Spending per Beneficiary 
Measure, how the measure will be scored, and the measure's 
performance period and baseline period. Because this additional 
measure is claims-based and is required for the Hospital IQR 
Program, its inclusion in the Hospital VBP Program does not result 
in any additional burden because the Hospital VBP Program uses data 
that are required for the Hospital IQR Program.

5. Effects of Requirements for Hospital Readmissions Reduction Program

    In section IV.C. of the preamble of this final rule, we are 
selecting three high cost, high volume conditions for the Hospital 
Readmission Reduction Program FY 2013 payment reduction, and the 
definition of readmission for these conditions. We also are 
finalizing the use of the following three measures for these 
conditions for the FY 2013 payment determination:

 Heart failure [HF] 30-day Risk Standardized Readmission 
Measure
 Acute Myocardial Infarction [AMI] 30-day Risk Standardized 
Readmission Measure
 Pneumonia [PN] 30-day Risk Standardized Readmission Measure

    These three risk-adjusted NQF endorsed measures will be 
calculated by CMS for hospitals subject to this provision using 
Medicare FFS Part A and B claims data, and require no submission of 
additional data by the hospital. Therefore, there is no data 
collection burden associated with this provision for FY 2013. These 
measures also are used under the Hospital IQR Program, and have been 
publicly reported on the Hospital Compare Web site since 2009. 
Therefore, there is a high degree of familiarity and acceptance 
among the stakeholder community with regard to these measures.
    We also are establishing a methodology for calculating the 
Excess Readmission Ratio using these three measures for the FY 2013 
payment determination. This is defined as a ratio of the number of 
risk-adjusted readmissions (based on actual readmissions) for the 
given condition at a specified hospital compared with the number of 
readmissions that will be expected for an average hospital caring 
for the same patients. Below is a description of this calculation:
    Numerator--Adjusted number of readmission at specific hospital 
(calculated for each patient and add up results for all patients):
    Hospital-specific readmission effect + average hospital 
contribution to readmission risk + [risk factor weights x patient 
risk factors]
    Denominator--Number of readmissions if an average hospital 
treated the same patients (calculated for each patient and summed 
for all patients):
    Average hospital contribution to readmission risk + [risk factor 
weights x patient risk factors]
    We are providing a minimum case threshold of 25 cases for a 
given condition in order to have an Excess Readmission Ratio 
calculated. Using the 25-case threshold, we have analyzed the 
distribution of Excess Readmission Ratio calculations on various 
types of IPPS hospitals. The results of these analyses are shown in 
the three tables below.
BILLING CODE 4120-01-P

[[Page 51830]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.029

[[Page 51831]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.030

[[Page 51832]]

[GRAPHIC] [TIFF OMITTED] TR18AU11.031

    The three tables above show the distribution of Excess 
Readmission Ratios for AMI hospitalizations, HF hospitalizations, 
and PN hospitalizations respectively. The data for these tables come 
from the publicly-reported risk-standardized rates of

[[Page 51833]]

readmission reported in 2010 on Hospital Compare (representing 
hospitalizations between July 2006 and June 2009). The distributions 
of the ratios are shown only for hospitals with at least 25 cases 
included in the measures over the 3-year period.
    The first column of the tables lists hospital characteristics 
(census region, bed size, teaching status, and urban/rural location) 
and the second column shows the number of hospitals included in the 
distribution for the particular category. For example, for the first 
table, AMI readmission, a total of 2,477 hospitals had at least 25 
included hospitalizations between July 2006 and June 2009. Of these 
hospitals, 148 were in the New England region.
    The third and fourth columns show the number and percentage of 
hospitals (of those with 25 or more cases) in the particular 
category with an Excess Readmission Ratio less than or equal to 1; 
such hospitals would not have their payments adjusted due to the 
Readmission Reduction Program because they would not be found to 
have ``excess'' readmissions. For example in the first table, for 
AMI readmissions, 72 of the 148 hospitals in the New England region 
(that had 25 or more AMI hospitalizations) had an Excess Readmission 
Ratio of less than or equal to 1, which means that 48.6 percent of 
the hospitals in the New England region (with at least 25 cases of 
AMI in 3 years) would not have their payments affected by the 
Hospital Readmission Reduction Program, whereas the remaining 
hospitals would be at risk of a payment reduction based on excess 
readmissions.
    The following eight columns show the distribution of the excess 
readmissions. For example, for AMI, in the New England region the 
mean Excess Readmission Ratio is 1.0060, the lowest 5th percentile 
hospitals had ratios of 0.9172 or less and the hightest 95th 
percentile of hospitals had Excess Readmission Ratios of 1.1104 or 
greater.
    The final column of each table shows the number of hospitals, 
within the given category, that are not included in the distribution 
based on sample size. For example, for AMI, in the New England 
region 30 hospitals are not included in the distribution because 
they had fewer than 25 AMI hospitalizations over the 3-year period. 
Currently, 25 hospitalizations is the minimum number of 
hospitalizations for public reporting. Hospitals with fewer than 25 
cases for a given condition do not have risk-standardized rates of 
readmission reported on Hospital Compare. We are finalizing this 
threshold for the Readmission Reduction Program.
    Overall these analyses show, for all three conditions, that in 
all hospital categories approximately half of the hospitals are at 
risk of payment reductions based on excess readmissions. This 
percentage does not vary greatly by region; however for all three 
measures the Mid-Atlantic region has the lowest percentage of 
hospitals with Excess Readmission Ratios of less than or equal to 1 
and, therefore, the Mid-Atlantic region is the region with the 
highest percentage of hospitals at risk of payment reduction. By 
contrast, the Mountain region has the largest percentage of 
hospitals with ratios of less than or equal to 1. The distributions 
do not differ greatly by bed size, though the largest hospitals have 
slightly lower percentages of hospitals with ratios less than or 
equal to 1 for AMI and PN. The distributions do not vary greatly by 
teaching status or rural/urban location for any of the measures.
    We also are publicly reporting the readmission rates for these 
three measures on the Hospital Compare Web site using the current 
processes employed for public reporting of these measures, which 
includes a preview period. We believe that this also poses no 
additional burden to hospitals, as they currently employ this system 
for Hospital IQR public reporting.

6. Effects of Policy Changes Relating to Payment Adjustments for 
Medicare Disproportionate Share Hospitals (DSHs) and Indirect Medical 
Education (IME)

    In section IV.G. of the preamble of this final rule, we are 
finalizing our proposal to exclude from the hospital's 
disproportionate patient percentage (DPP) of the Medicare DSH 
calculation and from the available bed day count used to calculate 
the DSH payment adjustment and the IME payment adjustments, patient 
days for hospice patients receiving inpatient hospice services in a 
hospital setting. For the purpose of the DSH payment adjustment 
calculation, the patient days for hospice patients receiving 
inpatient hospice services in the hospital are excluded from both 
the numerator and the denominator of the Medicare and Medicaid 
fractions. As such, the impact on hospitals' DSH payment adjustment 
will vary based on the demographic composition of an individual 
hospital's patient population. In other words, under this policy, 
some hospitals may receive increased DSH payment adjustments and 
other hospitals may expect to receive lower DSH payment adjustments, 
depending on the extent to which a hospital provides inpatient 
hospice services to hospice patients.
    The final policy of excluding, from the available bed count, 
patient days for hospice patients receiving hospice services in an 
inpatient hospital setting only impacts DSH payment adjustments for 
limited situations. Specifically, urban hospitals with fewer than 
100 beds or rural hospitals with fewer than 500 beds, with the 
exception of rural referral centers or MDHs, are subject to a cap of 
their DSH payment adjustment of 12 percent. Thus, a decrease in the 
number of available beds due to the exclusion of beds used to 
provide inpatient hospice services only impacts a provider's DSH 
payment adjustments if it results in the hospital's bed count 
falling below the bed count threshold. Should a hospital fall below 
the bed count threshold, it would become subject to the Medicare DSH 
payment adjustment cap and its DSH payment could decrease.
    For IME payment purposes, a decrease in a hospital's number of 
available beds results in an increase in the resident-to-bed ratio. 
The exclusion of bed days associated with hospice patients from the 
available bed count for IME will reduce the available beds, increase 
the resident-to-bed ratio, and, consequently, may increase IME 
payments to teaching hospitals, depending on the extent to which 
these hospitals were providing inpatient hospice services to hospice 
patients.

7. Effects of the FY 2012 Low-Volume Hospital Payment Adjustment

    As discussed in section IV.E. of the preamble to this final 
rule, we discuss the provisions of sections 3125 and 10314 of the 
Affordable Care Act that expand eligibility for the low-volume 
hospital payment adjustment at section 1886(d)(12) of the Act for 
FYs 2011 and 2012 to hospitals with less than 1,600 Medicare 
discharges (instead of the prior requirement of less than 800 total, 
Medicare and non-Medicare, discharges) and hospitals that are 
located more than 15 miles from other IPPS hospitals (rather than 
the prior requirement of more than 25 miles). The payment adjustment 
is also changed from an empirically determined additional 25 percent 
payment adjustment to qualifying hospitals with less than 200 total 
discharges (69 FR 49099 through 49102 and 70 FR 47432 through 47434) 
to a continuous, linear sliding scale adjustment ranging from an 
additional 25 percent payment adjustment to qualifying hospitals 
with 200 or fewer Medicare discharges to no additional payment to 
hospitals with 1,600 or more Medicare discharges (75 FR 50241).
    Based on FY 2010 claims data (March 2011 update of the MedPAR 
file), we estimate that 514 out of the 529 hospitals in our database 
that qualified as a low-volume hospital for FY 2011 will continue to 
meet the Medicare discharges criterion to qualify as a low-volume 
hospital for FY 2012. For purposes of this impact analysis, we are 
assuming that all of these 514 hospitals will continue to meet the 
distance criterion in FY 2012. If all 514 hospitals qualified for 
the low-volume payment adjustment in FY 2012, we estimate that these 
hospitals will receive an additional estimated $293 million based on 
the FY 2012 low-volume payment adjustment (described in section 
IV.E. of the preamble of this final rule) as compared to FY 2012 
payments without the proposed low-volume adjustment. (As discussed 
in section IV.E. of the preamble of this final rule, for FY 2012, we 
are determining a hospital's number of Medicare discharges based on 
the most recent update of the FY 2010 MedPAR files (that is, the 
March 2011 update for this final rule.)
    In addition, we identified an additional 86 hospitals in our 
database that meet the Medicare discharges criterion to qualify as a 
low-volume hospital for FY 2012 based on our policy of determining a 
hospital's Medicare discharges based on data from the March 2011 
update of the FY 2010 MedPAR file (as established in section IV.E. 
of the preamble of this final rule). (We note that these 86 
hospitals did not meet the discharge criterion to qualify as a low-
volume hospital for FY 2011.) However, we are not able to estimate 
the number of these 86 hospitals that will also meet the distance 
criterion. The actual number of hospitals that will also meet the 
distance criterion to qualify as a low-volume hospital is very 
likely be significantly less than the estimated 86 maximum number of 
potential additional low-volume hospitals for FY 2012 (as compared 
to FY 2011). (We note that approximately 40 percent of the hospitals 
that met the discharge criterion for

[[Page 51834]]

FY 2011 also met the mileage criterion and, therefore, are eligible 
to receive the low-volume payment adjustment in FY 2011.) If all 
these 86 hospitals were to qualify as low-volume hospitals in FY 
2012, we estimate that an additional $23 million in payments will be 
made for the FY 2012 low-volume payment adjustment at section 
1886(d)(12) of the Act.

8. Effects of Changes Relating to MDHs

    As discussed in section IV.H. of the preamble to this final 
rule, section 3124 of Public Law 111-148 extended the MDH program 
for 1 additional year, from the end of FY 2011 (that is, for 
discharges before October 1, 2011) to the end of FY 2012 (that is, 
for discharges before October 1, 2012). The extension had no impact 
on FY 2011. For FY 2012, the extension allows the continuation of 
MDH status and the payment methodology, for an MDH to be paid its 
hospital-specific rate, based on its FY 1982, 1987, or 2002 updated 
costs per discharge, rather than the Federal rate, if this results 
in a greater aggregate payment. Therefore, the impact of the 
extension is one additional year of hospital-specific rate payments, 
when greater than Federal rate payments, for these hospitals as 
MDHs, rather than Federal rate payments for these hospitals without 
special treatment as MDHs.

9. Effects of Policy Relating to CRNA Services Furnished in Rural 
Hospitals and CAHs

    In section IV.I. of the preamble of this final rule, we discuss 
the interim final rule with comment that appeared in the November 
24, 2010 Federal Register (75 FR 72256) regarding pass-through 
payment for CRNA services. In that interim final rule with comment 
period, we stated that we were changing the effective date of our 
policy to allow hospitals and CAHs that have reclassified as rural 
under 42 CFR 412.103 to be eligible for CRNA pass-through from 
``cost reporting periods beginning on or after October 1, 2010'' to 
an effective date of ``December 2, 2010.'' In section IV.I. of the 
preamble of this final rule, we respond to the comment received on 
the interim final rule with comment period and state that we are 
finalizing the effective date of December 2, 2010, that was 
established in the interim final rule with comment period. Also in 
the interim final rule with comment period (75 FR 72258), we stated 
that a change to the effective date would only affect at most a 
small subset of hospitals and CAHs affected by the change to the 
regulations adopted in the FY 2010 IPPS/LTCH PPS final rule and, for 
this reason, we expected the change to the effective date in the 
interim final rule with comment period to have a minor impact on 
Federal expenditures. We continue to expect that this change to the 
effective date will have a minor impact on Federal expenditures.

10. Effect of the Additional Payments to Qualifying Hospitals in Low 
Medicare Spending Counties

    Under section 1109 of Public Law 111-152, Congress allocated 
$400 million to be spent for FYs 2011 and 2012 to qualifying 
hospitals located in a county that ranks, based upon its ranking in 
age, sex, and race adjusted spending for benefits under Medicare 
Parts A and B per enrollee, within the lowest quartile of counties. 
In the FY 2011 IPPS/LTCH PPS final rule, we identified the list of 
eligible counties, the qualifying hospitals, and their payment 
amounts and stated that we would distribute $150 million in FY 2011 
and $250 million in FY 2012. In section IV.J. of the preamble to 
this final rule, we modified the lists of qualifying hospitals and 
their payment amounts for FYs 2011 and 2012 because we found that 
some of the hospitals listed as qualifying hospitals for section 
1109 payments were no longer subsection (d) hospitals, a requirement 
to receive payments under section 1109 of the Act. Following these 
revisions, for FY 2011, there are 404 subsection (d) hospitals that 
are receiving payments under section 1109 of the Act. For FY 2012, 
there are 402 subsection (d) hospitals that will receive payments 
under section 1109 of the Act, although the number of qualifying 
hospitals may change should any of them cease to be a subsection (d) 
hospital prior to FY 2012. Furthermore, in this final rule, we 
finalized our proposal to spend the remaining $250 million in FY 
2012. We also finalized our proposal to make payments to the 
qualifying hospitals through a one-time annual payment made by one 
Medicare contractor who would directly pay all of the qualifying 
hospitals. In section IV.J. of the preamble to this final rule, 
Table J1 lists the distribution of payments among the list of 
qualifying hospitals.

11. Effects of Changes Relating to ESRD Add-On Payment

    In section IV.L. of the preamble of this final rule, we discuss 
our clarification that the term ``Medicare discharges'' as used in 
Sec.  412.104(a) refers to discharges of all beneficiaries entitled 
to Medicare Part A; that is, discharges associated with individuals 
entitled to Part A, including discharges of individuals receiving 
benefits under original Medicare, discharges of individuals whose 
inpatient benefits are exhausted or whose stay was not covered by 
Medicare, and discharges for individuals enrolled in Medicare 
Advantage Plans, cost contracts under section 1876 of the Act 
(health maintenance organizations (HMOs)) and competitive medical 
plans (CMPs).
    We are not able to provide a detailed analysis of the impact of 
the clarification of this definition. We are not making any changes 
to the existing regulations at Sec.  412.104 under which we will 
continue to provide an additional Medicare payment to a hospital for 
inpatient services provided to Medicare beneficiaries with ESRD who 
receive a dialysis treatment during a hospital stay, if the hospital 
has established that ESRD Medicare beneficiary discharges, excluding 
certain MS-DRGs for renal failure, admission for renal dialysis, and 
kidney transplant, where the beneficiary received dialysis services 
during the inpatient stay, are 10 percent or more of its total 
Medicare discharges. We note that this clarification could change 
both the denominator (total Medicare discharges) and the numerator 
(ESRD Medicare beneficiary discharges, excluding certain MS-DRGs for 
renal failure, admission for renal dialysis, and kidney transplant) 
associated with this calculation. As a result of our clarification, 
these discharges will be included in the denominator of the 
calculation for the determination of eligibility for the ESRD 
additional payment to hospitals. Similarly, for the numerator of 
this calculation, we also will include all discharges of ESRD 
beneficiaries who are entitled to Medicare Part A and who receive 
inpatient dialysis, subject to the exclusions of certain MS-DRG 
codes described above. Depending on whether or not the additional 
discharges are for ESRD beneficiaries, the calculation may increase 
or decrease.

12. Effects of Changes Relating to the Reporting Requirements for 
Pension Costs for Medicare Cost-Finding and Wage Reporting Purposes

    In sections III.D.3. and IV.M. of the preamble of this final 
rule, we are revising our policy for determining pension cost for 
Medicare purposes. We are setting forth two distinct policies: one 
for determining and reporting defined benefit pension costs on the 
cost report for Medicare cost-finding purposes and the other for 
determining and reporting defined benefit pension costs for Medicare 
wage index purposes. The allowable pension cost under the current 
rules and the revised policies are based on the amount funded. The 
current rules impose an actuarially based limit on the allowable 
amount and the rules adopted in this final rule limit the costs used 
in Medicare cost-finding based on historical funding data. Because 
the current rules and the policies adopted in this final rule are 
both tied to the amount funded, we expect that there will be minimal 
impact. We note that it is not possible to determine a precise 
impact for Medicare cost-finding purposes because we do not 
currently have data in the form and manner required to calculate the 
pension costs for all providers under our final policies. Moreover, 
because we lack these data, we are unable to determine a hospital-
level impact for the Medicare wage index. We note that our policies 
may result in redistribution within the Medicare wage index, but 
section 1886(d)(3)(E) of the Act requires any adjustments or updates 
made to the Medicare wage index to be budget neutral.

13. Effects of Implementation of Rural Community Hospital Demonstration 
Program

    In section IV.N. of the preamble of this final rule, we discuss 
our implementation of section 410A of Public Law 108-173, as 
amended, which requires the Secretary to conduct a demonstration 
that would modify reimbursement for inpatient services for up to 30 
rural community hospitals. Section 410A(c)(2) requires that ``[i]n 
conducting the demonstration program under this section, the 
Secretary shall ensure that the aggregate payments made by the 
Secretary do not exceed the amount which the Secretary would have 
paid if the demonstration program under this section was not 
implemented.'' As discussed in section IV.N. of the preamble of this 
final rule, in the IPPS final rules for each of the previous 7 
fiscal years, we have estimated the additional payments made by the 
program for each of the participating hospitals as a result of the

[[Page 51835]]

demonstration. In order to achieve budget neutrality, we are 
adjusting the national IPPS rates by an amount sufficient to account 
for the added costs of this demonstration. In other words, we are 
applying budget neutrality across the payment system as a whole 
rather than merely across the participants of this demonstration. We 
believe that the language of the statutory budget neutrality 
requirement permits the agency to implement the budget neutrality 
provision in this manner. The statutory language requires that 
``aggregate payments made by the Secretary do not exceed the amount 
which the Secretary would have paid if the demonstration * * * was 
not implemented'' but does not identify the range across which 
aggregate payments must be held equal.
    We are making an adjustment in the FY 2012 IPPS final rule of 
$52,452,060 to the national IPPS rates to account for estimated 
demonstration cost for FY 2012 for the 7 ``pre-expansion'' 
participating hospitals that are currently participating in the 
demonstration and the 18 additional hospitals selected to 
participate as a result of the expansion of the demonstration under 
the Affordable Care Act. In addition, in the FY 2012 proposed rule, 
we stated that the budget neutrality adjustment would also account 
for any differences between the cost of the demonstration program 
for hospitals participating in the demonstration during FYs 2007 and 
2008, represented by their cost reports beginning in FYs 2007 and 
2008, and the amount that was offset by the budget neutrality 
adjustment for FYs 2007 and 2008. In the proposed rule, we stated 
that we could not establish the amount of this difference because 
settled cost reports beginning in FYs 2007 and 2008 in the 
demonstration were not available. Similarly, for this final rule, 
the estimated $52,452,060 that we are offsetting does not account 
for any differences between the cost of the demonstration program 
for hospitals participating in the demonstration during FYs 2007 and 
2008 and the amount that was offset by the budget neutrality 
adjustment for FYs 2007 and 2008 because the specific numeric value 
associated with this component of the adjustment to the national 
IPPS rates cannot be known at this time. This is because settled 
cost reports beginning in FYs 2007 and 2008 of the hospitals 
participating during FYs 2007 and 2008 in the demonstration also are 
not available at this time.

14. Effects of Changes to the List of MS-DRGs Subject to Postacute Care 
Transfer and DRG Special Pay Policy

    In section IV.P. of the preamble to this final rule, we discuss 
changes to the list of MS-DRGs subject to the postacute care 
transfer and DRG special payment policies. As reflected in Table 5 
listed in section VI. of the Addendum to this final rule and 
available via the Internet, using criteria set forth in regulation 
at Sec.  412.4, we evaluated MS-DRG charges, discharge, and transfer 
data to determine which MS-DRGs qualify for the postacute care 
transfer and DRG special pay policies. We note that we are making no 
change to these payment policies in this FY 2012 final rule. We are 
changing the status of certain MS-DRGs as a result of revision of 
the MS-DRGs for FY 2012. We are changing the status of five MS-DRGs 
to qualify for the postacute care transfer policy in FY 2012, after 
not qualifying in FY 2011. An additional three MS-DRGs that 
qualified under the policy in FY 2011 do not qualify in FY 2012, and 
we are changing their status accordingly. Finally, three MS-DRGs now 
qualify for the MS-DRG special pay policy in FY 2012 after not 
qualifying in FY 2011, and we are adding them to the list of 
qualifying MS-DRGs. Column 4 of Table I in this Appendix A shows the 
effects of the changes to the MS-DRGs and relative weights with the 
application of the recalibration budget neutrality factor to the 
standardized amounts. Section 1886(d)(4)(C)(i) of the Act requires 
us annually to make appropriate classification changes in order to 
reflect changes in treatment patterns, technology, and any other 
factors that may change the relative use of hospital resources. The 
analysis and methods determining the changes due to the MS-DRGs and 
relative weights accounts for and includes changes in MS-DRG 
postacute care transfer and special pay policy statuses. We refer 
readers to section I.G.2.f. of this Appendix for a more detailed 
discussion of payment impacts due to MS-DRG reclassification 
policies.

15. Effects of Changes Relating to Hospital Services Furnished Under 
Arrangements

    In section IV.Q. of the preamble of this final rule, we are 
limiting the services that a hospital may provide under arrangement. 
Routine services must be provided in the hospital in which the 
patient is a registered inpatient in order for the services to be 
considered as being provided by the hospital. Only diagnostic and 
therapeutic services (that is, ancillary services) may be provided 
under arrangement outside the hospital. We are aware of only a few 
cases where routine services are being provided outside the hospital 
other than where the patient is a registered inpatient. Even in 
those few instances where a hospital (hospital A) is currently 
treating the services that are provided under arrangements at 
another hospital (hospital B), as if they are provided by hospital A 
and reporting the costs on hospital A's cost report, complying with 
this change should not be a burden on either the patient or the 
hospital. Under this policy, when the patient is transferred to 
hospital B for the services, the patient will need to be discharged 
from hospital A and admitted to hospital B. Therefore, we have 
determined that the impact of this change is negligible.

16. Effects of Change Relating to CAH Payment for Ambulance Services

    In section VI.B. of the preamble of this final rule, we discuss 
our revision of the regulations at Sec.  413.70(b)(5) to state that, 
effective for cost reporting periods beginning on or after October 
1, 2011, payment for ambulance services furnished by a CAH or by a 
CAH-owned and operated entity is 101 percent of the reasonable costs 
of the CAH or the entity in furnishing those services, but only if 
the CAH or the entity is the only provider or supplier of ambulance 
services located within a 35-mile drive of the CAH. In addition, we 
are revising the regulations at Sec.  413.70(b)(5) to state that, 
effective for cost reporting periods beginning on or after October 
1, 2011, if there is no provider or supplier of ambulance services 
located within a 35-mile drive of the CAH, but there is a CAH-owned 
and operated entity located more than a 35-mile drive from the CAH, 
the CAH owned and operated entity would be paid at 101 percent of 
reasonable costs for its ambulance services as long as that entity 
is the closest provider or supplier of ambulance services to the 
CAH. We believe this change will continue to allow for sufficient 
ambulance services to CAHs. We do not have sufficient information or 
data to determine how many CAH-owned and operated entities can 
qualify for reasonable cost-based payments under the change. As a 
result, we are unable to quantify the financial impact of this 
change for payment based on 101 percent of reasonable costs. 
However, even those entities that do not qualify for payment based 
on 101 percent of reasonable costs would be paid for ambulance 
services under the Medicare ambulance fee schedule.

I. Effects of Changes in the Capital IPPS

1. General Considerations

    For the impact analysis presented below, we used data from the 
March 2011 update of the FY 2010 MedPAR file and the March 2011 
update of the Provider-Specific File (PSF) that is used for payment 
purposes. Although the analyses of the changes to the capital 
prospective payment system do not incorporate cost data, we used the 
March 2011 update of the most recently available hospital cost 
report data (FYs 2008 and 2009) to categorize hospitals. Our 
analysis has several qualifications. We use the best data available 
and make assumptions about case-mix and beneficiary enrollment as 
described below. In addition, as discussed in section V.E. of the 
preamble to this final rule, we are making a -1.0 percent 
documentation and coding adjustment to the national capital rate for 
FY 2012 in addition to the -0.6 percent adjustment established for 
FY 2008, the -0.9 percent adjustment for FY 2009, and the -2.9 
percent adjustment for FY 2011. This results in a cumulative 
adjustment factor of 0.9479 that we applied in determining the FY 
2012 national capital rate to account for improvements in 
documentation and coding that do not reflect real changes in case 
mix under the MS-DRGs. We note that we applied a -2.6 percent 
documentation and coding adjustment to the Puerto Rico-specific 
capital rate in FY 2011, which reflects the entire amount of our 
current estimate of the effects of documentation for FYs 2008 and 
2009 that do not reflect real changes in case-mix under the MS-DRGs. 
Therefore, we are not adjusting the Puerto Rico-specific capital 
rate in FY 2012 to account for changes in documentation and coding.
    Due to the interdependent nature of the IPPS, it is very 
difficult to precisely quantify the impact associated with each 
change. In addition, we draw upon various sources for the data used 
to categorize hospitals in the tables. In some cases (for instance, 
the number of beds), there is a fair degree of variation in the data 
from different sources. We have attempted to construct these 
variables with the best available sources overall. However, it is 
possible that some

[[Page 51836]]

individual hospitals are placed in the wrong category.
    Using cases from the March 2011 update of the FY 2010 MedPAR 
file, we simulated payments under the capital IPPS for FY 2011 and 
FY 2012 for a comparison of total payments per case. Any short-term, 
acute care hospitals not paid under the general IPPS (Indian Health 
Service hospitals and hospitals in Maryland) are excluded from the 
simulations.
    The methodology for determining a capital IPPS payment is set 
forth at Sec.  412.312. The basic methodology for calculating 
capital IPPS payments in FY 2012 is as follows:
    (Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for 
hospitals located in Alaska and Hawaii) x (1 + DSH Adjustment Factor 
+ IME adjustment factor, if applicable).
    In addition to the other adjustments, hospitals may also receive 
outlier payments for those cases that qualify under the threshold 
established for each fiscal year. We modeled payments for each 
hospital by multiplying the capital Federal rate by the GAF and the 
hospital's case-mix. We then added estimated payments for indirect 
medical education, disproportionate share, and outliers, if 
applicable. For purposes of this impact analysis, the model includes 
the following assumptions:
     We estimate that the Medicare case-mix index will 
increase by 1.0 percent in both FYs 2011 and 2012.
     We estimate that the Medicare discharges will be 
approximately 11.8 million in FY 2011 and 12.2 million in FY 2012.
     The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. As discussed in section III.A.1.a. of 
the preamble of this final rule, the update is 1.5 percent for FY 
2012.
     In addition to the FY 2012 update factor, the FY 2012 
capital Federal rate was calculated based on a GAF/DRG budget 
neutrality factor of 1.0004, and a outlier adjustment factor of 
0.9382. As discussed in section III.A.4. of the Addendum to this 
final rule, an exceptions adjustment factor is not necessary in FY 
2012 because there are no longer any hospitals eligible to receive 
special exceptions payments in FY 2012. However, the special 
exceptions adjustment factor was not built permanently into the 
capital rate; that is, was not applied cumulatively. Therefore, 
because there will be no special exceptions payments in FY 2012, we 
are only applying an adjustment to restore the special exceptions 
adjustment that was applied to the FY 2011 capital rate, that is, 
1.0004 (calculated as 1/0.9996).
     For FY 2012, as discussed above and in section V.E. of 
the preamble to this final rule, we are applying a cumulative 0.9479 
adjustment in determining the FY 2012 national capital rate for 
changes in documentation and coding that are expected to increase 
case-mix under the MS-DRGs but do not reflect real case-mix change. 
This cumulative adjustment of 0.9479 reflects the additional -1.0 
percent adjustment in FY 2012 for the effects of documentation and 
coding in FYs 2008 and 2009.

2. Results

    We used the actuarial model described above to estimate the 
potential impact of our changes for FY 2012 on total capital 
payments per case, using a universe of 3,419 hospitals. As described 
above, the individual hospital payment parameters are taken from the 
best available data, including the March 2011 update of the FY 2010 
MedPAR file, the March 2011 update to the PSF, and the most recent 
cost report data from the March 2011 update of HCRIS. In Table III, 
we present a comparison of estimated total payments per case for FY 
2011 and estimated total payments per case for FY 2012 based on the 
FY 2012 payment policies. Column 2 shows estimates of payments per 
case under our model for FY 2011. Column 3 shows estimates of 
payments per case under our model for FY 2012. Column 4 shows the 
total percentage change in payments from FY 2011 to FY 2012. The 
change represented in Column 4 includes the 1.5 percent update to 
the capital Federal rate and other changes in the adjustments to the 
capital Federal rate. The comparisons are provided by: (1) 
Geographic location; (2) region; and (3) payment classification.
    The simulation results show that, on average, capital payments 
per case in FY 2012 are expected to increase as compared to capital 
payments per case in FY 2011. The capital rate for FY 2012 will 
increase approximately 0.34 percent as compared to the FY 2011 
capital rate. The changes to the GAFs are expected to result, on 
average, in a slight decrease in capital payments for most regions 
with the certain exceptions. The regional variations in the 
estimated change in capital payments are consistent with the changes 
in payments due to changes in the wage index (and policies affecting 
the wage index) shown in Table I in section I of this Appendix.
    We also are estimating a slight increase in outlier payments in 
FY 2012 as compared to FY 2011. This is primarily because, based on 
the FY 2010 claims from the March 2011 update of the MedPAR file, we 
are currently estimating that FY 2011 capital outlier payments are 
slightly less the projected percentage of 5.96 percent that we used 
to determine the outlier offset that we applied in determining the 
FY 2011 capital Federal rate.
    The net impact of these changes, as discussed above, is an 
estimated 1.8 percent change in capital payments per discharge from 
FY 2011 to FY 2012 for all hospitals (as shown below in Table III).
    The geographic comparison shows that, on average, all hospitals, 
urban and rural, are expected to experience an increase in capital 
IPPS payments per case in FY 2012 as compared to FY 2011. Capital 
IPPS payments per case for urban hospitals are estimated to increase 
1.8 percent, while rural hospitals are expected to experience a 1.2 
percent increase.
    The comparisons by region show that all regions will experience, 
on average, increases in capital IPPS payments. For urban areas, the 
estimated increase in capital payments per discharge from FY 2011 to 
FY 2012 ranges from a 1.0 percent increase for the East North 
Central and East South Central urban regions to a 5.8 percent 
increase for the New England urban region. As discussed above, the 
New England urban region is estimated to have a larger than average 
increase in capital payments per case in FY 2012 as compared to FY 
2011 due to the application of a rural floor. For rural regions, the 
estimated percent increase in capital payments per discharge from FY 
2011 to FY 2012 ranges from a 0.7 percent increase for the East 
North Central rural region to a 2.6 percent increase for the Pacific 
rural region.
    By type of ownership, voluntary hospitals and government 
hospitals are estimated to experience a 1.8 percent increase in 
capital payments per case; and proprietary hospitals are estimated 
to experience a 1.6 percent increase in capital payments per case 
from FY 2011 to FY 2012.
    Section 1886(d)(10) of the Act established the MGCRB. Hospitals 
may apply for reclassification for purposes of the wage index for FY 
2012. Reclassification for wage index purposes also affects the GAFs 
because that factor is constructed from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2012, we show the average capital payments per case for 
reclassified hospitals for FY 2012. All reclassified and 
nonreclassified hospitals are expected to experience an increase in 
capital payments in FY 2012 as compared to FY 2011. Urban 
reclassified hospitals are estimated to experience an increase of 
1.7 percent, while urban nonreclassified are estimated to experience 
the largest increase of 1.9 percent. Rural reclassified hospitals 
are estimated to experience an increase of 1.4 percent, while rural 
nonreclassified hospitals are estimated to have a 0.8 percent 
increase in capital payments per case. Other reclassified hospitals 
(that is, hospitals reclassified under section 1886(d)(8)(B) of the 
Act) are expected to experience an increase of 0.5 percent in 
capital payments from FY 2011 to FY 2012.

[[Page 51837]]

                                Table III--Comparison of Total Payments Per Case
                                 [FY 2011 payments compared to FY 2012 payments]
----------------------------------------------------------------------------------------------------------------
                                                 Number of     Average FY 2011  Average FY 2012
                                                 hospitals      payments/case    payments/case        Change
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
    All hospitals...........................            3,423              786              800              1.8
    Large urban areas (populations over 1               1,371              865              882              1.9
     million)...............................
    Other urban areas (populations of 1                 1,127              774              787              1.7
     million of fewer)......................
    Rural areas.............................              925              542              549              1.2
    Urban hospitals.........................            2,498              824              839              1.8
        0-99 beds...........................              632              664              675              1.6
        100-199 beds........................              782              711              724              1.9
        200-299 beds........................              449              762              775              1.7
        300-499 beds........................              430              842              856              1.6
        500 or more beds....................              205              993            1,015              2.1
    Rural hospitals.........................              925              542              549              1.2
        0-49 beds...........................              320              433              439              1.3
        50-99 beds..........................              348              500              505              1.0
        100-149 beds........................              152              536              543              1.3
        150-199 beds........................               58              613              621              1.2
        200 or more beds....................               47              656              664              1.2
By Region:
    Urban by Region.........................            2,498              824              839              1.8
        New England.........................              120              862              912              5.8
        Middle Atlantic.....................              320              877              890              1.4
        South Atlantic......................              380              770              781              1.6
        East North Central..................              401              800              808              1.0
        East South Central..................              153              729              737              1.0
        West North Central..................              169              816              830              1.8
        West South Central..................              366              779              796              2.1
        Mountain............................              159              847              861              1.7
        Pacific.............................              380              983            1,004              2.2
        Puerto Rico.........................               50              378              388              2.5
    Rural by Region.........................              925              542              549              1.2
        New England.........................               23              721              728              1.0
        Middle Atlantic.....................               69              554              562              1.4
        South Atlantic......................              165              529              536              1.3
        East North Central..................              120              574              577              0.4
        East South Central..................              170              498              501              0.7
        West North Central..................               99              570              581              1.8
        West South Central..................              183              484              491              1.4
        Mountain............................               66              575              581              1.1
        Pacific.............................               29              685              703              2.6
        Puerto Rico.........................                1              163              166              1.8
By Payment Classification:
    All hospitals...........................            3,423              786              800              1.8
    Large urban areas (populations over 1               1,384              864              881              1.9
     million)...............................
    Other urban areas (populations of 1                 1,135              774              787              1.7
     million of fewer)......................
    Rural areas.............................              904              544              550              1.2
Teaching Status:
    Non-teaching............................            2,391              671              682              1.7
    Fewer than 100 Residents................              792              784              795              1.5
    100 or more Residents...................              240            1,112            1,137              2.2
Urban DSH:
    100 or more beds........................            1,547              848              864              1.9
    Less than 100 beds......................              337              590              599              1.4
Rural DSH:
    Sole Community (SCH/EACH)...............              417              475              482              1.4
    Referral Center (RRC/EACH)..............              222              596              604              1.3
Other Rural:
    100 or more beds........................               27              485              488              0.5
    Less than 100 beds......................              134              450              453              0.7
Urban teaching and DSH:
    Both teaching and DSH...................              827              917              935              1.9
    Teaching and no DSH.....................              144              806              817              1.4
    No teaching and DSH.....................            1,057              711              725              1.9
    No teaching and no DSH..................              491              734              745              1.5
Rural Hospital Types:
    Non special status hospitals............            2,402              828              843              1.8
    RRC/EACH................................               56              741              750              1.2
    SCH/EACH................................               33              725              740              2.0
    Medicare-dependent hospitals (MDH)......               11              557              566              1.6
    SCH, RRC and EACH.......................               17              770              784              1.8

[[Page 51838]]

 
Hospitals Reclassified by the Medicare
 Geographic Classification Review Board:
FY 2012 Reclassifications:
    All Urban Reclassified..................              323              827              841              1.7
    All Urban Non-Reclassified..............            2,142              826              841              1.9
    All Rural Reclassified..................              332              588              596              1.4
    All Rural Non-Reclassified..............              532              475              479              0.8
    Other Reclassified Hospitals (Section                  54              547              550              0.5
     1886(d)(8)(B)).........................
Type of Ownership:
    Voluntary...............................            1,985              802              816              1.8
    Proprietary.............................              870              705              717              1.6
    Government..............................              566              801              815              1.8
Medicare Utilization as a Percent of
 Inpatient Days:
    0-25....................................              358            1,005            1,026              2.1
    25-50...................................            1,695              836              852              1.9
    50-65...................................            1,081              667              676              1.4
    Over 65.................................              198              581              590              1.5
----------------------------------------------------------------------------------------------------------------

J. Effects of Payment Rate Changes and Policy Changes Under the 
LTCH PPS

1. Introduction and General Considerations

    In section VII. of the preamble and section V. of the Addendum 
to this final rule, we set forth the annual update to the payment 
rates for the LTCH PPS for FY 2012. In the preamble, we specify the 
statutory authority for the provisions that are presented, identify 
those policies, and present rationales for our decisions as well as 
alternatives that were considered. In this section of Appendix A to 
this final rule, we discuss the impact of the changes to the payment 
rates, factors, and other payment rate policies related to the LTCH 
PPS that are presented in the preamble of this final rule in terms 
of their estimated fiscal impact on the Medicare budget and on 
LTCHs.
    Currently, our database of 426 LTCHs includes the data for 82 
nonprofit (voluntary ownership control) LTCHs and 322 proprietary 
LTCHs. Of the remaining 22 LTCHs, 13 LTCHs are government-owned and 
operated and the ownership type of the other 9 LTCHs is unknown. In 
the impact analysis, we used the rates, factors, and policies 
presented in this final rule, including the 1.8 percent annual 
update, which is based on the full increase of the LTCH PPS market 
basket and the reductions required by sections 1886(m)(3) and (m)(4) 
of the Act, the update to the MS-LTC-DRG classifications and 
relative weights, the update to the wage index values and labor-
related share, including the application of a budget neutrality 
adjustment for changes to the area wage adjustment, and the best 
available claims and CCR data to estimate the change in payments for 
FY 2012. The standard Federal rate for FY 2012 is $40,222.05. This 
rate reflects the 1.8 percent annual update to the standard Federal 
rate and the area wage level budget neutrality factor of 0.99775, 
which ensures that the changes in the wage indexes and labor-related 
share do not influence estimated aggregate payments.
    Based on the best available data for the 426 LTCHs in our 
database, we estimate that the update to the standard Federal rate 
for FY 2012 (discussed in section V.A.2. of the Addendum to this 
final rule) and the changes to the area wage adjustment for FY 2012 
(discussed in section V.B. of the Addendum to this final rule), in 
addition to an estimated increase in HCO payments and an estimated 
increase in SSO payments, will result in an increase in estimated 
payments from FY 2011 of approximately $126 million (or about 2.5 
percent). Based on the 426 LTCHs in our database, we estimate that 
the FY 2012 LTCH PPS payments will be approximately $5.257 billion, 
an increase from FY 2011 LTCH PPS payments which were approximately 
$5.131 billion. Because the combined distributional effects and 
estimated changes to the Medicare program payments are approximately 
$100 million, this final rule is considered a major economic rule, 
as defined in this section. We note that the approximately $126 
million for the projected increase in estimated aggregate LTCH PPS 
payments from FY 2011 to FY 2012 does not reflect changes in LTCH 
admissions or case-mix intensity in estimated LTCH PPS payments, 
which also will affect overall payment changes.
    The projected 2.5 percent increase in estimated payments per 
discharge from FY 2011 to FY 2012 is attributable to several 
factors, including the 1.8 percent annual update to the standard 
Federal rate, and projected increases in estimated HCO and SSO 
payments. As Table IV shows, the change attributable solely to the 
final update to the standard Federal rate is projected to result in 
an increase of 1.6 percent in payments per discharge from FY 2011 to 
FY 2012, on average, for all LTCHs. Because we are applying an area 
wage level budget neutrality factor to the standard Federal rate, 
the update to the wage data and labor-related share does not impact 
the increase in payments.
    As discussed in section V.B. of the Addendum to this final rule, 
we are updating the wage index values for FY 2012 based on the most 
recent available data. In addition, we are decreasing the labor-
related share from 75.271 percent to 70.199 percent under the LTCH 
PPS for FY 2012, based on the most recent available data on the 
relative importance of the labor-related share of operating and 
capital costs of the FY 2008-based RPL market basket. We also are 
applying an area wage level budget neutrality factor to the standard 
Federal rate to ensure that annual changes to the area wage level 
adjustment (that is, the wage index and labor-related changes) are 
budget neutral. We are making an area wage level budget neutrality 
factor of 0.99775, which reduces the final standard Federal rate by 
0.23 percent. Therefore, the changes to the wage data and labor-
related share do not result in a change in aggregate LTCH PPS 
payments.
    Table IV below shows the impact of the payment rate and policy 
changes on LTCH PPS payments for FY 2012 presented in this final 
rule by comparing estimated FY 2011 payments to estimated FY 2012 
payments. The projected increase in payments per discharge from FY 
2011 to FY 2012 is 2.5 percent (shown in Column 8). This projected 
increase in payments was attributable to the impacts of the change 
to the standard Federal rate (1.6 percent in Column 6), as well as 
the effect of the estimated increase in payments for HCO cases and 
SSO cases in FY 2012 as compared to FY 2011 (0.5 percent and 0.3 
percent, respectively). That is, estimated total HCO payments are 
projected to increase from FY 2011 to FY 2012 in order to ensure 
that the estimated HCO payments would be 8 percent of the total 
estimated LTCH PPS payments in FY 2012. An analysis of the most 
recent available LTCH PPS claims data (that is, FY 2010 claims data 
from the March 2011 update of the MedPAR file) indicates that the FY 
2011 HCO threshold of $18,785 (as established in the FY 2011 IPPS/
LTCH PPS final rule) may result in HCO payments in FY 2011 that fall 
slightly below the estimated 8 percent. Specifically, we currently 
estimate that HCO payments will

[[Page 51839]]

be approximately 7.5 percent of the estimated total LTCH PPS 
payments in FY 2011. We estimated that the impact of the increase in 
HCO payments will result in approximately a 0.5 percent increase in 
estimated payments from FY 2011 to FY 2012, on average, for all 
LTCHs. Furthermore, in calculating the estimated increase in 
payments from FY 2011 to FY 2012 for HCO and SSO cases, we increased 
estimated costs by the applicable market basket percentage increase 
as projected by our actuaries, which increases estimated payments by 
0.3 percent relative to last year. We note that estimated payments 
for all SSO cases comprised approximately 13 percent of the 
estimated total LTCH PPS payments, and estimated payments for HCO 
cases comprised approximately 8 percent of the estimated total LTCH 
PPS payments. Payments for HCO cases are based on 80 percent of the 
estimated cost of the case above the HCO threshold, while the 
majority of the payments for SSO cases (over 65 percent) are based 
on the estimated cost of the SSO case.
    As we discuss in detail throughout this final rule, based on the 
most recent available data, we believe that the provisions of this 
final rule relating to the LTCH PPS will result in an increase in 
estimated aggregate LTCH PPS payments and that the resulting LTCH 
PPS payment amounts will result in appropriate Medicare payments.

2. Impact on Rural Hospitals

    For purposes of section 1102(b) of the Act, we define a small 
rural hospital as a hospital that is located outside of an urban 
area and has fewer than 100 beds. As shown in Table IV, we are 
projecting a 3.5 percent increase in estimated payments per 
discharge for FY 2012 as compared to FY 2011 for rural LTCHs that 
will result from the changes presented in this final rule, as well 
as the effect of estimated changes to HCO and SSO payments. This 
estimated impact is based on the data for the 26 rural LTCHs in our 
database (out of 426 LTCHs) for which complete data were available.
    The estimated increase in LTCH PPS payments from FY 2011 to FY 
2012 for rural LTCHs is primarily due to the higher than average 
impacts from the changes to the area wage level adjustment, 
specifically, the reduction to the labor-related share from 75.271 
to 70.199. Although we are applying an area wage level budget 
neutrality factor for changes to the wage indexes and labor-related 
share to ensure that there is no change in aggregate LTCH PPS 
payments due to those changes, we estimated rural hospitals will 
experience a 0.7 percent increase in payments due to the changes to 
the area wage level adjustment, as shown in Column 7 below. Rural 
hospitals generally have a wage index of less than 1; therefore, a 
decrease to the labor-related share results in their wage index 
reducing a smaller portion of the standard Federal rate, resulting 
in an estimated increase in payments in FY 2012 as compared to FY 
2011.

3. Anticipated Effects of LTCH PPS Payment Rate Changes and Policy 
Changes

a. Budgetary Impact

    Section 123(a)(1) of the BBRA requires that the PPS developed 
for LTCHs ``maintain budget neutrality.'' We believe that the 
statute's mandate for budget neutrality applies only to the first 
year of the implementation of the LTCH PPS (that is, FY 2003). 
Therefore, in calculating the FY 2003 standard Federal rate under 
Sec.  412.523(d)(2), we set total estimated payments for FY 2003 
under the LTCH PPS so that estimated aggregate payments under the 
LTCH PPS were estimated to equal the amount that would have been 
paid if the LTCH PPS had not been implemented.
    As discussed above in section I.J.1. of this Appendix, we 
project an increase in aggregate LTCH PPS payments in FY 2012 of 
approximately $126 million (or 2.5 percent) based on the 426 LTCHs 
in our database.

b. Effects of Requirements for LTCH Quality Reporting Program

    In section VII.C. of the preamble of this final rule, we discuss 
our requirements for LTCHs to report quality data under the LTCH 
quality reporting program. As set forth at section 1886(m)(5)(A) of 
the Act, beginning with FY 2014, the Secretary must reduce by 2.0 
percentage points any annual update to the standard Federal rate for 
discharges for any LTCH which does not comply with the LTCH quality 
data submission requirements. In the FY 2012 IPPS/LTCH PPS proposed 
rule (76 FR 26076), we estimated that should we adopt the proposed 
requirements for the LTCH quality reporting program for FY 2014, few 
LTCHs would not receive the full payment update in any fiscal year 
as a result of failure to comply with the quality reporting program 
that has been mandated by section 3004 of the Affordable Care Act. 
We stated this because we believe that most LTCHs will see the new 
quality reporting program as an important step in improving the 
quality of care patients receive in these facilities. We also 
believe that most LTCHs will quickly and easily adapt to this new 
quality reporting program and find that the benefits of this program 
outweigh the burdens.
    At this time, information is not available to determine the 
precise number of LTCHs that will receive the 2-percent reduction to 
the annual update to the standard Federal rate for discharges due to 
noncompliance with the requirements of section 3004 of the 
Affordable Care Act. At this time, we have no way to estimate how 
many LTCHs will fully comply with the LTCH quality reporting 
program.
    In section VII.C. of the preamble of this final rule, we are 
adopting three quality reporting measures for LTCHs for FY 2014: (1) 
Catheter-Associated Urinary Tract Infections (CAUTI); (2) Central 
Line Catheter-Associated Blood Stream Infection Event (CLABSI); and 
(3) Pressure Ulcers that are New or Have Worsened. In the FY 2012 
IPPS/LTCH PPS proposed rule (76 FR 26076), we estimated that the 
total LTCH costs to report these data, including NHSN registration 
and training for the CAUTI and CLABSI quality measures; data 
submission for all three measures, and monitoring data submission 
would be $1,128,440.
    Comment: Several commenters expressed concern over the potential 
for negative financial implications and believed that large burdens 
would be imposed by requiring the reporting of CLABSI and CAUTI 
measures to the CDC via NHSN.
    Response: We wish to minimize any burdens associated with the 
LTCH quality reporting program. We believe that using the NHSN 
minimizes the potential reporting burdens on LTCHs. We note that the 
CDC estimates that 200 LTCHs out of a total of 435 certified LTCHs 
currently submit HAI data to the CDC via NHSN. This means that 46 
percent of LTCHs are already enrolled in NHSN, are familiar with the 
data collection mechanism, and have knowledge of the submission 
processes required by the CDC. For LTCHs that currently report both 
measures using the NHSN, there will be no additional burden.
    For LTCHs that currently report only one of the HAIs to NHSN 
(for example, an LTCH that reports CAUTI to NHSN, but does not 
report CLABSI), there will be only modest additional burdens as a 
result of new LTCH quality reporting program. Because these LTCHs 
are currently reporting data to NHSN for other purposes, they have 
already registered with the NHSN and taken the mandatory training. 
In addition, these LTCHs should already have staff members whom are 
familiar with the reporting procedures used by NHSN.
    LTCHs that do not already report information to NHSN will incur 
the most additional burden. This burden would consist of the 
following:
    (1) Registration with the NHSN;
    (2) Mandatory NHSN training (which is estimated to take 
approximately 4-5 hours);
    (3) LTCH training of administrative staff on how to transmit 
data to the NHSN; and
    (4) Quarterly reporting time.
    NHSN does not charge a fee for registration or the submission of 
data. The mandatory training is also free. This training must be 
taken before the LTCH can become a registered user. The training 
must be taken by an administrator, but this may be a person such as 
an infection control specialist, Director of Nursing, or another 
person associated with the LTCH's quality reporting program. Only 
one person is required to take the NHSN mandatory training in order 
for the LTCH to become registered.
    Once the LTCH is registered with the NHSN, it may wish to train 
other members of the staff about the use of the NHSN system. Each 
LTCH may decide how many additional staff should be trained. 
However, it is not likely that more than a few staff members per 
LTCH will need to be trained on the use of the NHSN system.
    The new quality reporting program requires that each LTCH must 
collect the CLABSI and CAUTI data to submit to NHSN. However, the 
collection of data pertaining to infectious diseases incurred by 
patients in an LTCH is an important part of safe and effective 
patient care. We believe that most, if not all, LTCHs already 
collect and record data pertaining to CAUTI, CLABSI, and pressure 
ulcers as a part of their safe and effective patient care. This 
belief is supported by research and environmental scans which have 
been performed by our measure developer contractor, as well as 
statements by LTCH providers during open door forums and during TEP 
discussions. Therefore, we

[[Page 51840]]

do not believe that there will be any significant additional burden 
related to data collection for the three quality measures.
    We anticipate that the amount of time that will be needed by 
each LTCH to report the data collected to the NHSN will be minimal 
for several reasons. First, these data will be aggregated and 
reported at intervals. Secondly, based on statistics provided by the 
CDC, we believe that only a small percentage of patients admitted to 
LTCHs will experience one of these serious HAIs. We estimate that 
there may be approximately six CAUTI and six CLABSI events per LTCH 
per month. This equates to approximately 144 HAI events per LTCH per 
year. We estimate that it will take approximately 15 minutes of 
administrative data entry time per submission to submit these data 
to NHSN. If the data are aggregated and submitted once per month, 
the time required of an administrative data entry person will be 3 
hours per month. If the average wage of an administrative assistant 
is $20.57, the estimated cost to an LTCH for the monthly submission 
of the CAUTI and CLABSI data will be $61.71, or $740.52 per LTCH per 
year.
    Comment: One commenter recommended that hospitals receive some 
payment to mitigate the additional cost associated with reporting 
this information.
    Response: The Affordable Care Act amended the Act to require the 
Secretary to implement quality reporting programs in settings that 
have not been required to do so in the past, including LTCHs. As 
noted above, we wish to minimize any burdens associated with the 
LTCH quality reporting program. However, the Act does not provide 
for additional payments to LTCHs for quality data reporting. In 
addition, by using NHSN and a subset of the CARE data item set, we 
are attempting to minimize the burden of the LTCH quality reporting 
program by using data submission methods that have been used or are 
being used by some LTCHs.
    After consideration of the public comments we received, we are 
finalizing the three quality reporting measures, namely (1) 
Catheter-Associated Urinary Tract Infections (CAUTI); (2) Central 
Line Catheter-Associated Blood Stream Infection Event (CLABSI); and 
(3) Pressure Ulcers that are New or Have Worsened as proposed for 
the FY 2014 payment determination.
    At this time, the data reporting mechanism for transferring 
pressure ulcer data to CMS remains under development. As discussed 
elsewhere in the preamble to this final rule, we expect the data 
reporting mechanism to be used will be a subset of the CARE data 
item set. Upon completion of the pressure ulcer assessment subset of 
the CARE data item set, a PRA package will be published in the 
Federal Register, in which CMS will state burden estimates related 
to the quality measure entitled ``Pressure Ulcers that are New or 
Have Worsened.'' Additionally, CMS will release further details and 
specifications regarding the data collection mechanism via the CMS 
Web site by no later than January 31, 2012.

c. Impact of Application of LTCH Moratorium on the Increase in Beds at 
Section 114(d)(1)(B) of Public Law 110-173 (MMSEA) to LTCHs and LTCH 
Satellite Facilities Established or Classified as Such Under Section 
114(d)(1)(B) of Public Law 110-173

    As discussed in section VII.F. of the preamble of this final 
rule, at Sec.  412.23(e)(8), for the period beginning October 1, 
2011, and ending December 28, 2012, we are applying the moratorium 
on the increase in the number of beds under section 114(d)(1)(B) of 
the MMSEA, as specified in Sec.  412.23(e)(7), to LTCHs and LTCH 
satellite facilities that were established or classified during the 
period after December 29, 2007 and ending September 30, 2011, under 
one of the exceptions to the moratorium at section 114(d)(2) of the 
MMSEA, as set forth in paragraph (e)(6)(ii) of Sec.  412.23. The 
final regulation precludes a LTCH or LTCH satellite facility that 
was developed under an exception to the moratorium on the 
establishment of new LTCHs and LTCH satellite facilities from 
increasing the number of Medicare-certified beds beyond the number 
certified by Medicare on October 1, 2011. Approximately 50 LTCHs and 
8 LTCH satellite facilities were developed under the exceptions at 
Sec.  412.23(e)(6)(ii); and under the moratorium at section 
114(d)(4) of the MMSEA, which solely applied to ``existing'' LTCHs 
and LTCH satellite facilities, additional beds may have been added 
to these LTCHs and LTCH satellite facilities since establishment. 
Under the new regulation at Sec.  412.23(e)(8), these ``new'' LTCHs 
and LTCH satellite facilities will also be subject to the moratorium 
on bed increases. Because additional increases in the number of LTCH 
beds in these facilities could result in added costs to the Medicare 
program, the impact of precluding additional growth in the number of 
Medicare-certified beds in these facilities is expected to result in 
no additional spending under the Medicare program from these LTCHs 
and LTCH satellite facilities.

d. Impact of the Clarification to the Greater Than 25 Day Average 
Length of Stay Requirement for LTCHs

    In section VII.E.5. of the preamble of this final rule, we 
present two clarifications to our existing policy for determining 
whether a hospital is meeting the greater than 25 day average length 
of stay requirement for payment under the LTCH PPS. First, we are 
clarifying and revising the regulations at Sec.  412.23(e)(3)(iv) 
dealing with the average length of stay determination when there is 
a change of ownership of either a hospital seeking to qualify as an 
LTCH or of an existing LTCH. Second, we described and are clarifying 
our existing policy regarding the inclusion of Medicare Advantage 
days in the average length of stay calculation. Because typically 
LTCHs track the lengths of stay of their Medicare patients on an 
ongoing basis for purposes of maintaining their LTCH status, and 
Medicare contractors are already tasked with evaluating each LTCH's 
average length of stay, we do not believe that there is any actual 
impact resulting from the clarification of these existing policies 
nor do they impose any additional burdens on either LTCHs or 
Medicare contractors.

e. Impact on Providers

    The basic methodology for determining a per discharge LTCH PPS 
payment is set forth in Sec.  412.515 through Sec.  412.536. In 
addition to the basic MS-LTC-DRG payment (the standard Federal rate 
multiplied by the MS-LTC-DRG relative weight), we make adjustments 
for differences in area wage levels, the COLA for Alaska and Hawaii, 
and SSOs. Furthermore, LTCHs may also receive HCO payments for those 
cases that qualify based on the threshold established each year.
    To understand the impact of the changes to the LTCH PPS payments 
presented in this final rule on different categories of LTCHs for FY 
2012, it is necessary to estimate payments per discharge for FY 2011 
using the rates, factors (including the FY 2011 GROUPER (Version 
28.0), and relative weights and the policies established in the FY 
2011 IPPS/LTCH PPS final rule (75 FR 50364 through 50400 and 50442 
through 50449). It is also necessary to estimate the payments per 
discharge that would have been made under the LTCH PPS rates, 
factors, policies, and GROUPER (Version 29.0) for FY 2012 (as 
discussed in VII. of the preamble and section V. of the Addendum to 
this final rule). These estimates of FY 2011 and FY 2012 LTCH PPS 
payments are based on the best available LTCH claims data and other 
factors, such as the application of inflation factors to estimate 
costs for SSO and HCO cases in each year. We also evaluated the 
change in estimated FY 2011 payments to estimated FY 2012 payments 
(on a per discharge basis) for each category of LTCHs.
    Hospital groups were based on characteristics provided in the 
OSCAR data, FY 2008 through FY 2009 cost report data in HCRIS, and 
PSF data. Hospitals with incomplete characteristics were grouped 
into the ``unknown'' category. Hospital groups included the 
following:
     Location: large urban/other urban/rural.
     Participation date.
     Ownership control.
     Census region.
     Bed size.
    To estimate the impacts of the final payment rates and policy 
changes among the various categories of existing providers, we used 
LTCH cases from the FY 2010 MedPAR file to estimate payments for FY 
2011 and to estimate payments for FY 2012 for 426 LTCHs. We believe 
that the discharges based on the FY 2010 MedPAR data for the 426 
LTCHs in our database, which includes 322 proprietary LTCHs, provide 
sufficient representation in the MS-LTC-DRGs containing discharges 
for patients who received LTCH care for the most commonly treated 
LTCH patients' diagnoses.

f. Calculation of Prospective Payments

    For purposes of this impact analysis, to estimate per discharge 
payments under the LTCH PPS, we simulated payments on a case-by-case 
basis using LTCH claims from the FY 2010 MedPAR files. For modeling 
estimated LTCH PPS payments for FY 2011, we applied the FY 2011 
standard Federal rate (that is, $39,599.95, under which LTCH 
discharges occurring on or after October 1,

[[Page 51841]]

2010, to September 30, 2011 are paid). For modeling estimated LTCH 
PPS payments for FY 2012, we applied the FY 2012 standard Federal 
rate of $40,222.05, which will be effective for LTCH discharges 
occurring on or after October 1, 2011, and through September 30, 
2012. The final FY 2012 standard Federal rate of $40,222.05 includes 
the application of an area wage level budget neutrality factor of 
0.99775 (as discussed in section VII.E.4. of the preamble of this 
final rule).
    Furthermore, in modeling estimated LTCH PPS payments for both FY 
2011 and FY 2012 in this impact analysis, we applied the FY 2011 and 
the FY 2012 adjustments for area wage levels and the COLA for Alaska 
and Hawaii. Specifically, we adjusted for differences in area wage 
levels in determining estimated FY 2011 payments using the current 
LTCH PPS labor-related share of 75.271 percent (75 FR 50445) and the 
wage index values established in the Tables 12A and 12B of the 
Addendum to the FY 2011 IPPS/LTCH PPS final rule (75 FR 50627 
through 50646). We also applied the FY 2011 COLA factors shown in 
the table in section V.B.5. of the Addendum to that final rule (75 
FR 50446) to the FY 2011 nonlabor-related share (24.729 percent) for 
LTCHs located in Alaska and Hawaii. Similarly, we adjusted for 
differences in area wage levels in determining the estimated FY 2012 
payments using the LTCH PPS FY 2012 labor-related share of 70.199 
percent and the FY 2012 wage index values presented in Tables 12A 
and 12B listed in section VI. of the Addendum to this final rule 
(and available via the Internet). We also applied the FY 2012 COLA 
factors shown in the table in section V.B.5. of the Addendum to the 
FY 2011 IPPS/LTCH PPS final rule to the FY 2012 nonlabor-related 
share (29.801 percent) for LTCHs located in Alaska and Hawaii.
    As discussed above, our impact analysis reflects an estimated 
change in payments for SSO cases, as well as an estimated increase 
in payments for HCO cases (as described in section V.C. of the 
Addendum to this final rule). In modeling final payments for SSO and 
HCO cases in FY 2012, we are applying an inflation factor of 1.057 
(determined by OACT) to the estimated costs of each case determined 
from the charges reported on the claims in the FY 2010 MedPAR files 
and the best available CCRs from the March 2011 update of the PSF. 
Furthermore, in modeling estimated LTCH PPS payments for FY 2012 in 
this impact analysis, we used the FY 2012 fixed-loss amount of 
$17,931 (as discussed in section V. of the Addendum to this final 
rule).
    These impacts reflect the estimated ``losses'' or ``gains'' 
among the various classifications of LTCHs from the FY 2011 to FY 
2012 based on the payment rates and policy changes presented in this 
final rule. Table IV illustrates the estimated aggregate impact of 
the LTCH PPS among various classifications of LTCHs.
     The first column, LTCH Classification, identifies the 
type of LTCH.
     The second column lists the number of LTCHs of each 
classification type.
     The third column identifies the number of LTCH cases.
     The fourth column shows the estimated payment per 
discharge for FY 2011 (as described above).
     The fifth column shows the estimated payment per 
discharge for FY 2012 (as described above).
     The sixth column shows the percentage change in 
estimated payments per discharge from FY 2011 to FY 2012 due to the 
update to the standard Federal rate (as discussed in section V.A.2. 
of the Addendum to this final rule).
     The seventh column shows the percentage change in 
estimated payments per discharge from FY 2011 to FY 2012 for changes 
to the area wage level adjustment (that is, the final wage indexes 
and labor-related share), including the application of an area wage 
level budget neutrality factor (as discussed in section V.B.5. of 
the Addendum to the final rule).
     The eighth column shows the percentage change in 
estimated payments per discharge from FY 2011 (Column 4) to FY 2012 
(Column 5) for all changes (and includes the effect of estimated 
changes to HCO and SSO payments).

                                  Table IV--Impact of Payment Rate and Policy Changes to LTCH PPS Payments for FY 2012
                                          [Estimated FY 2011 payments compared to estimated FY 2012 payments*]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 Percent
                                                                                                                   Percent      change in
                                                                                                                  change in     estimated
                                                                                                                  estimated   payments per     Percent
                                                                                                                payments per    discharge     change in
                                                                                     Average FY    Average FY     discharge   from FY 2011  payments per
                                                             Number of   Number of    2011 LTCH     2012 LTCH   from FY 2011   to FY 2012     discharge
                    LTCH Classification                        LTCHs     LTCH PPS    PPS payment   PPS payment   to FY 2012    for changes  from FY 2011
                                                                           cases      per case    per case \1\     for the     to the area   to FY 2012
                                                                                                                   annual      wage level      for all
                                                                                                                  update to    adjustment    changes \4\
                                                                                                                 the federal   with budget
                                                                                                                  rate \2\     neutrality
                                                                                                                                   \3\
(1)                                                                (2)         (3)           (4)           (5)           (6)           (7)           (8)
--------------------------------------------------------------------------------------------------------------------------------------------------------
All Providers.............................................         426     135,100       $37,977       $38,911           1.6           0.0           2.5
By Location:
    Rural.................................................          26       5,862        33,445        34,366           1.7           0.7           3.5
    Urban.................................................         400     129,238        38,182        39,118           1.6           0.0           2.4
    Large.................................................         204      77,420        39,911        40,884           1.6          -0.2           2.2
    Other.................................................         196      51,818        35,599        36,478           1.6           0.3           2.8
By Participation Date:
    Before Oct. 1983......................................          16       5,914        33,691        34,509           1.6          -0.6           1.9
    Oct. 1983-Sept. 1993..................................          44      16,673        40,019        41,075           1.5          -0.2           2.4
    Oct. 1993-Sept. 2002..................................         186      63,376        37,198        38,085           1.6           0.0           2.4
    After October 2002....................................         176      48,317        38,826        39,794           1.6           0.1           2.6
    Unknown Participation Date............................           4         820        37,558        38,534           1.6           1.5           4.1
By Ownership Type:
    Voluntary.............................................          82      19,596        38,992        40,120           1.6           0.0           2.9
    Proprietary...........................................         322     113,085        37,702        38,596           1.6           0.0           2.4
    Government............................................          13       1,720        42,710        44,026           1.6          -0.2           2.9
    Unknown Ownership Type................................           9         699        42,249        43,546           1.6          -0.2           2.9
By Region:
    New England...........................................          15       7,313        33,726        34,501           1.5          -0.6           1.7
    Middle Atlantic.......................................          30       7,970        38,866        39,802           1.6          -0.1           2.3
    South Atlantic........................................          59      15,577        41,327        42,388           1.5           0.0           2.6
    East North Central....................................          70      19,913        39,857        40,820           1.6          -0.5           2.0
    East South Central....................................          29       8,177        37,658        38,635           1.6           0.2           2.8

[[Page 51842]]

 
    West North Central....................................          26       5,903        39,877        40,921           1.6           0.3           2.9
    West South Central....................................         141      50,675        33,357        34,176           1.7           0.5           2.9
    Mountain..............................................          32       6,742        41,479        42,579           1.6          -0.4           2.2
    Pacific...............................................          24      12,830        48,595        49,716           1.5          -0.4           1.8
By Bed Size:
    Beds: 0-24............................................          29       3,667        32,708        33,554           1.7           0.5           3.1
    Beds: 25-49...........................................         199      43,952        37,489        38,410           1.6           0.1           2.6
    Beds: 50-74...........................................         114      36,429        38,383        39,368           1.6           0.1           2.6
    Beds: 75-124..........................................          47      21,072        40,614        41,622           1.6          -0.3           2.2
    Beds: 125-199.........................................          23      16,057        36,539        37,410           1.5          -0.1           2.3
    Beds: 200 +...........................................          14      13,923        37,509        38,339           1.6           0.0           2.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Estimated FY 2012 LTCH PPS payments based on the final payment rates and policy changes presented in the preamble and the Addendum to this final
  rule.
\2\ Percent change in estimated payments per discharge from FY 2011 to FY 2012 for the annual update to the standard Federal rate, as discussed in
  section V.A.2. of the Addendum to this final rule.
\3\ Percent change in estimated payments per discharge from FY 2011 to FY 2012 for changes to the area wage level adjustment at Sec.   412.525(c) (as
  discussed in section V.B. of the Addendum to this final rule).
\4\ Percent change in estimated payments per discharge from FY 2011 LTCH PPS (shown in Column 4) to FY 2012 LTCH PPS (shown in Column 5), including all
  of the changes presented in the preamble and the Addendum to this final rule. Note, this column, which shows the percent change in estimated payments
  per discharge for all changes, does not equal the sum of the percent changes in estimated payments per discharge for the annual update to the standard
  Federal rate (column 6) and the changes to the area wage level adjustment with budget neutrality (Column 7) due to the effect of estimated changes in
  both estimated payments to SSO cases that are paid based on estimated costs and aggregate HCO payments (as discussed in this impact analysis), as well
  as other interactive effects that cannot be isolated.

g. Results

    Based on the most recent available data for 426 LTCHs, we have 
prepared the following summary of the impact (as shown above in 
Table IV) of the LTCH PPS payment rate and policy changes presented 
in this final rule. The impact analysis in Table IV shows that 
estimated payments per discharge are expected to increase 
approximately 2.5 percent, on average, for all LTCHs from FY 2011 to 
FY 2012 as a result of the payment rate and policy changes presented 
in this final rule, as well as estimated increases in HCO and SSO 
payments. We note that we updated the standard Federal rate for FY 
2012 by 1.8 percent, which is based on the latest estimate of the 
LTCH PPS market basket increase (2.9 percent), the reduction of 1.0 
percentage point for the multifactor productivity adjustment and the 
0.1 percentage point reduction required under sections 1886(m)(3) 
and (m)(4) of the Act. We noted earlier in this section that for 
most categories of LTCHs, as shown in Table IV (Column 6), the 
impact of the increase of approximately 1.8 percent for the annual 
update to the standard Federal rate is projected to result in 
approximately a 1.6 percent change in estimated payments per 
discharge for all LTCHs from FY 2011 to FY 2012. Because payments to 
cost-based SSO cases and a portion of payments to SSO cases that are 
paid based on the ``blend'' option of the SSO payment formula at 
Sec.  412.529(c)(2)(iv) are not affected by the annual update to the 
standard Federal rate, we estimated that the effect of the 1.8 
percent annual update to the standard Federal rate will result in a 
1.6 percent increase on estimated aggregate LTCH PPS payments for 
all LTCH PPS cases, including SSO cases. Furthermore, as discussed 
previously in this regulatory impact analysis, the average increase 
in estimated payments per discharge from the FY 2011 to FY 2012 for 
all LTCHs of approximately 2.5 percent (as shown in Table IV) was 
determined by comparing estimated FY 2012 LTCH PPS payments (using 
the rates and policies discussed in this final rule) to estimated FY 
2011 LTCH PPS payments (as described above in section I.J.1. of this 
Appendix).

(1) Location

    Based on the most recent available data, the vast majority of 
LTCHs are located in urban areas. Only approximately 6 percent of 
the LTCHs are identified as being located in a rural area, and 
approximately 4 percent of all LTCH cases are treated in these rural 
hospitals. The impact analysis presented in Table IV shows that the 
average percent increase in estimated payments per discharge from FY 
2011 to FY 2012 for all hospitals is 2.5 percent for all changes. 
For rural LTCHs, the percent change for all changes is estimated to 
be 3.5 percent, while for urban LTCHs, we estimate the increase to 
be 2.4 percent. Large urban LTCHs are projected to experience an 
increase of 2.2 percent in estimated payments per discharge from FY 
2011 to FY 2012, while other urban LTCHs are projected to experience 
an increase of 2.8 percent in estimated payments per discharge from 
FY 2011 to FY 2012, as shown in Table IV.

(2) Participation Date

    LTCHs are grouped by participation date into four categories: 
(1) Before October 1983; (2) between October 1983 and September 
1993; (3) between October 1993 and September 2002; and (4) after 
October 2002. Based on the most recent available data, the majority 
(approximately 47 percent) of the LTCH cases are in hospitals that 
began participating in the Medicare program between October 1993 and 
September 2002, and are projected to experience nearly the average 
increase (2.4 percent) in estimated payments per discharge from FY 
2011 to FY 2012, as shown in Table IV.
    In the participation category where LTCHs began participating in 
the Medicare program before October 1983, LTCHs are projected to 
experience a lower than average percent increase (1.9 percent) in 
estimated payments per discharge from FY 2011 to FY 2012, as shown 
in Table IV. Approximately 4 percent of LTCHs began participating in 
Medicare before October 1983. The LTCHs in this

[[Page 51843]]

category are projected to experience a lower than average increase 
in estimated payments because of decrease in payments due to the 
changes to the area wage adjustment. Approximately 10 percent of 
LTCHs began participating in Medicare between October 1983 and 
September 1993. These LTCHs are projected to experience a 2.4 
percent increase in estimated payments from FY 2011 to FY 2012. 
LTCHs that began participating in Medicare after October 2002 
currently represent approximately 41 percent of all LTCHs, and are 
projected to experience an average increase (2.6 percent) in 
estimated payments from FY 2011 to FY 2012.

(3) Ownership Control

    Other than LTCHs whose ownership control type is unknown, LTCHs 
are grouped into three categories based on ownership control type: 
voluntary, proprietary, and government. Based on the most recent 
available data, approximately 19 percent of LTCHs are identified as 
voluntary (Table IV). We expect that, for these LTCHs in the 
voluntary category, estimated FY 2012 LTCH payments per discharge 
will increase higher than the average (2.9 percent) in comparison to 
estimated payments in FY 2011 primarily because we project an 
increase in estimated HCO payments and SSO payments to be higher 
than the average for these LTCHs. The majority (76 percent) of LTCHs 
are identified as proprietary and these LTCHs are projected to 
experience a nearly average increase (2.4 percent) in estimated 
payments per discharge from FY 2011 to FY 2012. Finally, government-
owned and operated LTCHs (3 percent) are also expected to experience 
a higher than average increase in payments of 2.9 percent in 
estimated payments per discharge from FY 2011 to FY 2012.

(4) Census Region

    Estimated payments per discharge for FY 2012 are projected to 
increase for LTCHs located in all regions in comparison to FY 2011. 
Of the 9 census regions, we project that the increase in estimated 
payments per discharge will have the largest positive impact on 
LTCHs in the West North Central and West South Central regions (2.9 
percent, as shown in Table IV). The estimated percent increase in 
payments per discharge from FY 2011 to FY 2012 for those regions is 
largely attributable to the changes in the area wage level 
adjustment.
    In contrast, LTCHs located in the New England region are 
projected to experience the smallest increase in estimated payments 
per discharge from FY 2011 to FY 2012. The average estimated 
increase in payments of 1.7 percent for LTCHs in the New England 
region is primarily due to estimated decreases in payments 
associated with the area wage level adjustment.

(5) Bed Size

    LTCHs are grouped into six categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater 
than 200 beds.
    We project that payments for small LTCHs (0-24 beds) will 
experience a 3.1 percent increase in payments due to increases in 
the area wage adjustment while large LTCHs (200+ beds) will 
experience a 2.2 percent increase in payments. LTCHs with between 75 
and 124 beds and between 125 and 199 beds are expected to experience 
a slightly below average increase in payments per discharge from FY 
2011 to FY 2012 (2.2 percent and 2.3 percent, respectively) 
primarily due to an estimated decrease in their payments from FY 
2011 to FY 2012 due to the area wage level adjustment.

4. Effect on the Medicare Program

    As noted previously, we project that the provisions of this 
final rule will result in an increase in estimated aggregate LTCH 
PPS payments in FY 2012 of approximately $126 million (or 
approximately 2.5 percent) for the 426 LTCHs in our database.

5. Effect on Medicare Beneficiaries

    Under the LTCH PPS, hospitals receive payment based on the 
average resources consumed by patients for each diagnosis. We do not 
expect any changes in the quality of care or access to services for 
Medicare beneficiaries under the LTCH PPS, but we continue to expect 
that paying prospectively for LTCH services will enhance the 
efficiency of the Medicare program.

K. Alternatives Considered

1. General

    This final rule contains a range of policies. It also provides 
descriptions of the statutory provisions that are addressed, 
identifies policies, and presents rationales for our decisions and, 
where relevant, alternatives that were considered.

2. Alternative Considered for Hospital Inpatient Quality Review (IQR) 
and Value-Based Purchasing (VBP) Programs: Medicare Spending per 
Beneficiary Measure

    In the FY 2012 IPPS/LTCH PPS proposed rule (76 FR 25896 and 
25897 and 76 FR 25927 and 25928), we described our proposed policy 
for implementing the claims-based Medicare spending per beneficiary 
measure for the FY 2014 Hospital IQR Program and the claims-based 
Medicare spending per beneficiary measure for the FY 2014 Hospital 
VBP Program. In addition, we described an alternative we considered 
for the Medicare spending per beneficiary measure (76 FR 26080 
through 26082). We considered this alternative approach based on the 
principle that Medicare spending per beneficiary benchmarks for 
lower quality hospitals should not exceed the benchmarks for higher 
quality hospitals. This alternative approach was more complex than 
the approach we are finalizing. Due to its increased complexity, in 
the proposed rule, we included the discussion of this alternative 
approach in this section, rather than earlier in the preamble of the 
proposed rule, for ease of presentation. The approach consisted of 
setting differential spending benchmarks for different quality 
score-based cohorts of hospitals and applying an efficiency 
adjustment to the quality score.
    We did not receive any public comments on the discussion of an 
alternative approach to incorporating a Medicare spending per 
beneficiary measure into the FY 2014 Hospital VBP Program or the 
Hospital IQR Program. We are finalizing the addition of a Medicare 
spending per beneficiary measure to the FY 2014 Hospital IQR 
Program, as described in section IV.A.3.b.(ii)(B) of the preamble to 
this final rule, and to the FY 2014 Hospital VBP Program, as 
described in section IV.B.3.b.(iii) of the preamble to this final 
rule.

L. Overall Conclusion

1. Acute Care Hospitals

    Table I of section I.G. of this Appendix demonstrates the 
estimated distributional impact of the IPPS budget neutrality 
requirements for the MS-DRG and wage index changes, and for the wage 
index reclassifications under the MGCRB. Table I also shows an 
overall increase of 1.1 percent in operating payments. We estimate 
that operating payments will increase by approximately $1.13 billion 
in FY 2012. For FY 2012, we are distributing $250 million to 
hospitals that qualify to receive additional payment under section 
1109 of Public Law 111-152, which is an additional $100 million than 
what we had distributed under this provision in FY 2011. In 
addition, we estimate a savings of $21 million associated with the 
HACs policies in FY 2012, which is an additional $1 million in 
savings than in FY 2011. We estimate that we will spend $900,000 in 
new technology add-on payments in FY 2012, which is approximately 
$17 million less than what we spent in FY 2011. We estimate that low 
volume payments in FY 2012 will be $5 million more than the low 
volume payments made in FY 2011. These estimates, added to our FY 
2012 operating estimate of $1.13 billion, will result in an increase 
of $1.22 billion for FY 2012. We estimate that capital payments will 
experience a 1.8 percent increase in payments per case, as shown in 
Table III of section I.I. of this Appendix. We project that there 
would be a $151 million increase in capital payments in FY 2012 
compared to FY 2011. The cumulative operating and capital payments 
should result in a net increase of $1.369 billion to IPPS providers. 
The discussions presented in the previous pages, in combination with 
the rest of this final rule, constitute a regulatory impact 
analysis.

2. LTCHs

    Overall, LTCHs are projected to experience an increase in 
estimated payments per discharge in FY 2012. In the impact analysis, 
we are using the rates, factors, and policies presented in this 
final rule, including updated wage index values and relative 
weights, and the best available claims and CCR data to estimate the 
change in payments under the LTCH PPS for FY 2012. Accordingly, 
based on the best available data for the 426 LTCHs in our database, 
we estimate that FY 2012 LTCH PPS payments will increase 
approximately $126 million (or approximately 2.5 percent).

M. Accounting Statements and Tables

1. Acute Care Hospitals

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table V below, we 
have prepared an accounting statement showing the classification of 
the expenditures associated with the provisions

[[Page 51844]]

of this final rule as they relate to acute care hospitals. This 
table provides our best estimate of the change in Medicare payments 
to providers as a result of the changes to the IPPS presented in 
this final rule. All expenditures are classified as transfers to 
Medicare providers.

 Table V--Accounting Statement: Classification of Estimated Expenditures
                 Under the IPPS From FY 2011 to FY 2012
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $1.369 billion.
From Whom to Whom.........................  Federal Government to IPPS
                                             Medicare Providers.
                                           -----------------------------
    Total.................................  $1.369 billion
------------------------------------------------------------------------

2. LTCHs

    As discussed in section I.J. of this Appendix, the impact 
analysis for the changes under the LTCH PPS for this final rule 
projects an increase in estimated aggregate payments of 
approximately $126 million (or approximately 2.5 percent) for the 
426 LTCHs in our database that are subject to payment under the LTCH 
PPS. Therefore, as required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI below, 
we have prepared an accounting statement showing the classification 
of the expenditures associated with the provisions of this final 
rule as they relate to changes to the LTCH PPS. Table VI provides 
our best estimate of the estimated increase in Medicare payments 
under the LTCH PPS as a result of the provisions presented in this 
final rule based on the data for the 426 LTCHs in our database. All 
expenditures are classified as transfers to Medicare providers (that 
is, LTCHs).

       Table VI--Accounting Statement: Classification of Estimated
     Expenditures From the FY 2011 LTCH PPS to the FY 2012 LTCH PPS
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers              Positive transfer--Estimated
                                             increase in expenditures:
                                             $126 million.
------------------------------------------------------------------------

II. Regulatory Flexibility Act (RFA) Analysis

    The RFA requires agencies to analyze options for regulatory 
relief of small entities. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
government jurisdictions. We estimate that most hospitals and most 
other providers and suppliers are small entities as that term is 
used in the RFA. The great majority of hospitals and most other 
health care providers and suppliers are small entities, either by 
being nonprofit organizations or by meeting the SBA definition of a 
small business (having revenues of less than $7.5 million to $34.5 
million in any 1 year). (For details on the latest standards for 
health care providers, we refer readers to page 33 of the Table of 
Small Business Size Standards for NAIC 622 found on the SBA Web site 
at: http://www.sba.gov/contractingopportunities/sizestandardtopics/tableofsize/index.html.)
    For purposes of the RFA, all hospitals and other providers and 
suppliers are considered to be small entities. Individuals and 
States are not included in the definition of a small entity. We 
believe that the provisions of this final rule relating to acute 
care hospitals will have a significant impact on small entities as 
explained in this Appendix. Because we lack data on individual 
hospital receipts, we cannot determine the number of small 
proprietary LTCHs. Therefore, we are assuming that all LTCHs are 
considered small entities for the purpose of the analysis in section 
I.J. of this Appendix. Medicare fiscal intermediaries and MACs are 
not considered to be small entities. Because we acknowledge that 
many of the affected entities are small entities, the analysis 
discussed throughout the preamble of this final rule constitutes our 
regulatory flexibility analysis. In the FY 2012 IPPS/LTCH PPS 
proposed rule, we solicited public comments on our estimates and 
analysis of the impact of our proposals on those small entities. We 
did not receive any public comments.

III. Impact on Small Rural Hospitals

    Section 1102(b) of the Social Security Act requires us to 
prepare a regulatory impact analysis for any proposed or final rule 
that 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. With the 
exception of hospitals located in certain New England counties, for 
purposes of section 1102(b) of the Act, we now define a small rural 
hospital as a hospital that is located outside of an urban area and 
has fewer than 100 beds. Section 601(g) of the Social Security 
Amendments of 1983 (Pub. L. 98-21) designated hospitals in certain 
New England counties as belonging to the adjacent urban area. Thus, 
for purposes of the IPPS and the LTCH PPS, we continue to classify 
these hospitals as urban hospitals. (We refer readers to Table I in 
section I.G. of this Appendix for the quantitative effects of the 
policy changes under the IPPS for operating costs.)

IV. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule whose mandates require spending in 
any 1 year of $100 million in 1995 dollars, updated annually for 
inflation. In 2011, that threshold level is approximately $136 
million. This final rule will not mandate any requirements for 
State, local, or tribal governments, nor will it affect private 
sector costs.

V. Executive Order 12866

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

Appendix B: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of MedPAC, recommend 
update factors for inpatient hospital services for each fiscal year 
that take into account the amounts necessary for the efficient and 
effective delivery of medically appropriate and necessary care of 
high quality. Under section 1886(e)(5) of the Act, we are required 
to publish update factors recommended by the Secretary in the 
proposed and final IPPS rules, respectively. Accordingly, this 
Appendix provides the recommendations for the update factors for the 
IPPS national standardized amount, the Puerto Rico-specific 
standardized amount, the hospital-specific rates for SCHs and MDHs, 
and the rate-of-increase limits for certain hospitals excluded from 
the IPPS, as well as LTCHs, IPFs, and IRFs. We also discuss our 
response to MedPAC's recommended update factors for inpatient 
hospital services.

II. Inpatient Hospital Update for FY 2012

A. FY 2012 Inpatient Hospital Update

    Section 1886(b)(3)(B) of the Act, as amended by sections 3401(a) 
and 10319(a) of the Affordable Care Act, sets the applicable 
percentage increase under the IPPS for FY 2012 as equal to the rate-
of-increase in the hospital market basket for IPPS hospitals in all 
areas, subject to a reduction of 2.0 percentage points if the 
hospital fails to submit quality information under rules established 
by the Secretary in accordance with section 1886(b)(3)(B)(viii) of 
the Act, and then subject to an adjustment based on changes in 
economy-wide productivity and an additional reduction of 0.1 
percentage point. Sections 1886(b)(3)(B)(xi) and (b)(3)(B)(xii) of 
the Act, as added by section 3401(a) of the Affordable Care Act, 
state that the application of the multifactor productivity 
adjustment and the additional FY 2012 adjustment of 0.1 percentage 
point may result in the applicable percentage increase being less 
than zero.
    In accordance with section 1886(b)(3)(B) of the Act, as amended 
by section 3401(a) of the Affordable Care Act, in section IV.K.3. of 
the preamble of the proposed rule, based on IGI's first quarter 2011 
forecast of multifactor productivity (MFP), we proposed a MFP 
adjustment (the 10-year moving average of MFP for the period ending 
FY 2012) of 1.2 percent.
    Therefore, in the FY 2012 IPPS/LTCH PPS proposed rule, based on 
IGI's first quarter 2011 forecast of the FY 2012 market basket 
increase, we proposed an applicable percentage increase to the FY 
2012 operating standardized amount of 1.5 percent (that is, the FY 
2012 estimate of the market basket rate-of-increase of 2.8 percent 
less an

[[Page 51845]]

adjustment of 1.2 percentage points for economy-wide productivity 
and less 0.1 percentage point) for hospitals in all areas, provided 
the hospital submits quality data in accordance with section 
1886(b)(3)(B)(viii) of the Act and our rules. For hospitals that 
fail to submit quality data, we proposed an applicable percentage 
increase to the operating standardized amount of -0.5 percent (that 
is, the FY 2012 estimate of the market basket rate-of increase of 
2.8 percent less 2.0 percentage points for failure to submit quality 
data, less an adjustment of 1.2 percentage points for economy-wide 
productivity, and less an additional adjustment of 0.1 percentage 
point).
    For this final rule, in accordance with section 1886(b)(3)(B) of 
the Act, as amended by section 3401(a) of the Affordable Care Act, 
based on IGI's second quarter 2011 forecast of MFP, we are 
finalizing a MFP adjustment (the 10-year moving average of MFP for 
the period ending FY 2012) of 1.0 percent for FY 2012.
    Based on IGI's second quarter 2011 forecast of the FY 2012 
market basket increase, we are finalizing an applicable percentage 
increase to the FY 2012 operating standardized amount of 1.9 percent 
(that is, the FY 2012 estimate of the market basket rate-of-increase 
of 3.0 percent less an adjustment of 1.0 percentage point for 
economy-wide productivity and less 0.1 percentage point) for 
hospitals in all areas, provided the hospital submits quality data 
in accordance with section 1886(b)(3)(B)(viii) of the Act and our 
rules. For hospitals that fail to submit quality data, we are making 
an applicable percentage increase to the operating standardized 
amount of -0.1 percent (that is, the FY 2012 estimate of the market 
basket rate-of increase of 3.0 percent less 2.0 percentage points 
for failure to submit quality data, less an adjustment of 1.0 
percentage point for economy-wide productivity, and less an 
additional adjustment of 0.1 percentage point).

B. Update for SCHs and MDHs for FY 2012

    Section 1886(b)(3)(B)(iv) of the Act provides that the FY 2012 
applicable percentage increase in the hospital-specific rates for 
SCHs and MDHs equals the applicable percentage increase set forth in 
section 1886(b)(3)(B)(i) of the Act (that is, the same update factor 
as for all other hospitals subject to the IPPS). Therefore, the 
update to the hospital specific rates for SCHs and MDHs is subject 
to section 1886(b)(3)(B)(i) of the Act, as amended by sections 
3401(a) and 10319(a) of the Affordable Care Act. Accordingly, the 
applicable percentage increase to the hospital-specific rates 
applicable to SCHs and MDHs for FY 2012 is 1.9 percent for hospitals 
that submit quality data or -0.1 percent for hospitals that fail to 
submit quality data.

C. FY 2012 Puerto Rico Hospital Update

    Section 401(c) of Public Law 108-173 amended section 
1886(d)(9)(C)(i) of the Act and states that, for discharges 
occurring in a fiscal year (beginning with FY 2004), the Secretary 
shall compute an average standardized amount for hospitals located 
in any area of Puerto Rico that is equal to the average standardized 
amount computed under subclause (I) for FY 2003 for hospitals in a 
large urban area (or, beginning with FY 2005, for all hospitals in 
the previous fiscal year) increased by the applicable percentage 
increase under subsection (b)(3)(B) for the fiscal year involved. 
Therefore, the update to the Puerto Rico-specific operating 
standardized amount is subject to the applicable percentage increase 
set forth in section 1886(b)(3)(B)(i) of the Act as amended by 
sections 3401(a) and 10319(a) of the Affordable Care Act (that is, 
the same update factor as for all other hospitals subject to the 
IPPS). Accordingly, the applicable percentage increase to the Puerto 
Rico-specific standardized amount for FY 2012 is 1.9 percent.

D. Update for Hospitals Excluded From the IPPS

    Section 1886(b)(3)(B)(ii) of the Act is used for purposes of 
determining the percentage increase in the rate-of-increase limits 
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of 
the Act sets the percentage increase in the rate-of-increase limits 
equal to the market basket percentage increase. In accordance with 
Sec.  403.752(a) of the regulations, RNHCIs are paid under Sec.  
413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to 
update the percentage increase in the rate-of-increase limits.
    Section 1886(j)(3)(C) of the Act addresses the increase factor 
for the Federal prospective payment rate of IRFs. Section 123 of 
Public Law 106-113, as amended by section 307(b) of Public Law 106-
554 (and codified at section 1886(m)(1) of the Act), provides the 
statutory authority for updating payment rates under the LTCH PPS. 
In addition, section 124 of Public Law 106-113 provides the 
statutory authority for updating all aspects of the payment rates 
for IPFs.
    Currently, children's hospitals, cancer hospitals, and RNHCIs 
are the remaining three types of hospitals still reimbursed under 
the reasonable cost methodology. In this final rule, we are 
providing our current estimate of the FY 2012 IPPS operating market 
basket percentage increase (3.0 percent) to update the target limits 
for children's hospitals, cancer hospitals, and RNHCIs for FY 2012.
    For FY 2012, as discussed in section VII. of the preamble to 
this final rule, we are establishing an update to the LTCH PPS 
standard Federal rate for FY 2012 based on the full proposed LTCH 
PPS market basket increase estimate (2.9 percent). The annual update 
also includes the requirement at section 1886(m)(3)(A)(i) of the Act 
to reduce the annual update by the economy-wide productivity 
adjustment described in section 1886(b)(3)(B)(xi)(ii) of the Act, 
which is currently estimated to be 1.0 percent. In addition, section 
1886(m)(3)(A)(ii) of the Act requires that any annual update for FY 
2012 be reduced by the ``other adjustment'' at section 1886(m)(4)(C) 
of the Act, which is 0.1 percentage point. Accordingly, the update 
factor to the standard Federal rate for FY 2012 is 1.8 percent (that 
is, we are applying a factor of 1.018 in determining the LTCH PPS 
standard Federal rate for FY 2012).
    Effective for cost reporting periods beginning on or after 
January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments 
are based on a Federal per diem rate that is derived from the sum of 
the average routine operating, ancillary, and capital costs for each 
patient day of psychiatric care in an IPF, adjusted for budget 
neutrality. In the RY 2012 IPF PPS final rule (76 FR 26434 through 
26435), we extended the IPF PPS RY 2012 by 3 months (a total of 15 
months instead of 12 months) through September 30, 2012. Based on 
IGI's first quarter 2011 forecast, with history through the fourth 
quarter of 2010, the projected 15-month market basket update based 
on the FY 2008-based RPL market basket for the 15-month RY 2012 
(July 1, 2011 through September 30, 2012) is 3.2 percent. 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 CY 2011, we adjusted the IPF PPS update 
by 0.25 percentage point for RY 2012. Therefore, we applied the 15-
month FY 2008-based RPL market basket increase of 3.2 percent for RY 
2012, which was then adjusted by the ``other adjustment'' of 0.25 
percentage point.
    IRFs are paid under the IRF PPS for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and thereafter, the 
Federal prospective payments to IRFs are based on 100 percent of the 
adjusted Federal IRF prospective payment amount, updated annually 
(69 FR 45721). Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) 
of the Act require the application of a 0.1 percentage point 
reduction to the market basket increase factor for FYs 2012 and 
2013. In addition, section 1886(j)(3)(C)(ii)(I) of the Act requires 
the application of an economy-wide productivity adjustment. As 
published elsewhere in this Federal Register, in accordance with 
section 1886(j)(3)(C) of the Act, as amended by section 3401(d) of 
the Affordable Care Act, we base the FY 2012 market basket update, 
used to determine the applicable percentage increase for the IRF 
payments, on the second quarter 2011 forecast of the FY 2008-based 
RPL market basket (estimated to be 2.9 percent). This percentage 
increase is then reduced by the MFP adjustment (the 10-year moving 
average of MFP for the period ending FY 2012) of 1.0 percent, which 
was calculated based on IGI's second quarter 2011 forecast. 
Following application of the productivity adjustment, the applicable 
percentage increase is then reduced by 0.1 percentage point, as 
required by section 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of 
the Act, as added and amended by sections 3401 (d) of the Affordable 
Care Act. Therefore the final FY 2012 IRF update is 1.8 percent (2.9 
percent market basket update less 1.0 percentage point MFP 
adjustment less 0.1 percentage point legislative adjustment).

III. Secretary's Final Recommendations

    MedPAC is recommending an inpatient hospital update equal to one 
percent for FY

[[Page 51846]]

2012. MedPAC's rationale for this update recommendation is described 
in more detail below. As mentioned above, section 1886(e)(4)(A) of 
the Act requires that the Secretary, taking into consideration the 
recommendations of MedPAC, recommend update factors for inpatient 
hospital services for each fiscal year that take into account the 
amounts necessary for the efficient and effective delivery of 
medically appropriate and necessary care of high quality. Consistent 
with current law, we are recommending an applicable percentage 
increase to the standardized amount of 1.9 percent (that is, the FY 
2012 estimate of the market basket rate-of-increase of 3.0 percent 
less an MFP adjustment of 1.0 percentage point and less 0.1 
percentage point). We are recommending that the same applicable 
percentage increase apply to SCHs and MDHs and the Puerto Rico-
specific standardized amount.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we are 
recommending update factors for all other types of hospitals. 
Consistent with our update for these facilities, we are recommending 
an update for children's hospitals, cancer hospitals, and RNHCIs of 
3.0 percent.
    For FY 2012, consistent with policy set forth in section VII. of 
the preamble of this final rule, we are recommending an update of 
1.8 percent to the LTCH PPS standard Federal rate. In addition, 
consistent with the update specified in the FY 2012 IRF PPS final 
rule (as described above), we are recommending an update of 1.8 
percent (that is, the market basket increase factor of 2.9 percent 
less 1.0 percentage point for the MFP adjustment and less 0.1 
percentage point in accordance with sections 1886(j)(3)(C)(ii)(II) 
and 1886(j)(3)(D)(ii) of the Act) to the IRF PPS Federal rate for FY 
2012. Finally, consistent with the update specified in the FY 2012 
IPF PPS final rule (as described above), we are recommending an 
update of 3.2 percent reduced by 0.25 percentage point to the IPF 
PPS Federal rate for RY 2012 for the Federal per diem payment 
amount.

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 
Payments in Traditional Medicare

    In its March 2011 Report to Congress, MedPAC assessed the 
adequacy of current payments and costs, and the relationship between 
payments and an appropriate cost base. MedPAC recommended an update 
to the hospital inpatient rates equal to one percent. MedPAC expects 
Medicare margins to remain low in 2012. At the same time though, 
MedPAC's analysis finds that efficient hospitals have been able to 
maintain positive Medicare margins while maintaining a relatively 
high quality of care. MedPAC also recommended that Congress should 
require the Secretary to make adjustments to inpatient payment rates 
in future years to recover all overpayments due to documentation and 
coding improvements. MedPAC noted that priority should be given to 
preventing future overpayments.
    Response: With regard to MedPAC's recommendation of an update to 
the hospital inpatient rates equal to one percent, for FY 2012, as 
discussed above, sections 3401(a) and 10319(a) of the Affordable 
Care Act amended section 1886(b)(3)(B) of the Act. Section 
1886(b)(3)(B) of the Act, as amended by these sections, sets the 
requirements for the FY 2012 applicable percentage increase. 
Therefore, we are establishing an applicable percentage increase for 
FY 2012 of 1.9 percent, provided the hospital submits quality data, 
consistent with these statutory requirements.
    Similar to our response last year, we agree with MedPAC that 
hospitals should control costs rather than have Medicare accommodate 
the current rate of growth. As MedPAC noted, the lack of financial 
pressure at certain hospitals can lead to higher costs and in turn 
bring down the overall Medicare margin for the industry.
    With regard to MedPAC's recommendation that Congress should 
require the Secretary to make adjustments to inpatient payment rates 
in future years to recover all overpayments due to documentation and 
coding improvements, we refer the reader to section III. D. of the 
preamble to this final rule for a complete discussion on the FY 2012 
MS-DRG documentation and coding adjustment. In section III. D. of 
the preamble to this final rule, we are making a prospective 
adjustment of 2.0 percent and a recoupment of 2.9 percent to the FY 
2012 inpatient payment rates to recover overpayments due to 
documentation and coding improvements. We note that any recoupments 
for overpayments due to documentation and coding improvements beyond 
the authority of section 7(b)(1)(B) of Public Law 110-90 would 
require additional changes to current law by Congress. Therefore, 
without a change to current law, our ability to recoup all 
overpayments due to documentation and coding improvements is 
limited.
    We note that, because the operating and capital prospective 
payment systems remain separate, we are continuing to use separate 
updates for operating and capital payments. The update to the 
capital rate is discussed in section III. of the Addendum to this 
final rule.
    We address public comments related to MedPAC's recommendation of 
an update to the hospital inpatient rates equal to 1.0 percent in 
section II.D. of the preamble to this final rule.

[FR Doc. 2011-19719 Filed 8-1-11; 4:15 pm]
BILLING CODE 4120-01-P
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